**Unconventional Monetary Policy and the Safety of the Banking System**, with M. Magill and J.C. Rochet, 2016.

This paper presents a simple general equilibrium model which simultaneously incorporates the banking sector and the monetary and macroprudential policy of the Central Bank. Banks are viewed as intermediaries which channel funds from cash pools and depositors who insist on the complete safety of their funds, and investors who accept risks, to borrowers who invest in risky projects. Bank debt is rendered safe by the explicit or implicit guarantee of the government. The presence of cash pools which can either buy (short-term) government bonds or lend to banks implies that the choice of an interest rate by the Central Bank determines the cost of funds for the banks. The government insurance of debt gives it an advantage over equity which implies that capital requirements are needed to obtain existence of a banking equilibrium. The paper studies the possible monetary and prudential policies of the Central Bank and their effect on the banking equilibrium, for economies with a high demand for safe asset---a notion precisely defined in he paper. We show that the conventional monetary and prudential tools, the interest rate and the capital requirements of banks, are not independent instruments, and that there is no choice of policy which can lead to a Pareto optimum. However enlarging the monetary policy toolkit by adding the payment of interest on bank reserves and QE policies can, in conjunction with appropriate capital requirements, restore the Pareto optimality of the banking equilibrium.

**A Critique of Market Value Maximization**with M. Magill and J.C. Rochet, 2013 (circulated under the title

**"Reforming Capitalism"**and published as

**"Toward a Stakeholder Theory of the Firm"**in

*Econometrica*)

The majority of economists share the view that a firm---even a large corporation--- should serve the exclusive interests of its shareholders. This paper argues that shareholder value maximization is not a socially optimal criterion when large firms make investment decisions which either decrease the probability of adverse technological outcomes or increase the probability of producing more efficiently (firm-specific innovations). Such investments affect the expected prices on the product and labor markets on which the firms operate, thereby influencing not only the firms' expected profits but also the expected welfare of consumers and workers ( a pecuniary externality). This suggests that a firm's criterion should include the welfare of all its stakeholders. We show that when firms are stakeholder oriented in that they maximize a weighted sum of shareholder value and their contribution to consumer and employee welfare, then the resulting stakeholder equilibrium improves upon the shareholder equilibrium.

**Prices and Investment with Collateral and Default**, with M. Magill,

*Journal of Economics, Dynamics and Control*, 2015

This paper uses the framework of an OLG economy with three-period lived agents in which a durable good serves as collateral for loans, to study the effect of an unanticipated income shock when the economy is in steady state equilibrium. We focus on on the consequence of the possibility of default on loans when the value of the collateral falls below the value of the debt it secures. We analyze the impulse response functions of the price and production of the durable good and show that there is an asymmetry between the response of the price and investment of the durable good to a positive and a negative income shock arising from default on the collateralized loans. We show that this asymmetry can be seen in the data on housing prices and construction and is attributable to the default on mortgages in periods of decreasing prices which acts as a turbo mechanism magnifying the decline in investment.

**Term Structure and Forward Guidance as Instruments of Monetary Policy,**with M. Magill,

*Economic Theory, 2014.*

This paper studies a simple monetary model with a Ricardian fiscal policy in which equilibria are indeterminate if monetary policy consists solely of a rule for fixing the short-term interest rate. We introduce explicitly into the model the agents' expectations of inflation which create the indeterminacy and show that there are two types of policies---a term-structure rule or a forward-guidance rule for the short rate---which can lead to determinacy. The first consists in fixing the interest rates on a family of bonds of different maturities as function of realized inflation; the second consists in fixing the short-term interest rate and the expected values of the short-term interest rate for a sequence of periods into the future as a function of realized inflation. If the monetary authority chooses an inflation process which satisfies conditions derived in the paper and applies one of these rules, it can anchor agents' expectations to this process, in the sense that it is the unique inflation process compatible with equilibrium when the interest rates or expected future values of the short rate are those specified by the term-structure or forward-guidance rule.

**Anchoring Expectations of Inflation**, with M. Magill,

*Journal of Mathematical Economics, 2014*.

**Abstract**. This paper studies existence and uniqueness of equilibrium in a monetary model in which fiscal policy is Ricardian. The innovation of the paper is to model agents' expectations as endogenous probabilities which are determined in equilibrium. Since economies with a Ricardian fiscal policy typically exhibit indeterminacy of equilibrium when the monetary policy instrument is the short-term interest rate, we augment the instruments of monetary policy to the interest rates on a family of bonds of maturities 1,...T and derive conditions under which this ensures uniqueness of equilibrium.