Abstract
ABSTRACT This paper introduces household financial decision-making process into the classic financial intermediation model, which allows us to study the impact of households’ portfolio choice on the behavior of financial intermediation and the real economy. Our numerical results show that the incorporation of household financial decision helps stabilize the aggregate economy through the following channel. A negative shock of capital quality reduces the total assets of financial intermediaries and tightens their lending to enterprises. This leads to a decline in social investment and output. Then, the household responds to this by changing their asset composition, which alleviates the impact of the negative shock and thus stabilize the economy.
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