The authors develop a credit market model with adverse selection where risk-neutral borrowers self select because lenders make use of a costly screening technology. Equilibrium contracts are debt contracts, and this is robust to randomization, in contrast to results for the costly state...

Existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not. A monetary model is constructed, where seasonal variations in the demand for liquidity and credit play a critical role in generating...