This paper analyzes the effects of several policy instruments for mitigating financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios, allow for interbank trading and...

Business cycles imply liquidity risks for banks. This paper explores how these risks influence bank lending over the cycle. With forward-looking banks, lending cycles, credit booms and busts, or suppressed and highly fragile bank systems can emerge, depending on the magnitude of liquidity risks....

The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. Key features of the model are that bank capital increases incentives for banks to monitor borrowers, thereby reducing the...