default risk and risk averse international investors abstract this paper develops an endogenous default risk model for small open economies that interact with risk averse international investors whose preferences exhibit decreasing absolute risk aversion dara by incorporating risk averse investors who trade with an emerging economy the present model explains a larger proportion and volatility of the spread between sovereign bonds and riskless assets than the standard model with risk neutral investors the paper shows that if investors have dara preferences then the emerging economy s default risk capital flows and bond prices are a function not only of the fundamentals of the economy but also of the level of financial wealth and risk aversion of international investors in particular as investors become wealthier or less risk averse the emerging economy becomes less credit constrained as a result the emerging economy s default risk is lower and its bond prices and capital inflows are higher additionally with risk averse investors the risk premium in the asset prices of the sovereign countries can be decomposed into two components a base premium that compensates the investors for the probability of default and an excess premium that compensates them for taking the risk of default

news and sovereign default risk in small open economies this paper builds a unified model of sovereign debt default risk and news shocks news shocks improve the quantitative performance of the sovereign default model in a number of empirically relevant dimensions first with news shocks not all defaults occur during downturns second the news shocks help account for key differences between developing and more developed economies as the precision of news improves the model predicts lower variability of consumption less countercyclical trade balance and interest rate spreads as well as a higher level of debt in line with more developed economies third the model captures the hump shaped relationship between default rates and the precision of news obtained from the data finally the news shocks have a nonmonotonic effect on welfare

a quantitative model of sovereign debt bailouts and conditionality in times of sovereign debt crises international financial institutions provide temporary financial support contingent on the implementation of specific macroeconomic policies this paper develops a model of sovereign debt and default with endogenous participation rates in bailout programs conditionality enters as a constraint on fiscal policy in the model the insurance character of bailouts generates incentives for debt accumulation quantitative results suggest that bailouts prevent sovereign defaults in the short run but may come at a cost of a greater default probability in the long run increasing the intensity of conditionality lowers the bailout participation rate and generates a hump shaped pattern of sovereign default risk

firm dynamics and financial development abstract using comprehensive firm level datasets this paper studies the impact of cross country variation in financial market development on firms financing choices and growth in less financially developed economies small firms grow faster and have lower leverage than large firms as financial development improves the growth difference between small and large firms shrinks while the leverage difference rises the paper then develops a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk the model explains the observed cross country variations in firm size leverage and growth in response to changes in financial frictions

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

emerging market economies and the world interest rate abstract we use a factor augmented var model to estimate the dynamic responses of interest rates in emerging market economies to the world interest rate which we extract from a dynamic factor model of yields in industrialized countries our results provide evidence that many emerging market yields respond to world rate shocks at least gradually which is broadly consistent with capital market integration our findings also suggest that the world rate captures information about emerging market yields not contained in us rates which are typically used to proxy for the world rate

agency relationships in family firms theory and evidence does owner management necessarily eliminate the agency costs of ownership drawing on agency literature and on the economic theory of the household we argue that private ownership and owner management expose privately held owner managed firms to agency threats ignored by jensen s and meckling s 1976 agency model private ownership and owner management not only reduce the effectiveness of external control mechanisms they also expose firms to a self control problem created by incentives that cause owners to take actions which harm themselves as well as those around them jensen 1994 p 43 thus shareholders have incentive to invest resources in curbing both managerialand owner opportunism we extend this thesis to the domain of the family firm after developing hypotheses which describe how family dynamics and specifically altruism exacerbate agency problems experienced by these privately held owner managed firms we use data obtained from a large scale survey of family businesses to field test our hypotheses and find evidence which suggests support for our proposed theory finally we discuss the implications of our theory for research on family and other types of privately held owner managed firms

an empirical examination of institutional investor preferences for corporate social performance this study investigates the pattern of institutional shareholding in the u k and its relationship with socially responsible behavior by companies within a sample of over 500 uk companies we estimate a set of ownership models that distinguish between long and short term investors and their largest components and which incorporate both aggregated and disaggregated measures of corporate social performance csp the results suggest that long term institutional investment is positively related to csp providing further support for earlier studies by johnson and greening 1999 academy of management journal 42 564 576 and graves and waddock 1994 academy of management journal 37 1034 1046 disaggregation of csp into its constituent components suggests that the pattern of institutional investment is also related to the form which csp takes investigation of the impact of investment screens on the selection of stocks suggests that long term institutional investors select primarily through exclusion rejecting those firms which have the worst csp

