We show that trade frictions in OTC markets result in inefficient private liquidity provision. We develop a dynamic model of market-based financial intermediation with a two-way interaction between primary credit markets and secondary OTC markets. Private allocations are generically inefficient...

We show that trade frictions in over‐the‐counter (OTC) markets result in inefficient private liquidity provision. We develop a dynamic model of market‐based financial intermediation with a two‐way interaction between primary credit markets and secondary OTC markets. Private allocations...

In this companion paper to Goodhart et al. (2012), we explore the interactions of various types of financial regulation. We find that regulations that control fire-sale risk are critical for delivering financial stability and improving the welfare of savers and borrowers. We describe the...

We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The...

We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending....

The purpose of this paper is to explore financial instability in this case due to a housing crisis and defaults on mortgages. The model incorporates heterogeneous banks and households. Mortgages are secured by collateral, which is equal to the amount of housing which agents purchase. Individual...

This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a "shadow banking system" that each help...