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Financial Crisis Resolution

Josef Schroth

No 617, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2012
New Economics Papers: this item is included in nep-dge
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More papers in 2012 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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