Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign...

The interaction between credit frictions, financial innovation, and a switch from optimistic to pessimistic beliefs played a central role in the 2008 financial crisis. This paper develops a quantitative general equilibrium framework in which this interaction drives the financial amplification...

We develop a quantitative equilibrium model of financial crises to assess the interaction between ex-post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the...

Credit constraints that link a private agent's debt to market-determined prices embody a systemic credit externality that drives a wedge between competitive and (constrained) socially optimal equilibria, which induces private agents to ``overborrow". We quantify the effects of this externality...

Credit constraints that link a private agent's debt to market-determined prices embody a systemic credit externality that drives a wedge between competitive and (constrained) socially optimal equilibria, which induces private agents to ``overborrow". We quantify the effects of this externality...