We show in this paper that bank failures can be contagious. Unlike earlier work where contagion stems from depositor panics or ex ante contractual links between banks, we argue bank failures can shrink the common pool of liquidity, creating or exacerbating aggregate liquidity shortages. This...

We explore the connection between money, banks, and aggregate credit. We start with a simple 'real' model without money, where banks make loans repayable in goods and depositors hold claims on the bank payable on demand in goods. Aggregate production may be delayed in the economy. If so, we show...

We explore the connection between money, banks, and aggregate credit. We start with a simple real' model without money, where banks make loans repayable in goods and depositors hold claims on the bank payable on demand in goods. Aggregate production may be delayed in the economy. If so, we show...

The amount of liquidity that banks offer depends on the degree of direct participation in financial markets - that is, on the liquidity of financial markets. Conversely, banks influence the amount of liquidity offered by financial markets.Financial markets and financial institutions compete to...