Financial Fragility , Liquidity , and Asset Prices

Financial Fragility, Bubbles and Monetary Policy

The paper models the links between financial fragility, asset markets and monetary policy. It is shown that central bank’s concern about the cost of financial disruption may generate an asymmetric response, thus contributing to the creation of an asset price bubble. In an economy with a highly leveraged financial structure, the central bank has an incentive to prevent a “run” on financial inter...

Liquidity, Interest, and Asset Prices *

A stylized theory of money and central banking is added to a model of competitive equilibrium in asset markets to explain the determination of the general level of asset prices and interest rates. The cash-in-advance constraint provides a transactions demand for money, but this is not sufficient to guarantee the determinacy of the price level if liquidity is costless or the price level is uncer...

Do Intermediaries Matter for Aggregate Asset Prices?

We propose a simple framework for intermediary asset pricing. Two elements shape if and how intermediaries matter for asset prices: how they make investment decisions (preference alignment), and the extent to which final investors offset their decisions by direct trading (substitution). We show that existing empirical evidence has not provided causal evidence that intermediaries matter for asse...

Liquidity Demand of Corporate Sector and Soft budget Constraint

This paper examines the relation between liquidity demands of corporate sector and investment decisions. It shows that the liquidity asset holding has two impacts on investments. First, the liquidity can absorb a liquidity shock and helps to continue a necessary project. Second, it helps to continue an undesirable project and decreases the incentive of firms. This negative aspect is quite simil...

Business Cycle Developments, Financial Fragility, Housing and Commodity Prices Comments on Financial (in)stability, supervision, and liquidity: a dynamic general equilibrium approach

Financially Constrained Arbitrage and Cross-Market Contagion

We propose a continuous time infinite horizon equilibrium model of financial markets in which arbitrageurs have multiple valuable investment opportunities but face financial constraints. The investment opportunities, heterogeneous along different dimensions, are provided by pairs of similar assets trading at different prices in segmented markets. By exploiting these opportunities, arbitrageurs ...