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This paper investigates in a non-linear setting the impact on the real economy of frictions stemming from the financial sector. We develop a medium scale DSGE model with a banking sector where an occasionally binding constraint on banks’ capital induces a relevant non-linearity. The model -...
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, which enables increased leverage and investment. In the absence of frictions in the securitization process, we show that the … required to repay debt and finance new investments when the economy is hit by a negative shock. Moreover, the equilibrium may … be constrained inefficient due to the existence of a pecuniary externality that can result in over or under-investment …
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