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| Farhi, Emmanuel; Tirole, Jean. |
| The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities have little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about... |
| Tipo: Working or Discussion Paper |
Palavras-chave: Monetary Policy; Funding Liquidity Risk; Strategic Complementarities; Macro-Prudential Supervision; Financial Economics; E44; E52; G28. |
| Ano: 2009 |
URL: http://purl.umn.edu/52545 |
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| Tirole, Jean. |
| The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a... |
| Tipo: Working or Discussion Paper |
Palavras-chave: Liquidity; Contagion; Bailouts; Regulation; Financial Economics; E44; E52; G28. |
| Ano: 2010 |
URL: http://purl.umn.edu/91011 |
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