Motivated by the observation that exchange-rate management resembles market-making, we use microstructure theory to conduct a welfare analysis of exchange-rate management, including the “corner solutions” of a free float and a fixed peg. We show that a policy that smoothes out exchange-rate...

We develop a theory of sovereign borrowing where default penalties are not implementable. We show that when debt is held by both domestic and foreign agents, the median voter might have an interest in serving it. Our theory has important practical implications regarding (a) the role of financial...

Leveraged investors may be subject to contagion when sales of repossessed collateral create a downward spiral in fire sales prices, increasing margin requirements and drying up the supply of liquidity. This raises the question whether market integration is desirable when the risk of contagion is...

We study a two-country setting in which leveraged investors generate fire-sale externalities, leading to financial crises and contagion. Governments can affect the incidence of financial crisis and the degree of contagion by injecting public liquidity and, additionally, by segmenting the...

This article reviews the development of corporate finance from domestic analyses to international comparisons of financial systems, to comparative corporate governance, to law and finance, and most recently to politics and finance. It describes how both theoretical developments and empirical...

I show how to design a welfare-improving tax system for a Diamond-Dybvig (DD) related economy. In addition to its relevance to the DD literature, the paper constructs a nice example for a Pareto-improving intervention when markets are incomplete, and provides a welfare analysis of the market for...

In a series of stimulating and thought provoking papers, Mayer (1988, 1990)—on the grounds of flow-of-funds data of the type presented in Table 1—has argued that: (i) retentions are usually the most important source of investment finance, which by itself is an indication of the substantial...

We investigate the concepts of ‘activist macroeconomic policy’ and ‘stabilization’ within an optimal taxation framework when insurance markets are incomplete.