institutional ownership of stock and dimensions of corporate social performance an empirical examination collectively institutions own an increasing proportion of outstanding corporate equities as an emergent force in shaping corporate america the linkages between institutional ownership and corporate social performance csp require empirical examination not only do corporate policy makers need to know those areas where social performance may lure or inhibit capital infusions lawmakers also need a better understanding of the social forces guiding corporate policy as anticipated this study found a positive relationship between the amount of institutional ownership of corporate stock and a company s social responsiveness as measured by the representation of women on its board of directors however no statistically significant relationship with social responsibility as measured by charitable giving was found the exemplar of social issues management compliance with the sullivan principles showed an unexpected negative relationship with the level of institutional ownership

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

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

taking stock a critical assessment of recent research on inventories empirical and theoretical aspects of inventory behavior became hot topics in the 1950s and early 1960s no one seemed to notice the tension that was developing between the emerging macroeconomic and microeconomic views of inventories macroeconomists routinely thought of inventories as a destabilizing factor yet the prevailing micro theory viewed inventories as a stabilizing factor it was a fascinating question that was barely explored instead somewhat inexplicably interest in inventories dried up as if inventories were of minor economic significance and little intrinsic interest by the early 1980s then economists once again knew something they had known in the 1950s that inventory investment is of first order importance in business cycles but they were also beginning to realize that the standard production smoothing buffer stock model of inventories was in deep trouble this paper focuses on developments since that realization

financial systems financing constraints and investment empirical analysis of oecd countries this paper investigates the influence of cash flow on corporate investment in 11 oecd countries we find that the sensitivity of investment levels to internally available funds differs significantly across countries and is lower in countries with predominantly close bank firm relationships than in countries with predominantly arm s length bank firm relationships at the same time we find no relationship of the levels of financial constraints to indicators of overall financial development our results are consistent with the view that information and incentive problems in the capital market have important effects on corporate investment and that close bank firm relationships can reduce these problems and thus improve the access of firms to external finance

private capital flows capital controls and default risk abstract what has been the effect of the shift in emerging market capital flows toward private sector borrowers are emerging market capital flows more efficient if not can controls on capital flows improve welfare this paper shows that the answers depend on the form of default risk when private loans are enforceable but there is the risk that the government will default on behalf of all residents private lending is inefficient and capital controls are potentially pareto improving however when private agents may individually default capital flow subsidies are potentially pareto improving

a qualitative response analysis of uk firms employment and output decisions this paper investigates firms employment and output decisions and presents some empirical evidence concerning the rationality of firms expectations the dymanic model is based on the assumptions of convex adjustment costs and monopolistic competition in the product market the results are obtained using categorical information on individual firms contained in business surveys collected by the confederation of british industry ordered probit models are used to estimate the employment and output equations we find that expected demand is a critical determinant of firms decisions the effect of changes in cost conditions is not as well determined and the data are not consistent with the rational expectations hypothesis

recent developments in quantitative models of sovereign default the current crisis and discussions in the euro area in particular show that sovereign debt crises defaults are no longer confined to developing economies following crises in many latin american countries the literature on quantitative dynamic macro models of sovereign default has been advancing rapidly current debate should take note of the findings of this literature an extensive overview of which has been provided in this paper this paper also discusses the inherent difficulties as well as possibilities of integrating this type of model into standard business cycle models rbc and dsge models this is likely to be particularly helpful when using models to analyse upcoming issues in the euro area such as a suitable sovereign insolvency law or the assumption of joint liability

capital mobility and international sharing of cyclical risk this paper investigates whether the international globalization of financial markets allows for significant cross country risk sharing at the business cycle frequency we find that cross country risk sharing is still limited and this is unlikely to be the result of financial frictions that limit state contingent contracts part of the limited international risk sharing could be the consequence of frictions that de facto reduce the short term mobility of financial capital but even with these frictions we find significant divergence between model predictions and the data

the impact of demand and price expectations on the behavior of prices the effects of demand and price expectations on price behavior are analyzed using data from the manufacturing sector and a model formulated to pinpoint the demand oriented factors affecting prices and to incorporate price expectations as a direct influence on price behavior the expected normal demand is seen to have a strong and systemic influence on price behavior the expected normal level of new orders is found to be an adequate measure with sector data in general although some industries require more specification the effects of inventories and unfilled orders on prices are sporadic and across sectors and industries demand oriented forces are concluded to perform as well statistically as cost push determinants expectations concerning the current normal industry price level have a significant and consistent impact on price behavior this supports the idea that firms setting prices take into account their estimates of competitor s prices future price expectations appear to have little effect on current price information 15 references

