Implications on Households of Bank's Asset Substitution

In this paper we develop a DSGE model to analyze the welfare implications over households that bank's asset decomposition might have. We model a representative bank that potentially faces liquidity difficulties due to a mismatch between credits issued to firms and deposits supplied by households. This bank has a portfolio consisting of loans and bonds. The results show that positive liquidity shocks, driven by changes in the household preferences, affect the bank's asset allocation decisions and are beneficial to households. Similarly, when the bond's return rate increases, there is a substitution effect that lowers the loan to bond ratio, but despite this, the bank's intermediation activity increases inducing a positive effect over the household's welfare.

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