Xavier Freixas and Kebin Ma reexamine the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. By means of a simple model, they show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk in different ways.
In the economy we observe stock price booms and busts. How do these cycles come about, could there be a way of smoothing them and, in that case, should we? Klaus Adam, Johannes Beutel, and Albert Marcet show that a very simple model of stock prices can explain very well the stock price volatility found in the data assuming that investors do not understand perfectly well how prices are formed.
Barcelona GSE research on VoxEU.org by Alberto Martín and Jaume Ventura
There is a widespread view among macroeconomists that fluctuations in collateral are an important driver of credit booms and busts. This column distinguishes between ‘fundamental’ collateral – backed by expectations of future profits – and ‘bubbly’ collateral – backed by expectations of future credit. Markets are generically unable to provide the optimal amount of bubbly collateral, which creates a natural role for stabilisation policies. A lender of last resort with the ability to tax and subsidise credit can design a ‘leaning against the wind’ policy that replicates the ‘optimal’ bubble allocation.
Alessandro Tarozzi, Jaikishan Desai, and Kristin Johnson investigate the impact of microcredits in rural Ethiopia.