financial integration credit market imperfections and consumption smoothing abstract contrary to standard theoretical reasoning recent empirical research shows that financial integration is associated with higher consumption volatility in developing countries this paper illustrates how domestic credit market imperfections can alter the standard predictions about the consumption smoothing possibilities under financial autarky and international financial integration i use a two country international real business cycle model where the non traded sector in the small country faces borrowing constraints due to contract enforceability problems if the international risk sharing opportunities are non existent households can secure themselves against the shocks in the non traded sector only by adjusting their labor effort which leads to changes in sectorial output and terms of trade the deterioration of the terms of trade acts as a dampening effect on consumption causing it to be less volatile under financial autarky relative to financial integration under financial integration international financial assets provide the insurance against domestic productivity shocks without affecting the relative prices hence allowing the consumption to react more

how to avoid borrowed plumes in academia abstract publications in top journals today have a powerful influence on academic careers although there is much criticism of using journal rankings to evaluate individual articles we ask why this practice of performance evaluation is still so influential we suggest this is the case because a majority of authors benefit from the present system due to the extreme skewness of citation distributions performance paradox effects aggravate the problem three extant suggestions for reforming performance management are critically discussed we advance a new proposal based on the insight that fundamental uncertainty is symptomatic for scholarly work it suggests focal randomization using a rationally founded and well orchestrated procedure

equilibrium indeterminacy and asset price fluctuation in japan a bayesian investigation this paper investigates sources of asset price fluctuation in japan using an estimated financial accelerator model for explicit treatment of expectational beliefs characterized by sunspots the model is analyzed over the parameter space where the equilibrium can be indeterminate we show that indeterminacy arises if the financial accelerator effect is sufficiently large according to our bayesian estimation results japan s economy was affected by sunspot shocks however the contribution of the sunspots to asset price volatility was low rather net worth and cost shocks drove the asset price fluctuation we find however that the sunspots substantially affected capital investment

evaluating international financial integration in a center periphery economy abstract does opening up capital markets facilitate risk diversification across borders are all countries gradually better off in the process of international financial integration this paper explores welfare implications for various countries in a center periphery framework with endogenous portfolio choice financial integration is divided into four stages financial autarky two country integration center periphery integration and global integration two effects from financial integration emerge diversification effects and financial terms of trade effects results show that financial integration between the center and a new periphery in center periphery integration generates welfare losses for the peripheral country already integrated and welfare gains for the central country allowing for financial integration between peripheries in global integration leads the welfare in the center to deteriorate from two country integration directly to global integration the large country gains while the small one loses

spurious welfare reversals in international business cycle models several papers have documented spurious welfare reversals incompletemarkets economy produces a higher level of welfare than the completemarkets economy this paper first demonstrates how conventional linearization can generate approximation errors that can result in welfare reversals using a two country production economy we argue that spurious welfare reversals are not only possible but also plausible under reasonable values for model parameters this paper then proposes an approximation method that modifies the conventional linearization by a bias correction this method can be easily implemented and approximates welfare as accurately as a second order perturbation method

why do stocks and consumption imply such different gains from international risk sharing abstract estimates of the gains to international risk sharing based upon stock returns tend to find dramatically higher gains than do estimates from consumption based models in this paper i examine the reasons for these differences using a common theoretical framework for both approaches i find that the differences are largely due to the much higher variability of stock returns and its implied intertemporal substitution in marginal utility also contrary to conventional wisdom the differences in gains from the two approaches do not arise from treating stock returns as exogenous rather than endogenous

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

capital controls monetary policy and balance sheets in a small open economy we develop a small open economy new keynesian model that incorporates a financial accelerator in combination with liability dollarization applying a ramsey type analysis we compare the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates in an economy without the financial accelerator an optimal monetary policy under flexible exchange rates is superior to an optimal capital control policy under fixed exchange rates in contrast in an economy with the financial accelerator an optimal capital control under fixed exchange rates yields higher welfare than an optimal monetary policy under flexible exchange rates jel e44 e52 f32 f38 f41

who should buy long term bonds according to conventional wisdom long term bonds are appropriate for conservative long term investors this paper develops a model of optimal consumption and portfolio choice for infinite lived investors with recursive utility who face stochastic interest rates solves the model using an approximate analytical method and evaluates conventional wisdom as risk aversion increases the myopic component of risky asset demand disappears but the intertemporal hedging component does not conservative investors hold assets to hedge the risk that real interest rates will decline long term inflation indexed bonds are most suitable for this purpose but nominal bonds may also be used if inflation risk is low

the case for inflation stability abstract we evaluate the case for inflation stabilization in a new keynesian nns model that includes various frictions capital accumulation and a variety of shocks in such a model price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs we find that such an opportunity is of limited value and that a strong case for perfect inflation stabilization remains policies that tolerate a small amount of inflation variability may outperform perfect inflation targeting when capital adjustment costs are low and the monetary distortion is substantial but only if prices are very flexible

