Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80794
Authors: 
Schroth, Josef
Year of Publication: 
2012
Series/Report no.: 
Bank of Canada Working Paper 2012-42
Abstract: 
This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are not constrained efficient when the economy experiences a financial crisis. A pecuniary externality entails that banks' desire to accumulate capital over time aggravates the scarcity of informed capital during the financial crisis. 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.
Subjects: 
Financial system regulation and policies
Financial markets
JEL: 
G01
G10
D53
G18
E60
Document Type: 
Working Paper

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