This paper studies the optimal design of a macro-prudential instrument, a loan-to-value (LTV) limit, and its implications for monetary policy in a model with nominal rigidities and financial frictions. The analysis accounts for both an effective lower bound on the nominal interest rate and an upper bound on the ability of LTV limits to stimulate credit demand. The welfare-based loss function features a role for macro-prudential policy to enhance risk-sharing. Optimal LTV limits are strongly countercyclical. In a house price boom-bust episode, the active use of LTV limits alleviates debt-deleveraging dynamics and prevents the economy from falling into a liquidity trap.

The recovery of 2013 that followed the United Kingdom's Great Recession featured a rapid fall in unemployment but stagnant wage growth. Did the wage Phillips curve break down? These dynamics have two main candidate explanations: declining labor frictions, meaning lower unemployment without increasing wage growth; or a demand recovery accompanied by weak productivity, meaning unemployment fell but equilibrium wage growth remained low. This paper investigates using an estimated New Keynesian model featuring unemployment. The data favor a mix of explanations, but with the balance of evidence favoring the second. A demand recovery reduced unemployment, but wages are likely to have remained weak mainly because of poor productivity.

We examine macroprudential bank capital policy in a macroeconomic model with a financial accelerator originating in the banking sector. Under Ramsey-optimal policy, the bank capital buffer tracks closely a model-based measure of the credit gap, defined as the gap between equilibrium credit in the economy featuring financial frictions and that in a hypothetical frictionless economy. Simple rules that vary the capital buffer in response to the credit gap perform worse than Ramsey policy, but only modestly so. When monetary policy controls inflation less aggressively, optimal macroprudential responses are smaller. Optimal macroprudential policy operates at a lower frequency than monetary policy.

We construct a macroeconomic model with overlapping generations to study credit traps-prolonged periods of stagnant real activity accompanied by low productivity, financial sector undercapitalization, and credit misallocation. Shocks to bank capital tighten banks' borrowing constraints causing them to allocate credit to easily collateralizable but low productivity projects. Low productivity weakens bank capital generation, reinforcing tight borrowing constraints, sustaining the credit trap steady state. Macroprudential policy to limit bank leverage can be welfare enhancing. In the presence of a credit trap, optimal leverage policy is countercyclical.

We develop a macroeconomic model in which commercial banks can offload risky loans to a "shadow" banking sector, and financial intermediaries trade in securitized assets. The model can account both for the business cycle comovement between output, traditional bank, and shadow bank credit, and for the behavior of macroeconomic variables in a liquidity crisis centered on shadow banks. We find that following a liquidity shock, stabilization policy aimed solely at the market in securitized assets is relatively ineffective.

Using vector autoregressive models with either constant or time-varying parameters and stochastic volatility for the United States, we find that a contractionary monetary policy shock has a persistent negative impact on the asset growth of commercial banks, but increases the asset growth of shadow banks and securitisation activity. To explain this ‘waterbed’ effect, we propose a standard New Keynesian model featuring both commercial and shadow banking, and we show that the model comes close to explaining the empirical results. Our findings cast doubt on the idea that monetary policy can usefully ‘get in all the cracks’ of the financial sector in a uniform way.

How does bank profitability vary with interest rates? We present a model of a monopolistically competitive bank subject to repricing frictions and test the model's predictions using a unique panel data set on UK banks. We find evidence that large banks retain a residual exposure to interest rates, even after accounting for hedging activity operating through the trading book. In the long run, both level and slope of the yield curve contribute positively to profitability. In the short run, however, increases in market rates compress interest margins, consistent with the presence of nonnegligible loan pricing frictions.

This paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities. Unprofitable banks have strong incentives to invest in risky assets and generate inefficient credit booms when macroeconomic fundamentals are good in order to signal high ability. We show that across-the-system countercyclical capital requirements that deter credit booms are constrained optimal when fundamentals are within an intermediate range. We also show that when fundamentals are deteriorating, a public announcement of that fact can itself play a powerful role in preventing inefficient credit booms, providing an additional channel through which macroprudential policies can improve outcomes.

We construct an overlapping generations macroeconomic model with which to study the causes, consequences and remedies to ‘credit traps’ — prolonged periods of stagnant real activity accompanied by low productivity, financial sector undercapitalisation, and the misallocation of credit. In our model, credit traps arise when shocks to bank equity capital tighten banks’ borrowing constraints, causing them to allocate credit to easily collateralisable but low productivity projects. Low productivity weakens bank capital generation, reinforcing tight borrowing constraints, sustaining the credit trap steady state. We use the model to study policy options, both ex ante(avoiding credit traps) and ex post (escaping them). Ex ante, restrictions on bank leverage can help to enhance the economy’s resilience to the shocks that can cause credit traps. Further, a policymaker focused on maximising the economy’s resilience to credit traps would set leverage countercyclically, allowing an expansion of leverage in minor downturns and reducing leverage in upswings. However, ex post, relaxing a leverage cap will not help escape the trap. Instead, a range of unconventional policies are needed. We study publicly intermediated lending, discount window lending, and recapitalisation, and compare the efficacy of these policies under different conditions.

