Global Imbalances and Financial Fragility

Global Imbalances and Financial Fragility

The U.S. is currently engulfed in the most severe financial crisis since the Great Depression. A key structural factor behind this crisis is the large demand for riskless assets from the rest of the world. In this paper we present a model to show how such demand not only triggered a sharp rise in U.S. asset prices, but also exposed the U.S. financial sector to a downturn by concentrating risk o...

Global Imbalances and the Financial Crisis: Products of Common Causes

One of the main global economic concerns before the financial crisis was the presence of large “global imbalances,” which refer to the massive and persistent current account deficits experienced by the United States and financed by the periphery . This concern was intellectually grounded on the devastating crises often experienced by emerging market economies that run chronic current account de...

Governance and Financial Fragility

Bailouts and Financial Fragility

Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by transferring resources to those investors facing losses. The anticipation of such a “bailout” distorts ex ante incentives, leading intermediaries to become excessively i...

Savings Gluts and Financial Fragility∗

We investigate the effects of an increase in liquidity (a “savings glut”) on the incentives to originate high quality assets, and on the fragility of the financial sector. Originators incur private costs when originating high quality assets. Assets are subsequently distributed in two markets: A private market where informed intermediaries operate, and an exchange where uninformed investors trad...