Banks’ leverage behaviour in a two-agent New Keynesian model

Abstract

In a NK model with two types of rational agents, savers and capitalists, and non- maximizing banks, nancial shocks do a¤ect the macroeconomic dynamics depending on banksbehaviour as for their leverage ratio. We rst show that the level of banks leverage - which may be imposed by banks regulation - a¤ects the steady state level of output, employment and consumption, as might be expected in a non-Modigliani- Miller world. Di¤erent banks behaviour after a shock has widely di¤erent e¤ects on the macroeconomic dynamics: passive leverage results to be shock absorbing and capable of neutralizing an initial nancial shock, whilst procyclical behaviour implies higher and more persistent instability and distributive e¤ects than the constant lever- age behaviour. Finally, we show that the interaction of procyclical leverage with hysteresis in output and employment stregthens the persistence of financial shocks