the welfare cost of nominal wage contracting we use a dynamic general equilibrium model to obtain quantitative estimates of the welfare cost of nominal wage contracting we find that the welfare cost of such contracts can vary quite a lot depending on the degree of indexation the size and persistence of monetary shocks and the contract length the size and persistence of technology shocks do not affect the welfare cost significantly the elasticity of labour supply is important for the welfare cost if the labour supply elasticity is small the welfare cost of nominal wage contracts can be substantial

how misleading is linearization evaluating the dynamics of the neoclassical growth model this paper investigates the reliability of employing linearization to evaluate the dynamic adjustments to changes in productive government spending in a ramsey growth model if government expenditure is introduced as a flow and the dynamic adjustment is fast linearization may yield a reasonably good approximation to the true dynamics even for fairly large policy shocks if government expenditure assumes the form of a stock leading to more sluggish adjustment linearization may yield misleading predictions these errors occur at the beginning of the transition and weigh heavily in welfare calculations the implications for temporary shocks and the speed of convergence are also considered

statistical nonlinearities in the business cycle a challenge for the canonical rbc model abstract the cyclical components of u s macroeconomic time series exhibit significant nonlinearities standard equilibrium models of business cycles cannot replicate nonlinear features of the data applying the efficient method of moments gallant a r tauchen g 1996 which moments to match econometric theory 12 4 657 681 to build an algorithm that searches over the model s parameter space establishes the parameterization that best allows replication of all statistical properties of the data the results show that under this parameterization the model captures nonlinearities in investment but fails to account for observed properties of consumption

cointegration and cagan s model of hyperinflation under rational expectations when money and prices are integrated of order two philip cagan s 1956 model of hyperinflation will give rise to two different levels of cointegration in most of the literature on the german hyperinflation one of these cointegrating relationships has been ruled out a priori by assuming that velocity shocks follow a random walk using data from the german hyperinflation the author finds this assumption to be unjustified based on a straightforward extension of the cointegrated var approach suggested by john y campbell and robert j shiller 1987 a method to evaluate the cagan model under rational expectations and no bubbles is proposed and implemented to the german data copyright 1993 by ohio state university press

how big are potential welfare gains from international risksharing abstract there is extensive evidence that risksharing across countries is far from perfect some have attributed this to small benefits from risksharing gains from riskpooling that have been reported range from negligible to enormous this paper documents to what extent the results are sensitive to the parameterization of preferences the stochastic process of the endowment and its measurement we find that gains from risksharing are quite sizable for realistic assumptions about the underlying factors for oecd countries they are equivalent to a permanent increase in tradables consumption in the range of 1 1 to 3 5 for a 50 year horizon and 2 5 to 7 4 for a 100 year horizon

time consistent control in non linear models abstract the paper shows how to use optimal control to compute optimal time consistent markovian government policies in nonlinear dynamic general equilibrium models it extends cohen and michel s 1988 results for the linear quadratic case the method involves replacing private agents costate variables with flexible functions of current state variables in the government s maximization problem the functions hold in equilibrium to an arbitrarily close approximation they can be found numerically by perturbation or projection methods a stochastic model of optimal public spending illustrates the technique

countercyclical taxes in a monopolistically competitive environment in the context of a neoclassical growth model with monopolistic competition this paper studies the stabilizing effects of countercyclical tax policy when the income tax rate has an additional role of financing government budget deficits consistent with the conventional wisdom countercyclical taxes generally reduce aggregate volatility unless the fiscal response to debt accumulation is weak the presence of monopoly power enhances these effects even when automatic stabilizers successfully stabilize business cycle fluctuations countercyclical taxes are welfare inferior due to reduced precautionary saving motives while if the fiscal response to debt is weak and countercyclical tax policy destabilizing the increased precautionary saving motive is not welfare enhancing as the asset accumulated is government debt rather than capital these results are generally robust nominal inertia may however dominate the precautionary saving mechanism

wage or price based inflation alternative targets in optimal monetary policy rules abstract in this paper the optimality of a specific variant of monetary policy rules a la taylor is tested within a general equilibrium monetary model with both nominal and real rigidities the traditional taylor rule is amended by the inclusion of the growth rate of nominal wage or wage inflation nominal rigidities are inserted via quadratic adjustment costs for both prices and wages a la rotemberg 1982 sticky prices in the united states journal of political economy 90 1187 1211 and kim 2000 constructing and estimating a realistic optimizing model of monetary policy journal of monetary economics 45 329 359 cost of capital adjustment together with a positive steady state inflation rate allow the model to match the main empirical facts about us economy the model is solved by using a second order approximation around the non stochastic steady state as in kim et al 2008 calculating and using second order accurate solutions of discrete time dynamic equilibrium models journal of economic dynamics and control 32 11 3397 3414 the welfare metric is offered by the second order expansion of the utility function conditional to the non stochastic steady state the results show that wage inflation targeting is welfare improving when coupled with inflation targeting moreover optimal monetary rules include also a positive coefficient for output targeting as the need to smooth out quantity adjustments induced by real and nominal rigidities similar results occurs when both targets are in expected value one period ahead the model shows good in sample and out of sample properties

