Annual Review of Financial Economics - Early Publication

We compare and contrast production economies exposed to long-run uncertainty with investors that have possibly different preferences and/or access to financial markets. We study the macroeconomic and asset-pricing properties of these models, identify common features, and highlight areas where these models depart from each other. Our framework allows us to investigate more fully the impact of investor heterogeneity, capital heterogeneity, and fluctuations of the growth components to the capital evolution as they affect the dynamics of macroeconomic quantities and asset prices. In our comparisons, we employ an array of diagnostic tools to explore time variation and state dependencies in nonlinear environments.

The fact that internal liquidity is a key source of corporate funding puts the marginal value of cash at the center of a variety of firm decisions, including investment, payout, financing, savings, and risk management policies. The marginal value of cash is inherently a dynamic concept, because a firm facing financing frictions has to be forward-looking, managing its asset and liability structures in a unified framework and carefully trading off the use of liquidity across time and states. We present a dynamic framework for corporate liquidity management and survey the related literature, with a focus on the determinants of the marginal value of cash and its ubiquitous role in firm decisions.

Margin—collateral or funds that investors deposit with their counterparties—is a crucial component of the practice of borrowing money to fund investment. While margin offers the potential for enhanced returns, it also exposes investors to the risk of escalated losses, thereby necessitating stringent regulatory oversight. Delving into the regulatory framework governing margin trading, we provide historical insights into the origins and dynamics of various margin requirements, and we review academic studies that illuminate the implications of these regulations for asset pricing, financial stability, and the design of margin rules. With an eye to the future, we also outline recent advancements in the evolving landscape of margin rules, such as portfolio margin and central clearing.

Over the past two decades, banks have increasingly focused on offering contingent credit in the form of credit lines as a primary means of corporate borrowing. We review the existing body of research regarding the rationales for banks’ provision of liquidity insurance in the form of credit lines, their significance in managing corporate liquidity, and the reasons and circumstances under which firms opt to utilize them. We emphasize that the options for firms to both draw down and repay credit lines are put options issued by banks, which are exercised by firms in a correlated manner during periods of widespread stress, with adverse effects on bank intermediation thereafter. We discuss the bank capital and the bank funding channels that can drive these effects, contrasting their roles during the global financial crisis of 2007–2008 and the COVID-19 outbreak. We conclude by discussing the increasing extension of bank credit lines to nonbank financial intermediaries as well as the role of stress tests and monetary policy in managing the risks of contingent credit under stress.

There are powerful imperatives on governments to support innovation, which have only grown more urgent amid slowing growth in the developed world and a rapidly changing climate. In this review, I describe the important role that economics and finance play in rigorously evaluating innovation policy. I organize government intervention in innovation into arenas, agendas, and instruments. The arenas are firms, financial intermediaries, universities, and government laboratories. The key agendas are entrepreneurship, defense, climate, health, and education. The instruments fall into three categories: supply-push, demand-pull, and legal. I provide theoretical rationales for government intervention in innovation and discuss how they intersect with government agendas and empirical evidence in practice. One takeaway is that the government has a key role to play in the type of failure-tolerant, open-ended research that yields breakthrough inventions. In contrast, there is less evidence that subsidizing financial intermediaries is useful.

This article reviews research and policy work on nonbank financial intermediation (NBFI), taking a financial stability perspective. It first documents the growth in NBFI, reviews its possible drivers, and documents recent instability episodes. NBFI now often surpasses traditional bank financing, and research on it has increased, including research on its financial stability characteristics. Given NBFI's many forms and dimensions, the article focuses on its market-based forms. Taking a cross-country perspective, it reviews the benefits of NBFI, in terms of access to finance and economic impact, and its risks, specifically those related to interconnections, interactions between liquidity and leverage, and procyclicality. It describes policy steps—underway and possible—to reduce these risks, highlights outstanding issues, and suggests further analytical work. It also considers the current state of available data and the means to address remaining gaps.

In this article, we summarize empirical research on the interaction between monetary policy and asset markets and review our previous theoretical work that captures these interactions. We present a concise model in which monetary policy impacts the aggregate asset price, which in turn influences economic activity with lags. In this context, the following occurs: (a) the central bank (the Fed, for short) stabilizes the aggregate asset price in response to financial shocks, using large-scale asset purchases if needed (the Fed put); (b) when the Fed is constrained, negative financial shocks cause demand recessions; (c) the Fed's response to aggregate demand shocks increases asset price volatility, but this volatility plays a useful macroeconomic stabilization role; (d) the Fed's beliefs about the future aggregate demand and supply drive the aggregate asset price; (e) macroeconomic news influences the Fed's beliefs and asset prices; ( f ) more precise news reduces output volatility but heightens asset market volatility; and (g) disagreements between the market and the Fed provide a microfoundation for monetary policy shocks and generate a policy risk premium.

Bank market power, in both loan and deposit markets, has important implications for credit provision and for financial stability. This article discusses these issues through the lens of a simple theoretical framework. On the asset side, banks choose the quality and quantity of loans. On the liability side, they may be subject to depositor runs whenever they offer demandable contracts. This structure allows us to review the literature on the role of market power for credit provision and stability and also highlight the interactions between the two sides of banks’ balance sheets. Our approach identifies relevant channels that deserve further analysis, especially given the rising importance of bank market power for monetary policy transmission and the rise of the digital economy.