We consider the debt capacity of a risky asset when debt is being rolled over and there is a liquidation cost in case of default. We show that debt capacity depends on how information about the quality of the asset is revealed. When the information structure is based on “optimistic”...

This paper reviews the cross-country record of economic growth, using as organizing framework how economic theory has guided that empirical analysis. The paper argues that recent studies of economic growth - both empirical and theoretical - distinguish from previous work in three distinct ways:...

The convergence hypothesis has generated a huge empirical literature: this paper critically reviews some of the earlier key findings, clarifies their implications, and relates them to more recent results. Particular attention is devoted to interpreting convergence empirics. The main findings...

The paper investigates whether the financial crisis did affect risk perceptions, and, hence, change structural parameters. By decomposing credit spreads of US corporate bonds into the contributions by credit, equity, and liquidity risk factors as well as structural change, the relative...

We propose a new approach to imposing economic constraints on time-series forecasts of the equity premium. Economic constraints are used to modify the posterior distribution of the parameters of the predictive return regression in a way that better allows the model to learn from the data. We...

We examine the pricing of financial crash insurance during the 2007-2009 financial crisis in U.S. option markets. A large amount of aggregate tail risk is missing from the price of financial sector crash insurance during the financial crisis. The difference in costs of out-of-the-money put...

We address the following questions concerning bank capital: why are banks so highly levered, what are the consequences of this leverage for the economy as a whole, and how can robust capital regulation be designed to restrict bank leverage to levels that do not generate excessive systemic risk?...

Theoretically, corporate debt is economically equivalent to safe debt minus a put option on the firm’s assets. We empirically show that indeed portfolios of long Treasuries and short traded put options ("pseudo bonds") closely match the properties of traded corporate bonds. Pseudo bonds...

Repo auctions are multiunit auctions regularly used by central banks to inject liquidity into the banking sector. Banks have a fundamental need to participate because they have to satisfy reserve requirements. Superficially, repo auctions resemble treasury auctions; the format and rules are...