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...

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...

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...

To economize on space, all the proofs of our paper "On Reaching for Yield and the Coexistence of Bubbles and Negative Bubbles" have been relegated to this appendix.The paper "On Reaching for Yield and the Coexistence of Bubbles and Negative Bubbles" to which these Appendices apply is available...

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...