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This paper studies how banks simultaneously manage the two sides of their balance sheet and its implications for bank … risk taking and real economic activity. First, we analyze how changes in funding affect the supply of bank loans. We then …
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We present a theory in which the key driver of short-term debt issued by the financial sector is the portfolio demand for safe and liquid assets by the nonfinancial sector. This demand drives a premium on safe and liquid assets that the financial sector exploits by owning risky and illiquid...
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