Using U.S. data from 1929 to 2013, we show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t through t+2. Underlying this result is the existence of predictable mean reversion in credit-market conditions. That is, when our sentiment...

The paper draws lessons from the experience of the past year for the conduct of central banks in the pursuit of macroeconomic and financial stability. Macroeconomic stability is defined as either price stability or as price stability and sustainable output or employment growth. Financial...

The recent financial crisis has shown that financial innovation can have devastating systemic impacts. International standard setters’ and national regulators’ response has been a global concerted effort to overhaul and tighten financial regulations....

The recent financial crisis has shown that financial innovation can have devastating systemic impacts. International standard setters’ and national regulators’ response has been a global concerted effort to overhaul and tighten financial regulations....

The recent crisis underlined that proper estimation of distress-dependence amongst banks in a global system is essential for financial stability assessment. We present a set of banking stability measures embedding banks’ linear (correlation) and nonlinear distress-dependence, and their changes...

The 2007-2009 recession is characterized by: a large drop in employment, an unprecedented decline in firm entry, and a slow recovery. Using confidential firm-level data, I show that financial constraints reduced employment growth in small relative to large firms by 4.8 to 10.5 percentage points....

Firms with limited internal liquidity significantly increased prices in 2008, while their liquidity unconstrained counterparts slashed prices. Differences in the firms' price-setting behavior were concentrated in sectors likely characterized by customer markets. We develop a model, in which...

We develop a general equilibrium model with nancial frictions in which internal capital (equity capital) and external capital (bank loans) have different rates of return. Financial development raises the rate of return on external capital but has a non-monotonic effect on the rate of return on...

We develop a model of a small open economy with credit market frictions to analyze the consequences of capital account liberalization. We show that financial opening facilitates the inflows of cheap foreign funds and improves production efficiency. Reforms increasing labor market flexibility can...

Jim Tobin, who died on March 11, 2002 at the age of 84, was one of giants of economics of the second half of the twentieth century and the greatest macroeconomist of his generation. Tobin’s influence on macroeconomic theory is so pervasive - so much part of our professional ‘acquis’ - that...