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.

We review the academic findings from psychology and economics on disagreement—specifically, the effect of disagreement on asset prices. We discuss measurement of disagreement and how disagreement, coupled with constraints on short selling, can sideline pessimistic investors and result in overpricing. We review the literature on short selling in financial markets, paying particular attention to how and why some issues become hard-to-borrow and what factors go into the determination of borrowing costs, and we discuss the evolution of borrowing costs over the last several decades. We show how an examination of the prices and borrowing costs for constrained stocks can lead to an improved understanding of how disagreement in financial markets arises and is resolved, and we discuss directions for future research.

We review the literature on the impact of the COVID-19 pandemic on financial markets. We first document several key facts about equity and fixed-income markets during this period. We then discuss various literatures that analyze broad movements in prices, market dislocations, and the impact of fiscal and monetary policy interventions. We conclude by discussing potential directions for future research.

Discounting of deferred impacts of government policies is a long-established practice that has been the target of substantial litigation and continued philosophical debate. Legal challenges to the social rate of discount have resulted in general acceptance of the principle of discounting at a nonzero rate for both monetary and nonmonetary impacts. Courts have displayed a general familiarity with discounting and often require transparent justification for the selection of the discount rate based on established scientific principles. The philosophical issues are more wide-ranging and include whether nonmonetary impacts should be discounted, the use of the opportunity cost of capital or the social rate of time preference, the time frame that is pertinent for setting the discount rate, and determination of whose preferences should have standing. Intergenerational issues are particularly challenging, raising questions regarding which generation's preferences should be recognized, the potential for dynamic inconsistencies arising from preferential discount rates, and intertemporal inequities. Benefit-cost analyses that include appropriate recognition of benefits and costs for future generations serve a constructive function in providing a mechanism for recognizing future effects on social welfare.

Most Western countries use a single discount rate to evaluate public investments and policies. This ignores the differential cost of risk, in a world where most risk markets exhibit surprisingly large prices of risk. The current discounting guidelines generate a misallocation of capital that entails a large welfare cost. We claim that the well-established asset pricing literature provides a strong normative justification in favor of risk-adjusting discount rates. More specifically, project-specific discount rates should be increasing in the income elasticity of the project's net benefit. This will favor projects whose net benefit materializes preferentially in low-income states, thereby recognizing their insurance benefit ex ante. The intuition is simple, the welfare benefit of the reform is large, and the methodology only requires evaluators to estimate an income elasticity on top of what is required in the current approach. It is time to fix our public discounting systems.

We explain the mechanics of smart contracts. We then highlight the benefits of smart contracts, such as overcoming commitment problems. We also discuss limitations, such as the difficulty for smart contracts to access information external to the blockchain and the difficulty of integrating smart contract code with traditional legal enforcement. We further highlight how the absence of a trusted intermediary inflates implementation costs for blockchain applications. We conclude with a discussion of the most prominent smart contract applications in decentralized finance: token issuance (e.g., initial coin offerings, nonfungible tokens), decentralized exchanges, and protocols for loanable funds. Our survey covers both institutional details and relevant literature.

This review revisits the literature on fiscal capacity using modern tools from asset pricing. We find that properly accounting for aggregate risk substantially reduces fiscal capacity. In this environment, the gap between the risk-free rate and the expected growth rate is not a sufficient statistic for fiscal capacity. To borrow at the risk-free rate when aggregate growth is risky, governments need to ask taxpayers to insure bondholders against aggregate risk, but governments in advanced economies tend to insure taxpayers against aggregate risk. We use this asset pricing perspective to review alternative mechanisms to boost fiscal capacity that have been explored in the literature.

In the past 20 years, measures of economic uncertainty have been developed that are purely market price based; structural model based, using data on real fundamentals and asset prices; text based; or survey based. We compare the performance of these uncertainty measures in forecasting three real variables with irreversibilities—investment, hiring, and credit creation—as well as in explaining fluctuations in stock market and Treasury bond market volatility. In general, we find that structural model–based measures do better than measures constructed using other approaches, with a model of stock market volatility by David and Veronesi performing the best on several (but not all) dimensions. Their learning-based model's volatility places time-varying weights on inflation, earnings, and consumption news, as agents in the economy assess the impact that inflation has on the stability of real economic growth.

An all-or-nothing view of financial access leading to overly simplistic policy recommendations has been largely overturned in the data. Heterogeneity and explicit obstacles to trade are key aspects that need to be incorporated into models when looking at ...Read More

We review the pricing and ownership of green bonds, whose proceeds are used for environmentally focused purposes. After presenting an overview of the literature on green securities and green bonds in particular, we summarize the US corporate and municipal green bond markets. Green municipal bonds provide the best opportunity for detailed empirical study of how pricing and ownership differ from those of ordinary bonds. Green bonds are issued at a small premium of several basis points over similar ordinary bonds except when they are issued simultaneously with ordinary bonds from the same issuer; in that situation, a premium emerges over time on the secondary market. Green bonds, especially small or nearly riskless ones, are also more closely held than ordinary bonds. These facts are consistent with a simple framework that incorporates assets with nonpecuniary utility.