Modern financial sectors consist of banks, asset markets and a central bank. This paper builds a model where these institutions provide different financial services, and their interaction supports efficient allocations. When one institution is missing equilibria are, by construction,...

We formulate the central bank's problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted stationary utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income....

In an environment of Over-The-Counter trading with adverse selection we study traders' incentives to screen their counterparties under different clearing arrangements. When the clearing arrangement is also a choice, traders decide which types of transactions to clear under each arrangement, with...

We study dynamic contracts between a lender and a borrower in the presence of costly state verification and hidden effort. The optimal contract minimizes social losses by mediating dynamic incentives and monitoring. Along the efficiency frontier, the threat of early termination is unavoidable...