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Financial Crisis Resolution

  • Josef Schroth


This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are inefficient when the economy experiences a financial crises. A pecuniary externality entails that bank back-loading may weaken bank incentives. 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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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 617.

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Date of creation: 2012
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Handle: RePEc:red:sed012:617
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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