Financial Crisis Resolution
AbstractThis paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are not constrained efficient when the economy experiences a financial crisis. A pecuniary externality entails that banks’ desire to accumulate capital over time aggravates the scarcity of informed capital during the financial crisis. I show that a constrained social planner finds it beneficial to introduce a permanent wedge between the deposit rate and the economy’s marginal rate of transformation. The wedge improves borrowers’ access to finance during a financial crisis by strengthening banks’ incentives to provide intermediation services. I propose a simple implementation of the constrained-efficient allocation that limits bank size.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 12-42.
Length: 25 pages
Date of creation: 2012
Date of revision:
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Financial markets; Financial system regulation and policies;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
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