Regulators dedicate much attention to a financial institution’s option to default, i.e. the option that distressed financial institutions have to transfer losses to their creditors. It is generally recognized that the existence of this option provides intermediaries with a powerful incentive to keep firm capital close to the minimal requirement. We argue, however, that undercapitalization harms...

In this study, we look at the determinants of industry-level capital intensities. Using cross-country data, we find that the most important determinant is a country’s factor endowment. In addition, we find that measures of labor regulation and financial development also matter: less restrictive labor regulations and greater financial development are associated with lower and higher capital-inte...

Although several studies have explored the relationship between the operation and performance of a supply chain (SC), a general SC model cannot deliver the expected financial results at a company-wide level. In this paper, we argue that this cannot guarantee the maximization of a firm’s overall value because short-term financial performance metrics do not reflect the risk to businesses and the ...

This paper develops a stochastic dynamic model to examine the impact of capital regulation on banks’ financial decisions. In equilibrium, lending decisions, capital buffer, and the probability of bank failure are endogenously determined. Compared to a flat-rate capital rule, a risk-sensitive capital standard causes the capital requirement to be much higher for small (and riskier) banks and much...

A strategic optimization model provides the ideal setting for allocating the scarce capital of a financial intermediary such as an insurance company. The goal of management is to maximize shareholder value. Capital allocation serves three primary purposes: to compare managerial performance across business units, to provide a risk indicator for regulators and other stakeholders, and to develop a...

Abstract The current financial crisis highlights the need to develop DSGE models with real-financial linkages and an active banking sector. This paper proposes a fully micro-founded framework that incorporates optimizing banks, the interbank market, and the credit market into a DSGE model, and evaluates the role of banks and financial shocks in the U.S. business cycles. We assume two types of h...

Based on a dynamic open-economy macroeconomic model, this paper aims at understanding the contribution of domestic financial under-development to foreign reserve accumulation in some emerging market economies, especially in China. It is argued that foreign reserve accumulation is a consequence of a growth strategy induced by strong capital investment in a financially constrained economy. It is ...