This paper develops a general equilibrium model to analyze the interaction between two sectors with differing degree of financial friction in the context of liquidity injections (credit expansion). We show that if too much liquidity is injected into the economy, overheating can build up in the...

<heading id="h1" level="1" implicit="yes" format="display">ABSTRACT</heading>We model the interaction of financial market transparency and different accounting regimes. This paper provides a theoretical rationale for the recently proposed shift in accounting standards from historic cost accounting to marking to market. The paper shows that marking to market can...

Purpose: This paper aims to study the design of bank capital regulation and points out a conceptual downside of risk-sensitive regulation. The author argues that when a bank is better informed about its risk than the regulator, designing regulation is subject to the Lucas critique. The...

Banking is risky and prone to failure. Yet banking regulation is surprisingly not all that risk-sensitive in practice. I show that when the bank has an informational advantage over the regulator, designing risk-sensitive banking regulation gives rise to a trade-off: relying on the banking market...

We study the effects of mark-to-market accounting (MTM) on banks' loan origination and retention decisions. We point out a conceptual shortcoming of MTM. Loan prices are informative in equilibrium but this price discovery is sustained by the good banks' costly retention. The attempt to exploit...

Banking is risky and prone to failure. Yet banking regulation is surprisingly not all that risk-sensitive in practice. I show that when the bank has an informational advantage over the regulator, designing risk-sensitive banking regulation gives rise to a trade-off: relying on the banking market...