Financial Institutions

This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that made lenders' negative private assessments about their borrowers public. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of the reaction by other lenders to the same firm.

Does private regulation work to provide and preserve collective benefits, and if so, when? To answer these questions, we focus on social structure and competitive exclusion. We argue that effective private regulation depends on social structures that support normative control of interested parties. However, competitive dynamics may transform private regulation into an instrument to defend the interest of institutional incumbents.

This paper describes the motives that gave rise to the creation of the Federal Reserve System, summarizes the history of Fed monetary policy from its origins in 1914 through the Treasury-Fed Accord of 1951, and reviews several of the principal controversies that surround that history. The persistence of conceptual errors in Fed monetary policy — particularly adherence to the "real bills doctrine" — is a central puzzle in monetary history, particularly in light of the enormous costs of Fed failures during the Great Depression.

This paper examines what we have learned about monetary policy strategy and considers how we should change our thinking in this regard in the aftermath of the 2007–09 crisis. It starts with a discussion of where the science of monetary policy stood before the crisis and how central banks viewed monetary policy strategy. It then examines how the crisis has changed the thinking of both macro/monetary economists and central bankers. Finally, it looks at what implications this change in thinking has had for monetary policy science and strategy.

What do economics and history have to tell us about the ways euro zone countries are likely to resolve their problems of fiscal unsustainability and banking system insolvency? In answering that question, I am among the most pessimistic observers of the likely future of the euro and its membership. In my view, the euro zone's likely failure to avoid at least some departures, if not total collapse, reflects its poor initial institutional design.

Dominant theories of trade tend to ignore the role of finance as a source of comparative advantage. On the other hand, the finance literature places financial institutions as a driver of economic growth. This paper unites these two competing schools of thought in a general equilibrium framework. For economies with high-quality institutions (defined by the competitiveness of the financial sector, the quality of corporate governance, and the level of property rights protection), finance is passive.