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Bank regulation presumes risks spill over more easily from large banks to the banking system than vice versa. Interestingly, we observe this is not the case. We find that the capacity to transmit risk is larger in the system-to-bank direction, leading to an increased default risk.

We explore the long-run effects of a monetary policy shock in a Heterogeneous Agent New Keynesian model built on the micro evidence that job losses lead to persistently lower individual earnings through a combination of skill decay and abandonment of the labour force.

To what extent does a central bank digital currency (CBDC) compete with bank deposits? To answer this question, we develop and estimate a structural model where each household chooses which financial institution to deposit their digital money with.

We study the interaction between epidemics and economic decisions in a model that has silent transmission of the virus. We find that rational behaviour strongly diminishes the severity of the epidemic but worsens the economic recession. We also find that the detection and isolation of not only symptomatic individuals but also those who are infected and asymptomatic or mildly symptomatic can reduce the severity of the recession caused by the pandemic.

This paper studies the implications of model uncertainty for wealth distribution in a tractable general equilibrium model with a borrowing constraint and robustness à la Hansen and Sargent (2008). Households confront model uncertainty about the process driving the return of the risky asset, and they choose robust policies.

Canada plans to adopt a retail payment system to allow Canadians to pay in real time (or near real time) 24 hours a day, 7 days a week. However, the traditional model for setting the overnight interest rate does not operate 24/7.

This paper studies the effects of financial development, taking into account both formal and informal financing. Using cross-country firm-level data, we document that informal financing is utilized more by rich countries than poor countries.

This paper analyzes the optimal quantity of central bank reserves in an economy where reserves and other financial assets provide liquidity benefits. Using a static model, I derive a constrained Friedman rule that characterizes the socially optimal level of reserves, demonstrating that this quantity is neither necessarily large nor small but depends on the marginal benefits of reserves relative to alternative safe assets.

Statistical inference--both estimation and testing--for stochastic volatility (SV) models is known to be challenging and computationally demanding. We propose simple and efficient estimators for SV models with conditionally heavy-tailed error distributions, particularly the Student’s t and Generalized Exponential Distributions (GED). The estimators rely on a small set of moment conditions derived from ARMA-type representations of SV models, with an option to apply “winsorization” to improve stability and finite-sample performance. Except for the degrees of-freedom parameter, closed-form expressions are available for all other parameters, extending Ahsan and Dufour (2019, 2021), thus eliminating the need for numerical optimization or initial values. We derive the estimators’ asymptotic distribution and show that, due to their analytical tractability, they support reliable, and even exact, simulation-based inference via Monte Carlo or bootstrap methods. We assess their performance through extensive simulations and demonstrate their practical relevance in financial return data, which strongly reject the normality assumption in favor of heavy-tailed models.

This paper studies optimal need-based financial aid when parental transfers—unobserved by policymakers—vary across and within families of similar means. Using data on U.S. college students, I document substantial inequality in parental transfers, especially among wealthier families. I then analyze how this affects aid design aimed at reducing inefficiencies from borrowing constraints and the aid itself.