This article studies the full equilibrium dynamics of an economy with financial frictions. Due to highly nonlinear amplification effects, the economy is prone to instability and occasionally enters volatile crisis episodes. Endogenous risk, driven by asset illiquidity, persists in crisis even for very low levels of exogenous risk. This phenomenon…

In this paper, we develop a framework for measuring, allocating and managing systemic risk. SystRisk, our measure of total systemic risk, captures the a priori cost to society for providing tail-risk insurance to the financial system. Our allocation principle distributes the total systemic risk among individual institutions according to their…

How should monetary policy and macro-prudential regulation respond to the dangers of financial bubbles? I argue that bubbles - and their collapse - become a serious problem when there is inadequate risk-sharing. Neither monetary policy nor traditional macro-prudential regulation is designed to deal with this risk-sharing problem. Monetary policy…