We analyze government interventions to alleviate debt overhang among banks. Interventions generate two types of rents. Informational rents arise from opportunistic participation based on private information while macroeconomic rents arise from free riding. Minimizing informational rents is a...

Asset-backed securities represent one of the largest and fastest growing financial markets. Under securitization, agents perform functions (for fees) that would alternatively be performed by a vertically integrated lender with ownership of a whole loan. We examine how outsourcing impacts...

This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values financial conglomerates that engage in multiple activities, e.g., lending and non-lending...

The volatility of US business cycles has declined during the last two decades. During the same period the financial structure of firms has become more volatile. In this paper we develop a model in which financial factors play a key role in generating economic fluctuations. Innovations in...

Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the sharp rise in U.S. household leverage from 2002 to 2006 and the increase in...

This paper studies a DSGE model with endogenous financial asset supply and ambiguity averse investors. An increase in uncertainty about profits leads firms to substitute away from debt and reduce shareholder payout in bad times when the equity premium is high. Regime shifts in volatility...

There is a demand for safe assets, either government bonds or private substitutes, for use as collateral. Government bonds are safe assets, given the government's power to tax, but their supply is driven by fiscal considerations, and does not necessarily meet the private demand for safe assets....

Economic growth involves metamorphosis of the financial system. Forms of banks and bank money change. These changes, if not addressed, leave the banking system vulnerable to crisis. There is no greater challenge in economics than to understand and prevent financial crises. The financial crisis...

This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict...

Private information about prospective borrowers produced by a bank can affect rival lenders due to a "winner%u2019s curse" effect. Strategic interaction between banks with respect to the intensity of costly information production results in endogenous credit cycles, periodic "credit crunches."...