Credit cycles have been a characteristic of advanced economies for over 100 years. On average, a sustained pick‐up in the ratio of credit to GDP has been highly correlated with banking crises. The boom phases of the cycle are characterised by large deviations in credit from trend. A range of mechanisms can generate these effects, each of which has strategic complementarity between banks at its core. Macro‐prudential policy could curb these credit cycles, both through raising the cost of maintaining risky portfolios and through an expectations channel that operates via banks' perceptions of other banks' actions.

Macroprudential capital policy is designed to make the financial system more resilient and reduce the likelihood and severity of financial crises. In doing so, it can have an impact on credit conditions and economic growth more generally. This article considers the effects on credit conditions over the near term. The direction and magnitude of those effects are likely to depend crucially on the state of the financial system and the economy as well as the way in which banks, financial investors and borrowers respond to changes in macroprudential capital policy.

Anderson and van Wincoop (2003) showed the importance of multilateral resistance general equilibrium effects in estimating the response of trade flows to trade costs. We integrate this into Helpman, Melitz, and Rubinstein's (2008) extension of Anderson and van Wincoop's framework, which allows for firm heterogeneity, in order to quantify the different margins of adjustment. For bilateral trade cost changes, the general equilibrium effects are small. Surprisingly, most country pairs reduce their trade after a multilateral fall in trade costs. The global trade response to lower costs is positive, amplified by firm entry, but significantly dampened by multilateral resistance.

This article examines Japan’s policies in dealing with its banking crisis during the 1991–2004 period, in order to draw lessons for policymakers today. Japan’s policy choices reflected a difficult trade-off between the need to contain moral hazard on the one hand, and the need to limit systemic risk on the other. The resolution of the crisis ultimately required recapitalising banks and resolving uncertainty over banks’ asset valuations.

In 2010, President Barack Obama appointed the Blue Ribbon Commission on America’s Nuclear Future (BRC) in order to study options for dealing with nuclear waste as alternatives to replace permanent disposal at Yucca Mountain, Nevada. The BRC recommended a new voluntary siting mechanism based on the Nuclear Waste Negotiator (NWN), an expired program decried as “radioactive racism” for its almost exclusive focus on Native Americans. The NWN inspired numerous articles supporting or opposing tribes’ efforts to host nuclear waste facilities. Rather than focus on the tribal majorities that have pursued such facilities, as previous scholarship has done, this Note refocuses the analysis on the substantial tribal minorities that have actively opposed their leaderships’ decisions to host such facilities. The Note has two main goals. First, it seeks to elucidate the uphill legal battle that minority tribe members face under current law if they decide to challenge the Bureau of Indian Affairs’ approval of the lease for a facility that their tribal leadership has signed. Second, it offers specific recommendations for Congress to implement as part of its impending nuclear waste legislation.

Do better international logistics reduce trade costs, raising a developing country's exports? Yes, but the magnitude of the effect depends on the country's size. The authors apply a gravity model that accounts for firm heterogeneity and multilateral resistance to a comprehensive new international logistics index. A one-standard deviation improvement in logistics is equivalent to a 14 percent reduction in distance. An average-sized developing country would raise exports by about 36 percent. Most countries are much smaller than average however, so the typical effect is 8 percent. This difference is chiefly due to multilateral resistance: it is bilateral trade costs relative to multilateral trade costs that matter for bilateral exports, and multilateral resistance is more important for small countries.

The first, the allocation channel, operates through the constraints and incentives of financial institutions. By employing regulatory tools that affect the cost-benefit trade-offs of financial decisions, the authority would incentivise financial institutions to reallocate their resources across alternative investments. During credit booms, for example, raising the countercyclical capital buffer would help enhance resilience and could dampen excessive balance sheet expansion. Conversely, lowering this buffer during a downturn would discourage banks from excessive deleveraging, provided that the remaining capital buffer is judged to be adequate to absorb future losses with a sufficiently high probability. In a post-crisis environment, however, some banks’ pre-crisis capitalisation may prove to be insufficient to absorb losses and confidence in the sector could, as a result, be low. Low capital levels may hamper banks’ access to funding markets and, ultimately, impair bank lending. Requiring undercapitalised banks to raise their capital levels could, in such circumstances, help underpin a sustained recovery of credit growth.