I develop an equilibrium model of U.S. money market funds (MMFs) and use it to analyze the effect of recently proposed regulations on the liquidity provided by these funds and their fragility. The model captures some of the key institutional features of MMFs, such as the "breaking the buck" liquidation rule and voluntary sponsor support, and it is consistent with several stylized facts identified in the literature on MMFs. In the model, the MMF industry may be prone to runs different from the canonical bank runs. These are not runs of investors on the MMFs but of the MMFs on the asset market. Moreover, the model shows that, even in a stylized setup, the policy analysis is complex. Regulation affects the payoffs from intermediation not only directly, but also through the fees, the sponsors' support decision, and asset prices, all of which are determined in equilibrium. The model takes into account general equilibrium effects that are not present in the current policy discussion and shows that they can overturn conventional intuition.
I analyze how the precision of information about the value of a bank's assets affects welfare and the economy's proneness to bank runs. In a model of banking with imperfect information, I find that more precise information need not be better: it may make an economy more fragile in the sense that bank runs are more likely to occur, and it may decrease welfare. When the transparency level is low, late consumers cannot distinguish bad states from good states based on their signal, and they have no incentives to withdraw early. As the transparency level increases, signals become more informative and incentives to withdraw early become stronger, increasing fragility and decreasing welfare.
I study a model in which banks need to borrow to make risky loans whose return is private information known only by the bank which made the loan. Banks cannot raise funds without either selling assets or pledging them as collateral. I show that collateral contracts arise endogenously even though all agents value the asset the same in autarky. The persistence of the need to borrow and the ability to make a profit from loans imply that banks will value the asset more than the lenders. On top of paying dividends, the asset resolves the banks' maturity mismatch problem and, since it is used as collateral, it relaxes a borrowing constraint. The amount that can be borrowed against the asset is determined in equilibrium. I show that increases in risk may decrease the asset's debt capacity and, thus, the level of intermediation in the economy.
Since Sandmo (1981), many articles have analyzed optimal fiscal policies in economies with tax evasion. All share a feature: they assume that the cost of enforcing the tax law is exogenous. However, governments often invest resources to reduce these enforcement costs. In a very simple model, we incorporate such investments in the analysis of an optimal fiscal policy. We characterize their optimal level and we show numerically how they interact with the other dimensions of the optimal fiscal policy. Finally, we highlight the differences between our results and those obtained in a model without investment in the tax administration.