What is the main limitation of much modern macro-economic theory, among the failings pointed out by William R. White at the 2010 Mayekawa Lecture? We argue that the main deficiency is a failure to incorporate the possibility of default, including that of banks, into the core of the analysis....

As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased. Alternative macroeconomic models are available for policy analyses, and this paper evaluates the usefulness of some models from...

This paper contains a general equilibrium model of an economy with incomplete markets (GEI) with money and default. The model is a simplified version of the real world consisting of a non-bank private sector, banks, a central bank, a government and a regulator. The model is used to analyse...

New technology in computing has led some to suggest that the ability to settle transactions electronically will develop to such an extent that money will disappear from use. Two versions of this belief exist. One maintains that there will be ‘e-money’, issued conceivably by many...

We examine the role that credit risk in the central bank’s monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and...

Busts after periods of prolonged prosperity have been found to be catastrophic. Financial institutions increase their leverage and shift their portfolios towards projects that were previously considered too risky. This results from institutions rationally updating their expectations and becoming...

This paper assesses the choice of different regulatory policy instruments for crisis management and prevention. We show that Capital and Liquidity Requirements (as Basel III proposes) are not sufficient to ensure Financial Stability. Three different tools are required to address three different...