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We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings.

When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and then explore optimal policy under a range of assumptions about how expectations are formed.

This paper relaxes the Bayesian Nash equilibrium (BNE) assumption commonly imposed in empirical discrete choice games with incomplete information. Instead of assuming that players have unbiased/correct expectations, my model treats a player’s belief about the behavior of other players as an unrestricted unknown function. I study the joint identification of belief and payoff functions.

Our stress-testing tool considers banks under stress that can strategically manage their balance sheets. Using confidential Canadian supervisory data, we assess whether bank behaviour to maximize shareholder value can amplify a hypothetical stress scenario.

How do outcomes of monetary and fiscal stabilization policies at the zero lower bound change when decision makers have finite planning horizons in the economy? We explore the effects of limited foresight on policy tools and the interaction between monetary and fiscal policy.

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.

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.

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.

We quantify the effects of large-scale stock purchases by a central bank and compare these to bond purchases. We find that the central bank’s equity purchases would lower the risk and term premiums on stocks and long-term bonds, respectively, and thereby stimulate economic activity.

An alternative to the standard CES aggregator, based on non-homothetic household preferences, is proposed. Specifically, the elasticity of substitution between goods declines during periods of strong per-capita consumption and vice versa, giving firms an incentive to adjust their desired markup in response to the state of demand. Empirical evidence favouring a direct role for per-capita consumption demand in inflation determination for Canada is presented.