Date Added: Oct 2010
The recent financial crisis has highlighted the limits of the "Originate to distribute" model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. The author builds a DSGE model with banks and examines its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow releasing bank capital and exacerbating the effect of productivity and other macroeconomic shocks on output and inflation.