the interrelationship between price and output decisions and investment decisions microfoundations and aggregate implications abstract this paper develops a model of firm behavior in which both price and output decisions and investment decisions are made the model permits an analysis of the dynamics of inventory and capital accumulation on price and output behavior there are two main results 1 short run price and output levels will differ from long run levels as desired stocks of inventory and capital diverge from actual levels 2 the size of the elasticities of price and output to changes in demand and cost variables depends on the speed with which gaps between desired and actual stocks are closed through investment

solving the feldstein horioka puzzle with financial frictions unlike the prediction of a frictionless open economy model long term average savings and investment rates are highly correlated across countries a puzzle first identified by feldstein and horioka 1980 we quantitatively investigate the impact of two types of financial frictions on this correlation one is limited enforcement w here contracts are enforced by the threat of default penalties the other is limited spanning where the only asset available is noncontingent bonds we find that the calibrated model with both frictions produces a savings investment correlation and a volume of capital flows close to the data to solve the puzzle the limited enforcement friction needs low default penalties under which capital flows are much lower than those in the data and the limited spanning friction needs to exogenously restrict capital flows to the observed level when combined the two frictions interact to endogenously restrict capital flows and thereby solve the feldstein horioka puzzle

semiparametric estimation of selection models some empirical results among the central theoretical developments in the econometric analysis of nonexperimental microeconomic data has been the analysis of selectivity bias following the work of james heckman 1974 statistical techniques were developed in the 1970s to consistently estimate the parameters of these models one potential drawback to the application of these techniques is their sensitivity to the assumed parametric distribution of the unobservable error terms in the model in recent years a number of estimation methods for selection models have been developed which do not impose parametric forms on error distributions these methods are termed semiparametric since only part of the model of interest the regression function is parametrically specified while the statistical theory of these semiparametric estimators has received much attention practical applications of the methods are lacking an exception being the paper by joel horowitz and george neumann 1987 in this paper we use semiparametric methods to reanalyze data on the labor supply of married women first studied by thomas mroz 1987 using parametric methods the object of this reanalysis is to determine whether mroz s results are sensitive to his parametric assumptions

elastic attention risk sharing and international comovements in this paper we examine the effects of elastic information processing capacity or elastic attention proposed in sims 2010 on international consumption and income correlations in a tractable small open economy soe model with exogenous income processes we find that in the presence of capital mobility in financial markets elastic attention due to a fixed information processing cost lowers the international consumption correlations by generating heterogeneous consumption adjustments to income shocks across countries facing different macroeconomic uncertainty in addition we show that elastic attention can improve the model s predictions for the other key moments of the joint dynamics of consumption and income

globalization and risk sharing we study the effects of globalization on risk sharing and welfare like the previous literature we assume that governments cannot commit to enforce the repayment of debts owed by their citizens unlike the previous literature we assume that governments cannot discriminate between domestic and foreign creditors when enforcing debt payments this creates novel interactions between domestic and international trade in assets i increases in domestic trade raise the benefits of enforcement and facilitate international trade in fact in our set up countries can obtain international risk sharing even in the absence of default penalties ii increases in foreign trade raise the costs of enforcement and hamper domestic trade as a result globalization may worsen domestic risk sharing and lower welfare we show how these effects depend on various characteristics of tradable goods and explore the roles of borrowing limits debt renegotiations and trade policy

the production and inventory behavior of the american automobile industry understanding inventory movements is central to an understanding of business cycles this paper presents an empirical study of the behavior of inventories in the automobile industry it finds that inventory behavior is well explained by the assumption of intertemporal optimization with rational expectations the underlying cost structure appears to have substantial costs of changing production as well as substantial costs of being away from target inventory thelatter being a function of current sales given this cost structure whether inventory behavior is stabilizing or destabilizing depends on the characteristics of the demand process in the automobile industry inventory behavior is destabilizing the variance of production is larger than the variance of sales

