Center for European Studies
2021 CefES-JRC Webinar Series
Financial intermediation and the macroeconomy:
Marco Casari presents his latest paper "Financial intermediation and the macroeconomy: an experiment", with M. Bigoni and G. Camera.
Existing experiments about financial intermediaries either study the financial side in isolation, or model the real sector in reduced form (parametric). In an experiment, we study the interaction between the financial and the real sector in a macroeconomy. Financial intermediaries support the settlement of transactions in the real sector but also undertake risky investments, hence their possible insolvency induces macroeconomic risk in both the financial and real sectors. In equilibrium, intermediaries take more risk than what would be socially optimal, because they neglect the negative externality imposed on real sector economic activities. We study how two prototypical institutions - one that facilitates the monitoring of intermediaries’ activities and another that imposes collateral requirements on financial activity - can reduce this externality and increase overall efficiency by insulating the real sector from disruptions in trading activity. Observed performance is weak for the monitoring institution and strong for collateral requirements.
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