This paper investigates how financial-sector leverage affects macroeconomic instability and welfare. In the model, banks borrow (use leverage) to allocate resources to productive projects and provide liquidity. When banks do not actively issue new equity, aggregate outcomes depend on the level...

Many capital structures implicitly or explicitly give agents the ability to use debt contracts as collateral for other financial promises. We study the effects of allowing debt to be used as collateral in a general equilibrium model with heterogeneous agents, collateralized financial contracts,...