This paper investigates theoretically how financial development affects the magnitude of financial amplification. Financial development yields two competing effects, balance sheet effects and shock cushioning effects. Depending on which of these forces dominates, we find that financial...

Does financial development exacerbate or dampen financial amplification? This paper develops a macroeconomic model with the borrowing constraint and heterogeneous agents to answer this question. In our framework, financial development produces two competing forces. One is the effect which...

This paper analyzes the effects of bubbles in an infinitely-lived agent model of endogenous growth with financial frictions and heterogeneous agents. We provide a complete characterization on the relationship between financial frictions and the existence of bubbles. Our model predicts that if...

Does financial development exacerbate or dampen financial amplification? This paper develops a macroeconomic model with the borrowing constraint and heterogeneous agents to answer this question. In our framework, financial development produces two competing forces. One is the effect which...

We examine the effect of asset price bubbles in the Kiyotaki-Moore model. We show that the dynamic interactions between bubble-asset price, land price, and output generate powerful bubbly dynamics. The boom-bust cycles in bubble-asset price cause boom-crash cycles in the land market...

In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also...

Previous theories of financial market rationing focussed on a single market, either the credit or the equity market. An interesting question is whether credit and equity rationing are mutually compatible, and how they interact. We consider a model with two-dimensional asymmetric information,...

This paper examines a set of financial policies, called financial restraint, that address financial market stability and growth in an initial environment of low financial deepening. Unlike with financial repression, where the government extracts rents from the private sector, financial restraint...