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Conference Paper
Perspectives on the role of government risk-bearing
Conference Paper
Economic consequences of income inequality
Conference Paper
Macroeconomic models with equity and credit rationing
Conference Paper
Monetary policy and the theory of the risk-averse bank
Working Paper
Monetary policy and the theory of the risk-averse bank
Working Paper
Collective Moral Hazard and the Interbank Market
The concentration of risk within financial system is considered to be a source of systemic instability. We propose a theory to explain the structure of the financial system and show how it alters the risk taking incentives of financial institutions. We build a model of portfolio choice and endogenous contracts in which the government optimally intervenes during crises. By issuing financial claims to other institutions, relatively risky institutions endogenously become large and interconnected. This structure enables institutions to share the risk of systemic crisis in a privately optimal way, ...