migration and sovereign default risk abstract during sovereign debt crises countries experience persistent economic declines spiking spreads and outflows of capital and workers to account for these salient features we develop a sovereign default model with migration and capital accumulation the model has a two way feedback default risk lowers workers welfare and induces emigration which in turn intensifies default risk by lowering tax base and investment compared with a no migration model our model produces higher default risk lower investment and a more profound and prolonged recession we find that migration accounts for almost all of the lack of recovery in gdp during the recent spanish debt crisis

globalisation pass through and the optimal policy response to exchange rates abstract in this paper we examine how monetary policy should respond to nominal exchange rates in a new keynesian open economy model that allows for a non trivial role for sterilised intervention the paper develops the argument against the backdrop of the evolving policy making environment of asian economies sterilised intervention can be a potent tool that offers policymakers an additional degree of freedom in maximising global welfare we show that the gains to sterilised intervention are greater when goods market integration is low and exchange rate pass through is high however increased financial internationalisation reduces the effectiveness of sterilised intervention as the international policy trilemma becomes more relevant unsterilised intervention may also have a role to play although the potential welfare gains from this are generally smaller most central banks in asia have actively used sterilised foreign exchange intervention as a policy tool to smooth exchange rates but over time declining exchange rate pass through and the increasing international integration of financial and goods markets will tend to reduce the efficacy of sterilised intervention given the limited effectiveness of unsterilised intervention our model implies that the role of exchange rate movements in the optimal setting of monetary policy in asia is decreasing

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

taxes and international risk sharing abstract we extend a standard model of international risk sharing to include an empirically plausible distortion taxes the tax inclusive theory implies even under full risk sharing a predictable relationship between consumption growth and the consumption and capital income tax rates both within and across countries we find strong empirical evidence in favor of this relationship while idiosyncratic output fluctuations account for substantially more of cross country consumption growth variability than do taxes trends in tax differentials are found to be informative about the dynamic evolution of international risk sharing in particular adjusting for capital taxes reveals a marked improvement in risk sharing over the last three decades that is absent in baseline measures this improvement has been driven by the convergence of average tax rates on capital income across oecd countries toward the united states average capital tax rate

does the influence of institutional investors depend on the institutional framework an international analysis this article analyses the effect of institutional ownership in alleviating or exacerbating the conflicts of interests among stakeholders in different legal and institutional frameworks this analysis is carried out based on two characteristics the concentration of power of institutional ownership and the identification of the main types of institutional investors in common law countries consistent with the convergence and entrenchment hypotheses we find a u shape relation between ownership structure and firm performance in civil law countries consistent with the collusion and contest theories we find an inverted u shape relation we also find that when institutional investors are classified as pressure resistant and pressure sensitive according to the strength of their ties with managers pressure resistant investors who operate more independently are the most capable of improving the value of the firm

ex ante implications of sovereign default i study how the possibility of default on external debts affects other capital allocation decisions in a small open economy in the model default has an option value derived from the randomization over ex post default regimes which depends on country specific productivity shocks this feature of default reduces incentives for ex ante diversification which would reduce exposure to the productivity shock as a result if the economys debt to capital ratio is allowed to cross a fixed threshold identified in the model the unique equilibrium exhibits an allocation of capital that is less productive in expectation and more volatile than in a benchmark model without default the model therefore captures a number of salient features of emerging and less developed countries where low levels of international risk sharing have gone hand in hand with frequent and recurring default events

the role of legal status in influencing bank financing and new firm growth this paper examines the characteristics of new firm founders who use loans and overdrafts from the clearing banks to finance initially their business bank lending to new firms appears unrelated to the personal characteristics of founders but related to whether individuals provide personal savings and the legal status of the business this contrasts with the factors which influence the growth of new firms here the founder s age employment status and birthplace are associated with larger firms the only variable which appears to influence consistently both bank lending and the employment growth in firms is whether or not the business is a limited company

ownership and firm innovation in a transition economy evidence from china we examine innovation performance of firms in a transition economy from an ownership perspective we focus specifically on the relationship between ownership structures and firm innovation performance drawing on data from 548 chinese firms we find volume of patent registration to be most strongly influenced by foreign ownership in the firm along with firm affiliation within a business group the influence of state and institutional ownership on innovation performance is positive but lagged contrary to expectations insider ownership leads to lower innovation performance and concentrated ownership has no significant impact our study has two principal contributions firstly we utilize a comprehensive treatment of ownership characteristics overcoming weakness in previous studies that have used a more narrow focus on ownership type secondly we contribute to understanding of how firms in transition economies build indigenous capabilities for innovation by drawing attention to the interplay of foreign and domestic control of agents innovation

