The gains from international monetary policy cooperation are sizeable when the crossborder spillovers of shocks are significant and policymakers face a strong incentive to use monetary policy to insulate their country from these spillovers. We show that financial market arrangements play an integral role in determining these incentives. In a quantitative two-countries, two-goods model with stic...

——————————————————————————————————— We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets tur...

This paper provides a theoretical model of an open economy credit channel including currency mismatch and financial fragility where exporting firms have access to international credit but non-exporting firms do not. The impact of the crisis is predicted to be dramatically different for exporters/non-exporters. We examine firms’ access to external finance in four Asian economies after 1997 using...

Do low interest rate environments lead to greater bank risk-taking? We show that, when banks can adjust their capital structures, reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function. However, if the capital structure is fixed, the effect depends on the degree of leverage: following a decrease in interest rates, well capitalize...

This paper introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a bench...

We estimate an empirical model of consumption disasters using new data on consumption for 24 countries over more than 100 years, and study its implications for asset prices. The model allows for partial recoveries after disasters that unfold over multiple years. We find that roughly half of the drop in consumption due to disasters is subsequently reversed. Our model generates a sizable equity p...

This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relativel...

In this paper we use a representative consumer model to analyse the equilibrium relation between the transitory deviations from the common trend among consumption, aggregate wealth, and labour income, cay, and focus on the implications for both stock returns and housing returns. The evidence based on data for 15 OECD countries shows that when agents expect future stock returns to be higher, the...

One of the important functions of financial intermediation is intertemporal risk smoothing. This paper studies the effects of a production shock in a closed economy and compares the abilities of market-based and bank-based financial systems in processing the shock. The analysis of the shock propagation indicates that a competitive banking system may collapse in absence of a proper regulation. P...

In this paper, we study the potential of stocks as a hedge against inflation for different investment horizons. We show that stocks can be a hedge against inflation even if stock returns are negatively correlated with unexpected inflation shocks, and only moderately positively related to expected inflation. Depending on the investment horizon, the optimal hedge ratio can be either positive or n...