Real interest and inflation rates have been very low in many industrialized countries since the Great Recession. In this paper, a mechanism of low and floating real interest and inflation rates is examined based on the concept a “Nash equilibrium of a Pareto inefficient path” and the law of motion for trend inflation. I show that, because the link between the marginal product of capital and the...

‘‘New Tigers” (including city commercial banks) outperform state-owned commercial banks burdened with non-performing loans from unprofitable state-owned enterprises. We study whether this is solely due to superior corporate governance (multiple shareholders versus total government ownership) or also to the favorable environment (the New Tigers target affluent China, while state-owned commercial...

This paper addresses the impact of dynamic risk management on bank risk taking. We show that when banks earn rents only from deposit insurance and can engage in risk management it is no longer in their interests to maximize risk; instead, they moderate their risk to increase their chances of survival. The paper also shows that the opportunity for risk management may change the impact of capital...

We propose a model in which firms compete to attract better managers by using corporate governance as part of an optimal executive compensation scheme. Higher governance decreases the cost of taking disciplinary actions against managers, but when managerial talent is scarce, competition among firms to attract better managers implies that firms under-invest in governance. The reason is that mana...

Foreign-dominated banking sectors, such as those prevalent in Central and Eastern Europe, are susceptible to two major sources of systemic risk: (i) linkages between local banks and (ii) linkages between a foreign mother bank and its local subsidiary. Using a nonparametric method based on extreme value theory, which accounts for fat-tail shocks, we analyze interdependencies in downward risk in ...

We analyze the impact of capital adequacy regulation on bank insolvency and aggregate investment. We develop a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of bank liquidity management and an insolvency mechanism. This allows us to study the impact of capital adequacy regulation...

We examine how financial networks influence asset prices and trading performance. Consistent with theoretical studies on the role of communication networks in information dissemination, we posit that global financial institutions, having more extensive and strategic financial networks, can more efficiently acquire and process information pertaining to asset trading due to their better access to...

My results suggest that the primary role of performance pricing in bank debt contracts is to delay costly renegotiation. This effect is concentrated in long-term loans, indicating that the renegotiation reduction benefits of pricing grids are larger for long maturities. For instance, a five-year loan with a pricing grid is refinanced for pricing-related reasons on average a year later than a si...

This paper develops a real options model of capital structure to understand two distinct roles played by intellectual capital in corporate financing decisions. First, intellectual capital limits a firm’s debt capacity because of its low liquidation value. Second, intellectual capital enhances a firm’s debt capacity through its positive impact on the earnings dynamics. We show that the former is...

This paper compares parametric and non-parametric estimates of productivity change in European banking between 1994 and 2000. Productivity growth has also been further decomposed into technological change, or change in best practice, and efficiency change. Both the parametric and non-parametric approaches consistently identify those systems that have benefited most (and least) from productivity...