financial globalization and real regionalization over the period 1972 1986 the correlations of gdp employment and investment between the united states and an aggregate of europe canada and japan were respectively 0 76 0 66 and 0 63 for the period 1986 to 2000 the same correlations were much lower 0 26 0 03 and 0 07 real regionalization at the same time u s international asset trade has significantly increased for example between 1972 and 1999 united states gross fdi and equity assets in the same group of countries rose from 4 to 23 percent of the u s capital stock financial globalization we argue that these two trends are intimately related we document that the correlation of real shocks between the u s and the rest of the world has declined we then present a model in which international financial market integration occurs endogenously in response to less correlated shocks financial integration further reduces the international correlations in gdp and factor supplies we find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle

international yield curve comovements impact of the recent financial crisis empirical evidence on international yield comovement is sparse and lacks consensus employing a dynamic correlation approach we show that during the recent global financial crisis euro area yields have ceased to comove with the yields of the other international markets canada uk and us some implications of our results are discussed

rational expectations and the smoothing properties of inventories of finished goods abstract this paper formulates and estimates a dynamic rational expectations equilibrium model of inventories of finished goods and employment of labor the view that the primary role of inventories of finished goods is to act as a buffer stock in the face of fluctuating demand is examined both the model and estimation results indicate that this is the case because of differences in the costs involved for firms in changing their inventory stocks and labor force in addition to providing some new evidence on the behavior of inventories of finished goods and employment the paper illustrates a technology for maximum likelihood estimation of structural parameters under the hypothesis of rational expectations

the institutional framework and economic development the compound growth rates of per capita output and farrell type efficiency measures for 115 market economies over the period 1960 80 were compared with measures of political civil and economic liberty it was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies politically open societies which subscribe to the rule of law to private property and to the market allocation of resources grow at three times the rate and are two and one half times as efficient as societies in which these freedoms are abridged

managerial ownership of voting rights abstract managers of firms with dual classes of common stock can choose different quantities of votes for a given cash flow interest by choosing different quantities of the two securities we study managerial stock holdings in 45 dual class firms and find that vote ownership per se is an important motivation for these holdings in that corporate officers and their families hold a median 56 9 of the votes and 24 0 of the common stock cash flows we also find significant family involvement in many sample firms and document four case studies in which explicit acquisition premiums were paid for superior voting shares

what can explain the apparent lack of international consumption risk sharing recent research in international business cycles finds that international consumption comovements do not match the risk sharing predictions of standard complete markets models in this paper i ask whether two different types of explanations can help explain this result 1 nonseparabilities between tradables and nontradable leisure or goods and 2 the effects of capital market restrictions on consumption risk sharing i find that risk sharing cannot be resolved by either explanation alone however when i allow for both nonseparabilities and certain market restrictions risk sharing among unrestricted countries cannot be rejected this evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries

default risk sectoral reallocation and persistent recessions abstract sovereign debt crises are associated with large and persistent declines in economic activity disproportionately so for nontradable sectors this paper documents this pattern using spanish data and builds a two sector dynamic quantitative model of sovereign default with capital accumulation recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk an adverse domestic shock increases the likelihood of default limits capital inflows and thus restricts the ability of the economy to exploit investment opportunities the economy responds by reducing investment and reallocating capital toward the traded sector to support debt service payments the real exchange rate depreciates a reflection of the scarcity of traded goods we find that these mechanisms are quantitatively important for rationalizing the experience of spain during the recent debt crisis

financial integration and international risk sharing abstract conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk there is little evidence however that countries have increased risk sharing despite widespread financial liberalization we show that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets while actual markets are far from frictionless financial contracts are incomplete and contract enforceability is limited when countries remove official capital controls default risk is still present as an implicit barrier to capital flows if default risk were eliminated capital flows would be six times greater and international risk sharing would increase substantially

investor protection and corporate governance recent research has documented large differences among countries in ownership concentration in publicly traded firms in the breadth and depth of capital markets in dividend policies and in the access of firms to external finance a common element to the explanations of these differences is how well investors both shareholders and creditors are protected by law from expropriation by the managers and controlling shareholders of firms we describe the differences in laws and the effectiveness of their enforcement across countries discuss the possible origins of these differences summarize their consequences and assess potential strategies of corporate governance reform we argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank centered and market centered financial systems

