Pecuniary externalities in models with financial friction justify macroprudential policies for preventing economic agents'excessive risk taking. We extend the Diamond and Rajan (2012) model of banks with the production factors and explore how a pe- cuniary externality affects a bank's leverage....

Pecuniary externalities in models with financial friction justify macroprudential policies for preventing economic agents'excessive risk taking. We extend the Diamond and Rajan (2012) model of banks with the production factors and explore how a pe- cuniary externality affects a bank's leverage....

A fast growing literature on small open economy models with pecuniary externalities has provided the theoretical grounds for the policy analysis of macro prudential regulations. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of...

A fast-growing literature on small open economy models with pecuniary external- ities has provided the theoretical grounds for the policy analysis of macro-prudential regulations and bailouts. Benigno, Chen, Otrok, Rebucci, and Young (2012a) recently showed that the macro-prudential regulations...

This paper develops a dynamic general equilibrium model that explicitly includes a banking sector engaged in a maturity mismatch. We demonstrate that rational competitive banks take on excessive risks systemically, resulting in overleverage and ine¢ ciently high crisis probabilities. The model...

This paper discusses the lean vs. clean policy debate in managing financial crises based on dynamic general equilibrium models with an occasionally binding collateral constraint. We show that a full state-contingent subsidy for debtors can restore the first-best allocations by forestalling...