We develop a general equilibrium model of competitive banks to examine the optimal design of bank regulation. There is a continuum of equilibria of the unregulated economy that feature varying relative sizes of the financial and real sectors. The unregulated economy underinvests (overinvests) in...

We develop an analytically tractable general equilibrium model to analyze the welfare effects of CDS trading and CDS regulation under aggregate uncertainty. If available equity capital is below a threshold, any equilibrium of the basic economy with no CDS markets features firm default and...