We examine how the banking sector may ignite the formation of assetprice bubbles when there is access to abundant liquidity. Inside banks,given lack of observability of effort, loan officers (or risk takers)are compensated based on the volume of loans but are penalized if bankssuffer a high...

We develop a model of financial intermediation wherein bank managers "reach for yield" - by overinvesting in risky assets and underinvesting in safer assets - provided they do not face much cost from liquidity shortfalls. The managers follow a pecking order in which their first preference is to...

We examine how the banking sector could ignite the formation of asset price bubbles when there is access to abundant liquidity. Inside banks, to induce effort, loan officers are compensated based on the volume of loans. Volume-based compensation also induces greater risk taking; however, due to...

We examine how the banking sector may ignite the formation of asset price bubbles when there is access to abundant liquidity. Inside banks, given lack of observability of effort, loan officers (or risk takers) are compensated based on the volume of loans but are penalized if banks suffer a high...

When liquidity chasing banks is high, loan officers (or risk-takers) inside banks expect future losses to be readily rolled over. This insurance effect induces them to relax lending standards. The resulting access to cheap credit can fuel asset price bubbles in the economy. To curb such...

This paper develops a continuous time asset pricing model of debt and equity in a framework where equityholders decide when to default but creditors decide when to liquidate. This framework is relevant for environments where creditors exert a significant influence on the timing of liquidation,...

This article develops a continuous time asset pricing model of debt restructuring and values equity and debt by taking into account the fact that in practice the default point differs from the liquidation point. This separation allows us to delegate the liquidation decision to the creditors...

This article develops a model that studies how the presence of a lender of last resort (LOLR) affects the ex ante investment incentives of banks. We show that a perfectly informed LOLR induces a first-best outcome for small and medium sized banks but causes moral hazard in larger banks given the...

This article analyses the impact of IMF conditionality on the intertemporal allocation of resources in an emerging market economy. The study identifies a principal agent problem between the government of the emerging market and its citizens and shows that conditionality has the potential to...