The equity and debt prices of large nonbank firms contain information about the future state of the banking system. In this sense, banks are informationally central. The amount of this information varies over time and over equity and debt. During a financial crisis banks are, by definition of a...

Are stock prices determined by fundamentals or can 'bubbles'exist? An important issue in this debate concerns the circumstances in which deviations from fundamentals are consistent with rational behavior. When there is asymmetric information between investors and portfolio managers, portfolio...

The authors consider a model of the stock market with delegated portfolio management. Portfolio managers try, but sometimes fail, to discover profitable trading opportunities. Although it is best not to trade in this case, their clients cannot distinguish 'actively doing nothing,' in this sense,...

Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets – loans – not be revealed, so that bank money does not fluctuate in value, reducing the efficiency of trade. This need for opacity...

Models of coordination failure have equilibria that are not first-best because of externalities. Usually these models display multiple equilibria. We provide an example of how the existence of some economic institutions and government policies can be explained as mechanisms for internalizing...