Economists have believed for a long time that financial systems are fragile in the sense that small shocks can cause serious disruption. Research has focused on phenomena, such as bank runs, which affect the stability of individual institutions. Only recently has there been interest in the...

In an overlapping generations economy with (incomplete) financial markets but no intermediaries, there is underinvestment in safe assets. In an economy with intermediaries and no financial markets, accumulating reserves of save assets allows returns to be smoothed, nondiversifiable risk to be...

It is generally agreed that speculators can make profits from insider trading or from the release of false information. Both forms of stock-price manipulation have now been made illegal. In this article, the authors ask whether it is possible to make profits from a different kind of...

We develop a simple model of the interbank market where banks trade a long term, safe asset. When there is a lack of opportunities for banks to hedge idiosyncratic and aggregate liquidity shocks, the interbank market is characterized by excessive price volatility. In such a situation, a central...

A complex financial system comprises both financial markets and financial intermediaries. We distinguish financial intermediaries according to whether they issue complete contingent contracts or incomplete contracts. Intermediaries such as banks that issue incomplete contracts, e.g., demand...

Relationships between intermediaries and their customers have become increasingly important in recent years. This paper argues that the need for costly ex ante information acquisition and analysis is a major barrier to the participation of investors and firms in sophisticated markets. Long-term...