In moral hazard models, bank shareholders have incentives to transfer wealth from the deposit insurer - that is, maximize put option value - by pursuing riskier strategies. For safe banks with large charter value, however, the risk-taking incentive is outweighed by the possibility of losing...

This paper explores sources of deposit dollarization unrelated to standard moral hazard arguments. We develop a model in which banks choose the optimal currency composition of their liabilities. We argue that the equal treatment of peso and dollar claims in the event of bank default can induce...

Do banks play a special role in the transmission mechanism of monetary policy? I use the presence of internal capital markets in bank holding companies to isolate plausibly exogenous variation in the financial constraints faced by subsidiary banks. In particular, I demonstrate that affiliated...

We define predatory lending as a welfare-reducing provision of credit. Using a textbook model, we show that lenders profit if they can tempt households into “debt traps,” that is, overborrowing and delinquency. We then test whether payday lending fits our definition of predatory. We find...

We compare forecasts of recessions using four different specifications of the probit model: a time-invariant conditionally independent version, a business cycle specific conditionally independent model, a time-invariant probit with autocorrelated errors, and a business cycle specific probit with...

We explore the connection between optimal monetary policy and heterogeneity among agents. We utilize a standard monetary economy with two types of agents that differ in the marginal utility they derive from real money balances — a framework that produces a nondegenerate stationary distribution...

The paper explores the optimal monetary policy reaction to productivity shocks in an open economy. Whereas earlier studies assume that countries specialize in producing particular goods, I enrich the analysis by allowing for incomplete specialization. I confirm the finding of Obstfeld and Rogoff...

We show how the interbank payment system can become illiquid following wide-scale disruptions. Two forces are at play in such disruptions—operational problems and changes in participants’ behavior. We model the interbank payment system as an n-player game and utilize the concept of a...

This paper evaluates current strategies for the empirical modeling of forecast behavior. In particular, we focus on the reliability of using proxies from time series models of heteroskedasticity to describe changes in predictive confidence. We address this issue by examining the relationship...

We investigate how bank migration across state lines over the last quarter century has affected the size and covariance of business fluctuations within states. Starting with a two-state version of the unit banking model in Holmstrom and Triocole (1997), we conclude that the theoretical effect of...