decentralized borrowing and centralized default abstract in the past foreign borrowing by developing countries was comprised almost entirely of government borrowing however private firms and individuals in developing countries now borrow substantially from foreign lenders it is often asserted that this surge in private sector borrowing generates excessive borrowing and frequent sovereign defaults in developing countries this paper analyzes the impact of decentralized borrowing using a quantitative model in which private agents decide how much to borrow and the government decides whether to default relative to a model in which the government determines both the level of borrowing and whether to default decentralized borrowing drives up aggregate credit costs and sovereign default risk and reduces aggregate welfare interestingly decentralized borrowing may lead to either too much or too little debt in equilibrium depending on the severity of default penalties

international risk sharing and financial shocks abstract a canonical two country real business cycle model with complete international asset markets fails to replicate the correlation between relative consumptions and real exchange rates i e the consumption real exchange rate anomaly or backus smith puzzle i show that when preferences are non separable between consumption and leisure the same two country model augmented by domestic financial frictions and shocks can account for this correlation positive financial shocks create important fluctuations in the labor wedge inducing firms to demand more labor these procyclical movements in hours worked significantly affect the marginal utility of consumption and help to explain the correlation between relative consumptions and real exchange rates

demand shocks and open economy puzzles abstract we pose good markets frictions on top of an otherwise standard two country international real business cycle irbc model shopping for goods takes effort which prevents perfect matching between customers and producers an increase in search effort implies increased measured productivity demand shocks increase expenditures and search effort simultaneously increasing output consumption productivity and the trade deficit and appreciating the real exchange rate thus we solve the backus smith puzzle and we show that the cross country correlation of consumption is higher than that of output standard irbc models cannot account for these puzzles along with movements in tfp

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

the balance of power in closely held corporations abstract we analyze a closely held corporation characterized by the absence of a resale market for its shares we show that the founder of the firm can optimally choose an ownership structure with several large shareholders to force them to form coalitions to obtain control by grouping member cash flows a coalition internalizes to a larger extent the consequences of its actions and hence takes more efficient actions than would any of its individual members the model has implications for the optimal bundling of cash flow and voting rights and for the optimal number and size of shareholders

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

institutional framework and economic development international evidence this paper examines the effect of quality of the institutional framework on economic development our empirical results support the hypothesis that good institutions improve efficiency and accelerate growth the positive effect of institutional quality is more pronounced with mutually reinforcing support of economic freedom our results also indicate that good institutions help developing countries grow faster to achieve conditional convergence we infer from the results that economic development requires not only physical and human capital formation but also freedom to choose and institutional support

sovereign default and capital accumulation i introduce endogenous capital accumulation into an otherwise standard quantitative sovereign default model in the tradition of eaton and gersovitz 1981 and find that conditional on a level of debt default incentives are u shaped in the capital stock the economy with too small or too large amounts of capital is likely to default in addition to an excusable motive for default in line with grossman and huyck 1989 our model also predicts an opportunistic motive for default in line with kehoe and levine 1993 the model predicts the opportunistic motive for default because 1 capital is used as a consumption insurance vehicle during autarky after default 2 installed capital within the border cannot be seized by foreign lenders and 3 our model does not use an ad hoc output cost of default which only penalizes default in high income states the two different motives for default allow the calibrated model to generate defaults in good and bad times in simulation with a frequency of 38 and 62 respectively this is consistent with tomz and wright 2007 s empirical finding that throughout history and across countries around one third of sovereign defaults occurred in good times when output is above trend whereas most defaults occur in bad times the model is calibrated to the business cycle moments of argentina and simulation results show that the model matches business cycle facts regarding emerging economies along other dimensions moreover simulation results show that default in good times occurs 1 after the economy has accumulated a significantly large amount of capital and 2 when the economy faces a modestly good shock both of which reduce the value of external borrowing but increase the value of staying in autarky on the other hand around defaults in bad times the model economy displays typical v shape economic dynamics with a collapse in absorption upon default especially investment aggregating quarterly data from the model into annual frequency is found to overestimate the fraction of defaults in good times around twofold

