The classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues of moral hazard,hardly appropriate when considering modern UK banking.We therefore modify the classic model to ncorporate franchise values due to market power; and risk-taking by banks with limited...

The recent financial crisis has forced a rethink of banking regulation and supervision and the role of nancial innovation. We develop a model where prudent banks may signal their type through high capital ratios. Capital regulation may ensure separation in equilibrium but deposit insurance will...

It has been argued that the Bretton Woods system (of pegged but adjustable exchange rates) set up after World War II was designed specifically to prevent the manipulation of exchange rates in pursuit of national macroeconomic objectives (see R. Cooper) ; so it is perhaps no coincidence that the...

The proposition that under a floating exchange rate regime restrictive monetary policy can lead to substantial "overshooting" of the nominal and real exchange rate is now accepted fairly widely. The fundamental reason is the presence of nominal stickiness or inerta in domestic factor and product...

A model of Dornbusch is adapted to analyse the consequences for output and competitiveness of certain aspects of the U.K. government's medium term financial strategy and some other policy actions. This includes the announcement of a sequence of reductions in the target rate of monetary growth,...

The stylised facts of currency crises in emerging markets include output contraction coming hard on the heels of devaluation, with a prominent role for the adverse balance-sheet effects of liability dollarisation. In the light of the South East Asian experience, we propose an eclectic blend of...

A simple dynamic framework is used to show how consolidation plans that are robust and effective at capacity output can be undermined by demand failure. If the market panics and interest rates rise, the process can indeed become dynamically unstable. Tightening fiscal policy to reassure...

Lending retail deposits to SMEs and household borrowers may be the traditional role of commercial banks: but banking in Britain has been transformed by increasing consolidation and by the lure of high returns available from wholesale Investment activities. With appropriate changes to the...

When financial markets freeze in fear, borrowing costs for solvent governments may fall towards zero in a flight to quality – but credit-worthy private borrowers can be starved of external funding. In Kiyotaki and Moore (2008), where liquidity crisis is captured by the effective rationing of...

European capital markets show increasing concern about the extent of sovereign debts and their sustainability. Here we explore some insights that the Overlapping Generations (OLG) framework has to offer on such issues. The OLG framework implies, for example, that there is a limit to the amount...