Procyclicality is an inherent feature of the real and especially the financial sector of an economy, which has been highlighted by the recent crisis. Due to procyclicality, banks are transformed from mitigation mechanisms to amplifiers of changes in economic activity potentially affecting...

This essay evaluates two central bank policy tools, capital requirements and lending of last resort, designed to avert financial panics in the context of endowment economics with complete markets and limited borrower commitment. Credit panics are self-fulfilling shocks to expected credit...