Understanding Financial Crises

By Franklin Allen; Douglas Gale | Go to book overview

2
Time, uncertainty, and liquidity

Financial economics deals with the allocation of resources over time and in the face of uncertainty. Although we use terms like [present values,] [states of nature,] and [contingent commodities] to analyze resource allocation in these settings, the basic ideas are identical to those used in the analysis of consumer and producer behavior in ordinary microeconomic theory. In this chapter we review familiar concepts such as preferences, budget constraints, and production technologies in a new setting, where we use them to study the intertemporal allocation of resources and the allocation of risk. We use simple examples to explain these ideas and later show how the ideas can be extended and generalized.


2.1 EFFICIENT ALLOCATION OVER TIME

We begin with the allocation of resources over time. Although we introduce some new terminology, the key concepts are the same as concepts familiar from the study of efficient allocation in a [timeless] environment. We assume that time is divided into two periods, which we can think of as representing the [present] and the [future.] We call these periods dates and index them by t = 0, 1, where date 0 is the present and date 1 is the future.


2.1.1 Consumption and saving

Suppose a consumer has an income stream consisting of Y0 units of a homogeneous consumption good at date 0 and Y1 units of the consumption good at date 1. The consumer's utility U(C0, C1) is a function of his consumption stream (C0, C1), where C0 is consumption at date 0 and C1 is consumption at date 1. The consumer wants to maximize his utility but first has to decide which consumption streams (C0, C1) belong to his budget set, that is, which streams are feasible for him. There are several ways of looking at this question. They all lead to the same answer, but it is worth considering each one in turn.

-27-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Understanding Financial Crises
Table of contents

Table of contents

  • Title Page iii
  • Preface v
  • Contents vii
  • 1: History and Institutions 1
  • 2: Time, Uncertainty, and Liquidity 27
  • 3: Intermediation and Crises 58
  • 4: Asset Markets 99
  • 5: Financial Fragility 126
  • 6: Intermediation and Markets 153
  • 7: Optimal Regulation 190
  • 8: Money and Prices 216
  • 9: Bubbles and Crises 235
  • 10: Contagion 260
  • Index 299
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen
/ 303

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.