A Study of Bank’s Intermediation Function in the Macroeconomy

This thesis proposes a continuous-time model with three heterogeneous agents to investigate the primitive intermediation function of banks and to understand their impact on the stability of the economy. In equilibrium, the influence of bank's activities on the economy is threefold. Bank lending serves as a risk-sharing channel that effectively reduces the entrepreneur's exposure to production risk. Besides, the bank also transfers part of the liquidity created from the central bank reserve to the household. Finally, when an exogenous shock hits the economy, the bank's consumption and investment decisions contribute to a feedback loop that generates an endogenous risk. The endogenous risk may amplify or mitigate exogenous shocks, depending on the reactions from the consumption goods price and the marginal productivity of the reinvestment technology that is held by the entrepreneur. As a policy implication, the model shows that a macro-prudential policy imposed on the bank, such as leverage ratio requirement, is a complement to the monetary policy.