Financial Intermediation and Aggregate Demand: A Sufficient Statistics Approach

RePEc Short ID: pzo92
ORCID iD: 0000-0002-0520-1659

Chiang, Yu-Ting; Żoch, Piotr

doi:10.20955/wp.2022.038

Working Paper Revision

Financial Intermediation and Aggregate Demand: A Sufficient Statistics Approach

Abstract: We provide a unified framework to study how the financial sector affects the transmission of macroeconomic policies, such as monetary and fiscal policies, and asset purchase programs. Our framework nests models of financial intermediation with various microfoundations and allows for rich household heterogeneity. The financial sector supplies liquidity by issuing liquid assets to finance illiquid capital. The elasticities of liquidity supply with respect to returns are sufficient statistics that summarize how the financial sector determines responses to policy through asset markets. This asset market channel has a strong effect on output when liquidity supply is inelastic. We apply our approach to study the relative effectiveness of policies targeting the financial sector versus households. In commonly used setups, aggregate output responses differ by orders of magnitude due to implicit assumptions about the elasticities. Our estimates of the liquidity supply elasticities for the U.S. economy imply a modest effect through the asset markets and a stronger effect of targeting households.

Keywords: financial frictions; liquidity; monetary policy; fiscal policy; Heterogeneous-agent New Keynesian (HANK) model;

JEL Classification: E2; E6; H3; H6;

https://doi.org/10.20955/wp.2022.038