With the recent financial crisis, many financial intermediaries experienced strains created by declining asset values and a loss of funding sources. In reviewing these stress events, one notices that some arrangements appear to have been more stable—that is, better able to withstand shocks to...

Basel III introduces the first global framework for bank liquidity regulation. As monetary policy typically involves targeting the interest rate on interbank loans of the most liquid asset - central bank reserves - it is important to understand how this new requirement will impact the efficacy...

Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by using public resources to augment the private consumption of those...

In nonconvex environments, a sunspot equilibrium can sometimes be destroyed by the introduction of new extrinsic information. We provide a simple test for determining whether or not a particular equilibrium survives, or is robust to, all possible re…nements of the state space. We use this...

We study a finite-depositor version of the Diamond-Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the (constrained) efficient allocation of resources in closed-form and show that this allocation provides liquidity...

Central banks have responded to the current financial crisis with an unprecendented program of lending to banks and other financial institutions. In some cases, this lending has lead to a substantial increase in the monetary base. Can such lending programs cause an increase in inflation? Is so,...

We study the Green and Lin (JET, 2003) model of financial intermediation with two new features: traders may face a cost of contacting the intermediary and consumption needs may be correlated across traders. We show that each of these features is capable of generating an equilibrium in which some...

We study the role of commitment in a version of the Diamond and Dybvig (JPE, 1983) model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however,...

This paper presents a model in which currency crises can spread across countries as a result of the self-fulfilling beliefs of market participants. An incomplete-information approach is used to overcome many undesirable features of existing multiple-equilibrium explanations of contagion. If...