) which can be used to separate economies of high-quality institutions from those of low-quality institutions. On one hand …, for economies with high-quality institutions, the view that finance follows the real economy is essentially correct …. Equilibrium output and prices are determined by factor endowment. Further improvement in the institutions does not affect patterns …

We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We … find strong evidence that institutions with higher net worth hedge more, controlling for risk exposures, both across … institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to …