In order to protect the public's confidence in deposit money, governments usually guarantee bank deposits implicitly or through an explicit deposit insurance system. Thus bank insolvency does not induce immediate bank runs. In many episodes of banking crises, several years passed quietly after...

This paper proposes a simple model that formalizes a variant of Ohanian's (2001) conjecture explaining the productivity declines observed in the Great Depression. If a large payment shock like an asset-price collapse renders many firms insolvent, other economic agents become exposed to a higher...

This paper shows that some of the puzzling observations in the protracted recessions of the 1990s in Japan and the 1930s in the United States can be accounted for by a simple variant of the neoclassical growth model with borrowing constraints. There are three puzzles: First, a large wedge...

We conducted business cycle accounting (BCA) using the method developed by Chari, Kehoe, and McGrattan (2002a) on data from the 1980s--1990s in Japan and from the interwar period in Japan and the United States. The contribution of this paper is twofold. First, we find that labor wedges may have...

During some recent financial crises, the majority of domestic banks -or indeed the entire banking sector- became insolvent. We have analyzed the welfare effects of policy responses to bank insolvency by examining a modified version of the Diamond-Rajan model, introducing a fiat currency. The...

Is there any welfare distortion by the asymmetry between a key currency and a local currency in international trade? Interpreting this asymmetry as an international liquidity constraint for countries that cannot issue the key currency, I show that the answer may be yes. It is shown that the...

The sources of economic fluctuations discussed in the existing literature are information asymmetry, incomplete contracts, and serially correlated exogenous shocks. We show that an economy may fluctuate cyclically without these assumptions if production of payment services (deposit money)...

It is argued that existing theory implies that financial frictions appear as investment wedges. Since data show that the output declines in the Great Depression were mainly due to the productivity declines, it is also argued that financial frictions may not be the primary cause of the...

The boom-bust cycles such as the episode of the "Internet bubble" in the late 1990s may be described as the business cycle driven by changes in expectations, which is called the Pigou cycle by Beaudry and Portier (An exploration into Pigou's theory of cycles, Journal of Monetary Economics,...

This paper studies asset-price bubbles in an economy where a nondepletable asset (e.g., land) can provide transaction services, using a variant of the cash-in-advance model. When a landowner can borrow money immediately using the land as collateral, one can say that land essentially provides a...