computing second order accurate solutions for rational expectation models using linear solution methods this paper shows how to compute a second order accurate solution of a non linear rational expectation model using algorithms developed for the solution of linear rational expectation models the result is a state space representation for the realized values of the variables of the model this statespace representation can easily be used to compute impulse responses as well as conditional and unconditional forecasts

the macroeconomic effects of distortionary taxation abstract prescott 1986 estimates that technology shocks account for 75 of the fluctuations in the postwar u s economy this paper reestimates the contribution of technological change for a standard business cycle model that includes a public sector and fiscal disturbances i find that a significant fraction of the variance of aggregate consumption investment output capital stock and hours of work can be explained by disturbances in labor and capital tax rates and government consumption i also use the model to quantify the welfare costs of capital and labor taxation for both the time series and welfare calculations maximum likelihood estimates of taste technology and policy parameters are used

two pitfalls of linearization methods this paper illustrates two types of pitfalls when linearization methods are improperly applied first if we linearize the constraints before deriving the optimality conditions the derived conditions are not correct up to first order second even when we obtain the behavior of the economy that is correct to the first order applying this behavior to welfare implications may lead to incorrect results we also review different ways to avoid those pitfalls

patience persistence and welfare costs of incomplete markets in open economies abstract we investigate the welfare implications of alternative financial market structures in a two country endowment economy model we obtain an analytic expression for the expected lifetime utility of the representative household when sovereign bonds are the only internationally traded asset and we compare this welfare level with that obtained under complete asset markets the welfare cost of incomplete markets is negligible if agents are very patient and shocks are not very persistent but this cost is dramatically larger if agents are relatively impatient and shocks are highly persistent for realistic cases in which agents are very patient and shocks are highly persistent the welfare cost of incomplete markets is highly sensitive to the specific values of these parameters

financial integration macroeconomic volatility and welfare this paper studies the effects of financial integration on macroeconomic volatility and welfare we examine a two sector tradable and nontradable twocountry world economy with production in which both stocks and bonds are traded internationally but markets are incomplete the effects of integration are examined by comparing the equilibrium properties of the model under three financial configurations autarky low integration and high integration the model predicts a non monotonic relationship between the degree of financial integration and the volatility of several macroeconomic variables greater integration is initially associated with more volatile consumption and output but as integration proceeds further volatility declines we also find that while increased integration allows for significantly greater risk sharing between countries the improvement in welfare can be very small

welfare costs of sticky wages when effort can respond abstract we examine the impact of wage stickiness when employment has an effort as well as hours dimension despite wages being predetermined the labor market clears through the effort margin consequently welfare costs of wage stickiness are potentially much much smaller

on measuring the welfare cost of business cycles lucas 1987 argues that the gain from eliminating aggregate fluctuations is trivial following lucas a number of researchers have altered assumptions on preferences and found that the gain from eliminating business cycles are potentially very large however in these exercises little discipline is placed on preference parameters this paper estimates the welfare cost of business cycles allowing for potential time non separabilities in preferences where discipline is placed on the choice of preference parameters by requiring that the preferences be consistent with observed fluctuations in a model of business cycles that is a theoretical real business cycle world is constructed and the representative agent is then placed in this world the agent responds optimally to exogenous shocks given the frictions in the economy the agent s preference parameters along with other structural parameters are estimated using a bayesian procedure involving markov chain monte carlo methods two main results emerge from the paper first the form for the time non separability estimated in this paper is very different than the forms suggested and used elsewhere in the literature second the welfare cost of business cycles is close to lucas s estimate

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

incomplete pass through and the welfare effects of exchange rate variability abstract this paper considers the implications of incomplete exchange rate pass through for optimal monetary and exchange rate policy a two country model is presented which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate from a single country perspective the optimal exchange rate variance depends on the degree of pass through the size and openness of the economy the elasticity of labour supply and the volatility of foreign producer prices welfare may be decreasing or increasing in the volatility of the exchange rate

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

fiscal federalism and monetary unions a quantitative assessment abstract in this paper i provide a quantitative analysis of three different forms of fiscal federalism in monetary unions fully decentralized regional fiscal authorities as the benchmark fiscal equalization with nominal tax revenue sharing and a common central fiscal authority i assess the capability of the different arrangements to stabilize regional consumption output and employment over the business cycle i also study the implications for interregional income consumption risk sharing and welfare from this analysis the following results emerge first a central fiscal authority stabilizes consumption fluctuations and increases the scope of interregional income and consumption risk sharing second fiscal equalization destabilizes consumption fluctuations and also reduces the scope of interregional income and consumption risk smoothing third a central fiscal authority leads to welfare gains whereas fiscal equalization leads to welfare losses