In the event of third generation crisis, international lending of last resort should be used if and only if the ILLOR is informed on the subject of financial and banking domestic markets. Therefore, if will act at a macroeconomic level, as a usual ILLOR, but also at a microeconomic level, since...

In today's discussions of central banking, maintaining macro-financial stability has only recently appeared along-side the pursuit of low inflation as an important policy goal. This is in strong contrast to the earlier literature, where financial stability was often the main concern of the...

Are asset prices unduly volatile and often detached from their fundamentals? Does the bursting of financial bubbles depress the real economy? This paper addresses these issues by constructing a DSGE model with speculative bubbles. We characterize conditions under which storable goods, regardless...

The recent financial crisis has damaged the reputation of macroeconomics, largely for its inability to predict the impending financial and economic crisis. To be honest, this inability to predict does not concern me much. It is almost tautological that severe crises are essentially...

This paper assesses the 2007-2009 recession using neoclassical business cycle theory. I find that the 2007-2009 U.S. recession differs substantially from other postwar U.S. recessions, and also from the 2008 recession in other countries, in that lower labor input accounts for virtually all of...

We argue that credit constraints not only amplify fundamental shocks, they can also lead to self-fulfilling business cycles. We study a model with heterogeneous firms, in which imperfect contract enforcement implies that productive firms face binding credit constraints, with the borrowing...

This article studies the full equilibrium dynamics of an economy with financial frictions. Due to highly nonlinear amplification effects, the economy is prone to instability and occasionally enters volatile crisis episodes. Endogenous risk, driven by asset illiquidity, persists in crisis even...

I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter,...

In the aftermath of the financial crisis, it has been argued that a guideline for the design of the future policy framework should be to take the ‘a’ out of ‘asymmetry’ in the way monetary policy deals with asset price movements. Recent empirical evidence has suggested that the Federal...

Credit spreads are large, volatile, and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while fairly safe in ordinary recessions, is exposed to economic depressions,...