We examine the role of bank leverage to explain why the 2007-08 financial crisis unfolded at a time when the economy appears to be less fragile to crisis risks. To this end, we extend the model introduced by Diamond and Rajan (2012) to a variant where the probability of financial crises varies...

A fast growing literature on small open economy models with pecuniary externalities has provided the theoretical grounds for the policy analysis of macro prudential regulations. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of...