Wednesday, October 13, 2010: 9:40 AM
The recent financial crisis has shown the importance of understanding how financial intermediaries operate and how they affect the real economy. I present an infinite-horizon model of a banking firm as an inventory manager of cash flows. This model can capture many aspects of bank behavior that appear puzzling in other contexts; in particular, maturity transformation, the process of "borrowing short and lending long", arises naturally out of of optimal behavior. Finally, the model can be embedded in a general equilibrium framework with borrowers and lenders; I use this framework to analyze the effect of maturity transformation on consumption, savings, investment, interest rates, and the risk of financial crisis.