Explanations of why changes in the relative quantities of safe debt seem to affect asset prices often appeal informally to a “portfolio balance” mechanism. I show how this type of effect can be incorporated in a general class of structural, arbitrage-free asset-pricing models using a...

In this paper, we lay out a simple framework that captures much of what the theoretical literature has to say about the role of credit in systemically important asset booms and busts. In addition, we suggest ways in which to incorporate physical investment in the bubble asset as well as monetary...

Publicly owned or commissioned banks were common in Europe from the fifteenth century. This survey argues that while the early public banks were characterized by great experimentation in their design, a common goal was to create a liquid and reliable monetary asset in environments where such...

We use matched, bank-level panel data on Libor submissions and credit default swaps to decompose bank-funding spreads at several maturities into components reflecting counterparty credit risk and funding-market liquidity. To account for the possibility that banks may strategically misreport...

Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria. It has never been clear, however, whether bank-run equilibria in this framework are a natural byproduct of the economic environment or an artifact of suboptimal contractual...

We explore a policy-induced change in borrower ability to shop for mortgages to investigate whether market competitiveness affects mortgage interest rates. Our paper exploits a discontinuity in the competitive landscape introduced by the Home Affordable Refinancing Program (HARP). Under HARP,...

While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a...

We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under...

This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses...

We combine self-collected historical data from 1867 to 1907 with CRSP data from 1926 to 2012, to examine the risk and return over the past 140 years of one of the most popular mechanical trading strategies — momentum. We find that momentum has earned abnormally high risk-adjusted returns —a...