Financial Intermediaries and the Yield Curve

Andrés Schneider

2019-12-03 - I study the yield curve dynamics in a general equilibrium model with financial intermediaries facing financing constraints. The economy features a positive real term premium in equilibrium stemming from financing constraints that occasionally bind. A flat yield curve reduces intermediaries’ incentives to engage in maturity transformation and therefore is associated with lower levels of credit. I show that this mechanism 1) is a plausible reason for why a flattening of the yield curve precedes recessions and 2) also rationalizes why the term structure of distributions of future real outcomes are negatively skewed when financial conditions are tight.