corporate performance and managerial remuneration an empirical analysis abstract economic theories of efficient compensation predict a positive relationship between executive pay and corporate performance and yet efforts to document this relationship have been largely unsuccessful in this paper we argue that previous cross sectional studies have omitted important variables which seriously bias their results using data that focus on individual executives over time we find that executive compensation is strongly positively related to corporate performance as measured by shareholder return and growth in firm sales the results are robust to the stock market performance measure utilized

an analysis of the stock price reaction to sudden executive deaths implications for the managerial labor market abstract certain characteristics of managerial employment arrangements and of the managerial labor market make shareholder wealth dependent on an executive s continued employment these wealth effects are investigated by examining the common stock price reaction to unexpected deaths of senior corporate executives abnormal stock price changes are documented for a sample of fifty three events these abnormal stock price changes are associated with the executive s status as a corporate founder and with measures of the executive s talents and decision making responsibility and of the transaction costs associated with renegotiating or terminating the employment agreement

on the costs of a bank centered financial system evidence from the changing main bank relations in japan we examine the effects of bank firm relationships on firm performance in japan when access to capital markets is limited close bank firm ties increase the availability of capital to borrowing firms but do not lead to higher profitability or growth the cost of capital of firms with close bank ties is higher than that of their peers this indicates that most of the benefits from these relationships are appropriated by the banks finally the slow growth rates of bank clients suggest that banks discourage firms from investing in risky profitable projects however liberalization of financial markets reduces the banks market power the close relationship between manufacturing firms and financial institutions in japan has recently been at the center of the debate on the appropriate financial system for the reforming economies of eastern europe as opposed to the anglo saxon separation of finance and industry long term ties between main banks and their client firms involving bank loans bank equity holding and some bank appointed personnel which are common in japan and germany have often been described as a growth oriented financial system that could serve the needs of developing and reformed economiies better than anonymous capital markets modeled after the arnerican and british financial systems the claim that close ties between investmentoriented banks and industrial firms could help overcome the difficulties of relative backwardness dates back to gerschenkron 1962 who investigates european development rosovsky 1961 applies gerschenkron s framework to the analysis of japanese growth more recently aoki patrick and sheard 1994 hoshi kashyap and loveman 1994 and teranishi 1993 among others portray the close ties between finance and industry in japan as an important factor in the international competitiveness of modern japanese

the structure of ownership and the theory of the firm the separation of ownership from control produces a condition where the interests of owner and of ultimate manager may and often do diverge and where many of the checks which formerly operated to limit the use of power disappear in creating these new relationships the quasi public corporation may fairly be said to work a revolution it has divided ownership into nominal ownership and the power formerly joined to it thereby the corporation has changed the nature of profit seeking enterprise 1

inside the family firm the role of families in succession decisions and performance this paper uses a unique dataset from denmark to investigate the impact of family characteristics in corporate decision making and the consequences of these decisions on firm performance we focus on the decision to appoint either a family or an external chief executive officer ceo the paper uses variation in ceo succession decisions that result from the gender of a departing ceo s first born child this is a plausible instrumental variable iv as male firstchild firms are more likely to pass on control to a family ceo relative to female first child firms but the gender of a first child is unlikely to affect firms outcomes we find that family successions have a large negative causal impact on firm performance operating profitability on assets falls by at least four percentage points around ceo transitions our iv estimates are significantly larger than those obtained using ordinary least squares furthermore we show that family ceo underperformance is particularly large for firms in high growth industries and for relatively large firms overall the empirical results demonstrate that professional non family ceos provide extremely valuable services to the organizations they head

long duration bonds and sovereign defaults abstract this paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long duration bonds this contrasts with previous studies which assume the government can borrow using bonds that mature after one quarter we show that when we assume that the government issues bonds with a duration similar to the average duration of sovereign bonds in emerging economies the model generates an interest rate that is substantially higher and more volatile than the one obtained assuming one quarter bonds this narrows the gap between the predictions of the model and the data which indicates that the introduction of long duration bonds may be a useful tool for future research about emerging economies our analysis is also relevant for the study of other credit markets

