Optimal intermediated investment in a liquidity-driven business cycle

The first essay of this dissertation presents a general equilibrium model of a financial intermediary that extends the model first introduced by D. Diamond and P. Dybvig (JPE, 1983) to an infinite-horizon environment. This extension enables the relationship between the real business cycle and the composition of assets held in the banking sector to be studied. As in the D-D model, the bank is modeled as an optimal financial intermediary coalition here. Moreover, the bank's optimal policy involves decisions about liquidity that vary systematically over the business cycle. The second essay studies a version of the model in the first essay with a broader set of contracts---the direct mechanisms. We design an efficient allocation of the direct mechanism such that truth telling reporting strategy is an Perfect Bayesian Nash equilibrium of the mechanism. Further analysis show that there may still exist other equilibrium. The third essay describes the numerical algorithm we use to solve the model and provides an estimate for the approximation error.