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Working Paper
The financial accelerator and the flight to quality
Working Paper
Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises
There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households. In fact, the recent financial crisis that triggered the Great Recession featured a disruption of wholesale funding markets, where banks lend to one another. Accordingly, to understand the financial crisis as well as to draw policy implications, it is essential to capture the role of wholesale banking. The objective of this paper is to characterize a model that can be seen as a natural extension of ...
Journal Article
Are banks dead? Or are the reports greatly exaggerated?
This article reexamines the conventional wisdom that commercial banking is in severe decline. A careful reading of the evidence does not support it. True, on-balance sheet assets held by commercial banks have declined as a share of total intermediary assets. But this measure ignores the substantial growth in banks' off-balance sheet activities, in off-shore lending by foreign banks, and in the size of the financial intermediation sector. Adjusted for these considerations, the bank-assets measure shows no clear evidence of secular decline. Neither does an alternative measure, constructed using ...
Journal Article
Are banks dead?
Working Paper
A Macroeconomic Model with Financial Panics
This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
Journal Article
Monetary policy and asset price volatility
Over the past twenty years the world's major central banks have been largely successful at bringing inflation under control. While it is premature to suggest that inflation is no longer an issue of great concern, it is quite conceivable that the next battles facing central bankers will lie on a different front. One development that has already concentrated the minds of policymakers is an apparent increase in financial instability, of which one important dimension is increased volatility of asset prices.> In a presentation at the Federal Reserve Banks of Kansas City's 1999 symposium, "New ...
Conference Paper
Agency costs, collateral, and business fluctuations
Working Paper
Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations
We develop a model in which innovations in an economy's growth potential are an important driving force of the business cycle. The frame- work shares the emphasis of the recent ?new shock? literature on revisions of beliefs about the future as a source of fluctuations, but differs by tieing these beliefs to fundamentals of the evolution of the technology frontier. An important feature of the model is that the process of moving to the frontier involves costly technology adoption. In this way, news of improved growth potential has a positive effect on current hours. As we show, the model also ...
Working Paper
Current account dynamics and monetary policy
We explore the implications of current account adjustment for monetary policy within a simple two country SGE model. Our framework nests Obstfeld and Rogoff's (2005) static model of exchange rate responsiveness to current account reversals. It extends this approach by endogenizing the dynamic adjustment path and by incorporating production and nominal price rigidities in order to study the role of monetary policy. We consider two different adjustment scenarios. The first is a "slow burn" where the adjustment of the current account deficit of the home country is smooth and slow. The second ...