disequilibrium dynamics an empirical study despite the amount of attention devoted in economics to the study of equilibria the process by which an equilibrium can be attained is not well understood stephen smale 1977 called this the fundamental problem of economic theory this paper explores the microeconomics of the adjustment process by examining empirically the disequilibrium behavior of firms implications for the microeconomic foundations of macroeconomics are stressed the data from german industry describe the month by month price and output changes of individual firms as well as the firms own assessments of the levels of their inventories and unfilled orders because the data are qualitative use is made of the multivariate conditional logit model developed by marc nerlove and s james press 1973 1976 and extended by kawasaki and zimmermann section i discusses the underlying model of firm behavior and the significance of the inquiry for macroeconomics in section ii the econometric techniques are briefly described in section iii the empirical results are summarized and interpretations of the results are offered in section iv

inventories and risk in african manufacturing using a panel data set for zimbabwe which includes firm specific measures of contractual risk we show that contractual risk has a major effect on the holding input stocks and to a lesser extent the constitution of cash reserves this is consistent with inventories being a hedge against stockout risk by contrast firms facing more inter annual market risk hold less inventories this suggests that african manufacturers prefer adapting to long term market fluctuations as they materialise rather than building up inventories this interpretation is consistent with the finding that high market risk firms also have a low capacity utilisation rate

home bias and international risk sharing twin puzzles separated at birth abstract we document that international home bias in debt and equity holdings declined during the period 1993 2003 at the same time as international risk sharing increased using panel data regressions for oecd countries we demonstrate that less home bias is associated with more international risk sharing more generally we show that more financial integration is associated with more risk sharing when we measure financial integration as the ratio of foreign assets to gross domestic product our results indicate that risk sharing and international financial integration are closely related empirical phenomena

inventories and sticky prices more on the microfoundations of macroeconomics the role of inventories in making prices sticky is studied by analyzing a dynamic linear quadratic model of a monopoly firm facing stochastic demand but able to store its finished goods in inventory it is shown that in contrast to the usual presumption firms that exhibit the smallest output responses to demand fluctuations may also exhibit the smallest price fluctuations specifically firms which have very flexible inventory storage facilities or are subjected to very transitory demand shocks will rely on inventories as buffers and will change neither production nor price very much on the other hand firms which have very inflexible storage facilities or whose demand shocks are quite permanent will display large swings in both price and output the standard assumption about inventory carrying costs that has been used in the literature that they are linear is shown to imply that production is impervious to fluctuations in demand it is also established that prices may respond more strongly to positive demand shocks than to negative ones if it is impossible to hold negative inventories i e to have unfilled orders the model offers an explanation for stickiness in relative prices however under certain circumstances it may help explain the persistence of inflation this abstract was borrowed from another version of this item

can the production smoothing model of inventory behavior be saved the production smoothing model of inventory behavior has a long and venerable history and theoretical foundations that seem very strong yet certain overwhelming facts seem not only to defy explanation within the production smoothing framework but actually to argue that the basic idea of production smoothing is all wrong most prominent among these is the fact that the variance of detrended production exceeds the variance of detrended sales this paper first documents the stylized facts then it derives the production smoothing model rigorously and explains how the model can be amended to make it consistent with the facts finally it reviews the theoretical and empirical evidence and tries to draw some tentative conclusions

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

price and output adjustment in a model with inventories econometric evidence from categorical in this paper we investigate the role of inventories in the adjustment process of prices and output in response to demand and cost shocks using the qualitative information contained in business surveys of u k firms the discussion is organized around a model based on the assumption of monopolistic competition and which permits a production smoothing role for inventories the econometric results suggest that the stock of inventories has no impact on output decisions the effect on pricing decisions is weak at best anticipated demands shocks are the main factor accounting for output changes while both cost and demand shocks are important determinants of prices coauthors are fabio schiantarelli jon breslaw and william low copyright 1993 by mit press

does financial globalization promote risk sharing article i nfo in theory one of the main benefits of financial globalization is that it should allow for more efficient international risk sharing in this paper we provide an empirical evaluation of the patterns of risk sharing among different groups of countries and examine how international financial integration has affected the evolution of these patterns using a variety of empirical techniques we conclude that there is at best a modest degree of international risk sharing and certainly nowhere near the levels predicted by theory in addition only industrial countries have attained better risk sharing outcomes during the recent period of globalization developing countries have by and large been shut out of this benefit even emerging market economies many of which have reduced capital controls and all of which have witnessed large increases in cross border capital flows have seen little change in their ability to share risk we find that the composition of flows may help explain why emerging markets have not been able to realize this presumed benefi to f financial globalization in particular our results suggest that portfolio debt which had dominated the external liability stocks of most emerging markets until recently is not conducive to risk sharing