Option value arises in environments where an investment needs to be made under uncertainty. The decision to invest in postsecondary education is a perfect example. Students, as they learn about the uncertain educational outcomes, can drop out or transfer up to harder and more rewarding schools...

A prominent feature of the Kiyotaki and Wright (1989) model of commodity money is the multiplicity of dynamic equilibria. We show that the frequency of search is strongly related to the extent of multiplicity. To isolate the role of frequency of search in generating multiplicity, we (i) vary the...

We provide an analytical characterization of the optimal anticipated monetary policy in an economy where agents have a precautionary savings motive due to random production opportunities and the presence of borrowing constraints. Non storable production makes intrinsically useless outside money...

We study a model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price set by firms, describes the behavior of optimal prices in the presence of customer retention concerns, and...

We study the optimal anticipated monetary policy in a flexible-price economy featuring heterogenous agents and incomplete markets which give rise to a business cycle. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by cash-poor unproductive agents....

We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt...

We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt...

This paper reveals and tests a new theoretical implication of the credit channel of monetary policy: as financial frictions (monitoring or auditing costs) increase, the reaction of stock prices to monetary policy shocks decreases. Correspondingly, towards the end of the Enron accounting scandal,...

Despite the expectations of FOMC and market participants at the beginning of 2014 to the contrary, the yield on 10-year U.S. Treasury debt declined by about 50 basis points from 2.72 percent at the beginning of 2014 to 2.17 percent as of December 22, 2014. This raises the worrisome possibility...

This article rationalizes empirical patterns of market leverage, book leverage, book-to-market ratios, and stock returns across different book-to-market portfolios, using a model of firm financing and investment. The model analytically shows that tax deductibility of interest payments increases...