Many explanations for the rapid growth of the shadow banking system in the mid-2000s focus on money demand. This paper asks whether the short-term liabilities of the shadow banking system behave like money. We first present a simple model where households demand money services, which are supplied by three types of claims: deposits, Treasury bills, and asset-backed commercial paper (ABCP). The model provides predictions for the price and quantity dynamics of these claims, as well as the behavior of the banking system (in terms of issuance) and the monetary authority (in terms of open market operations). Consistent with the model, the empirical evidence suggests that the shadow banking system does respond to money demand. An extrapolation of our estimates would suggest that heightened money demand could explain up to approximately half the growth of ABCP in the mid-2000s.

We study the determinants of value creation in U.S. commercial banks. We develop novel measures of individual banks’ productivities at collecting deposits and making loans that we relate to bank market values. We find that deposit productivity is responsible for two-thirds of the value of the median bank and most variation in value across banks. Variation in productivity is driven by differences across banks in technology, customer demographics, and market power. We also find evidence of synergies between deposit-taking and lending. Our findings suggest that there is significant heterogeneity in banks’ ability to capture value by manufacturing safe assets.

We present a model that helps explain several past collapses of securitization markets. Originators issue too many informationally insensitive securities in good times, blunting investor incentives to become informed. The resulting endogenous scarcity of informed investors exacerbates primary market collapses in bad times. Inefficiency arises because informed investors are a public good from the perspective of originators. All originators benefit from the presence of additional informed investors in bad times, but each originator minimizes his reliance on costly informed capital in good times by issuing safe securities. Our model suggests regulations that limit the issuance of safe securities in good times.

We develop a novel methodology to infer the amount of capital allocated to quantitative equity arbitrage strategies. Using this methodology, which exploits time-variation in the cross-section of short interest, we document that the amount of capital devoted to value and momentum strategies has grown significantly since the late 1980s. We provide evidence that this increase in capital has resulted in lower strategy returns. However, consistent with theories of limited arbitrage, we show that strategy-level capital flows are influenced by past strategy returns and strategy return volatility and that arbitrage capital is most limited during times when strategies perform best. This suggests that the growth of arbitrage capital may not completely eliminate returns to these strategies.

Nonparametric estimators of treatment effects are often applied in settings where clustering may be important. We provide a general methodology for consistently estimating the variance of a large class of nonparametric estimators, including the simple matching estimator, in the presence of clustering. Software for implementing our variance estimator is available in Stata.

We provide evidence that financial market risk perceptions are important drivers of economic fluctuations. We introduce a novel measure of risk perceptions: the price of volatile stocks (PVSt), defined as the book-to-market ratio of low-volatility stocks minus the book-to-market ratio of high-volatility stocks. PVSt is high when perceived risk directly measured from surveys and option prices is low. Using our measure, we show that high perceived risk is associated with low risk-free interest rates, a high cost of capital for risky firms, and future declines in output and real investment. Perceived risk as measured by PVSt falls after positive macroeconomic news. These declines are predictably followed by upward revisions in perceived risk, indicating that fluctuations in investor risk perceptions are not fully rational.

We develop a model of government portfolio choice in which the government chooses the scale of risky projects in the presence of market failures and tax distortions. These frictions motivate the government to manage social risk and fiscal risk. Social risk management favors programs that ameliorate market failures in bad times. Fiscal risk management makes unattractive programs involving large government outlays when other government programs also require large outlays. These two risk management motives often conflict. Using the model, we explore how the attractiveness of different financial stability programs varies with the government’s fiscal burden and characteristics of the economy. Received December 19, 2016; editorial decision June 28, 2018 by Editor Itay Goldstein.

We develop a model in which specialized bond investors must absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, a shift in the supply of long-term bonds in one currency influences the foreign exchange rate between the two currencies, as well as bond term premia in both currencies. Our model matches several important empirical patterns, including the comovement between exchange rates and term premia, and the finding that central banks’ quantitative easing policies affect exchange rates. An extension of our model links spot exchange rates to the persistent deviations from covered interest rate parity that have emerged since 2008.

We study links between the labor market for loan officers and access to mortgage credit. Using novel data matching mortgage applications to loan officers, we find that minorities are underrepresented among loan officers. Minority borrowers are less likely to complete mortgage applications, have completed applications approved, and to ultimately take up a loan. These disparities are reduced when minority borrowers work with minority loan officers. These pairings also lead to lower default rates, suggesting minority loan officers have an informational advantage with minority borrowers. Our results suggest minority underrepresentation among loan officers reduces minority borrowers’ access to credit.