Abstract not found

Abstract not found

During the past 20 years, the world’s major central banks have been largely successful at bringing inflation under control. Although it is premature to suggest that inflation is no longer an issue of great concern, it is quite conceivable that the next battles facing central bankers will lie on a different front. One development that has already concentrated the minds of policymakers is an apparent increase in financial instability, of which one important dimension is increased volatility of asset prices. Borio, Kennedy, and Prowse (1994), among others, document the emergence of major boom-bust cycles in the prices of equity and real estate in a number of industrialized countries during the 1980s. Notable examples include the United States,

We provide a model that links a security’s market liquidity — i.e., the ease of trading it — and traders ’ funding liquidity — i.e., their availability of funds. Traders provide market liquidity and their ability to do so depends on their funding, that is, their capital and the margins charged by their financiers. In times of crisis, reductions in market liquidity and funding liquidity are mutually reinforcing, leading to a liquidity spiral. The model explains the empirically documented features that market liquidity (i) can suddenly dry up (i.e. is fragile), (ii) has commonality across securities, (iii) is related to volatility, (iv) experiences “flight to liquidity ” events, and (v) comoves with the market. Finally, the model shows how the Fed can improve current market liquidity by committing to improve funding in a potential future crisis.

We propose a multiperiod model in which competitive arbitrageurs exploit discrepancies between the prices of two identical risky assets traded in segmented markets. Arbitrageurs need to collateralize separately their positions in each asset, and this implies a financial constraint limiting positions as a function of wealth. In our model, arbitrage activity benefits all investors because arbitrageurs supply liquidity to the market. However, arbitrageurs might fail to take a socially optimal level of risk, in the sense that a change in their positions can make all investors better off. We characterize conditions under which arbitrageurs take too muchor too little risk.

reflects the author’s views and not necessarily those of the International Monetary Fund, its management, or its Board. I thank Laura Kodres for extremely useful conversations and suggestions, Sergei Antoshin for valuable research assistance, and Douglas Diamond, Jonathan Fiechter, Laura Kodres, Donald Kohn, Hyun Shin, Jeremy Stein, and Hung Tran for valuable comments on a previous draft. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau

Abstract not found

This paper develops a quantitative monetary DSGE model that allows for financial intermediaries that face endogenous balance sheet constraints. We use the model to simulate a crisis that has some basic features of the current economic downturn. We then use the model to quantitatively assess the effect of direct central bank intermediation of private lending, which is the essence of the unconventional monetary policy that the Federal Reserve has developed to combat the subprime crisis. We show numerically how central bank credit policy might help moderate the simulated crisis. We then compute the optimal degree of central bank credit intervention in this scenario and also compute the welfare gains. 1 1

We develop a canonical framework to think about credit market frictions and aggregate economic activity in the context of the current crisis. We use the framework to address two issues in particular: …rst, how disruptions in …nancial intermediation can induce a crisis that a¤ects real activity; and second, how various credit market interventions by the central bank and the Treasury of the type we have seen recently, might work to mitigate the crisis. We make use of earlier literature to develop our framework and characterize how very recent literature is incorporating insights from the crisis.

This paper provides new evidence of how macroeconomic conditions affect capital structure choice. We model firms ’ target capital structures as a function of macroeconomic conditions and firm-specific variables. We split our sample based on a measure of financial constraints. We find that target leverage is counter-cyclical for the relativelyunconstrained sample, but pro-cyclical for the relativelyconstrained sample. The choice of what type of security to issue/repurchase is significantly related to deviations from the target capital structure, particularly for the constrained sample. Macroeconomic conditions are significant for issue choice for unconstrained firms but less so for constrained firms. Our results support the hypothesis that unconstrained firms are able to time their issue choice to periods when macroeconomic conditions are favorable, while constrained firms take what they can get.