nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

interlinked contracts and moral hazard in investment abstract in agricultural tenancy arrangements the tenant is often required to undertake effort aimed at maintaining and improving the productive stocks this paper investigate the design of contracts which induce optimal investment of such effort it is found that a long term contract which interlinks tenancy with a credit agreement is optimal in equilibrium the tenant obtains credit from the landlord at a rate of interest below the market and is perpetually indebted to the landlord

rational heuristics expectations and behaviors in evolving economies with heterogeneous interacting agents we analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agent based model populated by heterogeneous interacting firms agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change imperfect information coordination hurdles and structural breaks in these circumstances we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naive learning rules our results suggest that fast and frugal robust heuristics may not be a second best option but rather rational responses in complex and changing macroeconomic environments jel c63 d8 e32 e6 o4

optimal taxation of flow pollutants when firms may also inflict catastrophic environmental damage in many industries firms affect the environment in two distinct types of ways firstly they emit routine anticipated volumes of flow pollutants secondly they can potentially inflict catastrophic environmental damage liability for which may be overhanging or limited by the law operaters of chemical plants nuclear power stations and oil tankers are three examples if an emissions tax or charge is to be levied on the flow pollutants in these cases how should it be set we use simple dynamic programming techniques to characterise second best optimality we identify contexts in which the tax should be raised above its pigovian level to take account of the catastrophic potential and others where it should be set below that level the analysis has significant implications for how policymakers should go about calibrating ecological taxes in a number of high profile industries

the formal divide customary rights and the allocation of credit to agriculture in tanzania abstractit is generally held that one mechanism to enable inclusive growth in tanzania is enabling farmers to access credit to raise productivity and incomes the formalisation of property rights in tanzania is being undertaken by a multiplicity of actors at great expense to donors individuals and the government while there have been a variety of different justifications for allocating certificates of customary rights of occupancy ccros to farmers in tanzania perhaps the most prominent argument is that it will enable farmers to finally overcome the divide between informal customary rights and the formal banking sector ccros would provide the collateral that would induce banks to lend money to small scale farmers as part of a six year investigation in manyara mbeya and dodoma regions our research team evaluated the impact of formalisation on farmers access to credit the paper will present the results while pointing to the continuing institutional and market imperfections that perpetuate the fo

another century of economic science there is a widespread consensus that during the past century economic science has come of age it has developed powerful statistical tools to analyse economic data to make forecasts and to test alternative hypotheses and it has employed sophisticated mathematical techniques to articulate its theories and to prove basic theorems characterising the economy samuelson 1947 encapsulated the mid century enthusiasm for the scientific method in his classic foundations of economic analysis arguing that economics should be based on observable behaviour and testable hypotheses and with his theory of revealed preference showing how this could be done with the theory of consumers behaviour

vertical coordination financial structure and the changing theory of the firm developments for evaluating these changes including the relationships to financial structure the theoretical developments include contributions from the economics of organizations stiglitz 1991 agency relationships jensen and meckling transactions cost economics williamson 1979 1985 incomplete contracting hart 1988 asymmetric information and financial contracting 1 these theoretical developments provide rich opportunities to apply new interesting concepts toward understanding and evaluating the changing managerial and organizational environment in agriculture

financial markets and development my views on this subject have been greatly affected both by the experience of developing countries during the past quarter century and by the major shift evolutionary if not revolutionary in the economists paradigm over that period we have seen that capital accumulation is not enough even the extremely high rates of savings of many of the socialist economies have not managed to compensate for their lack of ability in allocating capital and these countries have for the most part not fared well but extreme free market solutions have fared little better perhaps best illustrated by the experience of chile true believers in the doctrines of the left and the right have this in common they both claim that if the patient had only followed the doctor s orders more precisely the medicine would have worked

the informational content of initial public offerings the ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once a model is developed in which there is price risk from holding equity between periods when the uncertainty is small there must be pooling in the first period when uncertainty is large the pooling equilibria dominate the separating equilibrium the size of an entrepreneur s initial public offering of equity can be informative this point was made in leland and pyle 1977 and stiglitz 1982 an entrepreneur with a good project can signal the value of the project by his or her willingness to retain equity an implicit assumption of this analysis is that the entrepreneur has only one opportunity to sell equity the assumption of a single sale is important since once the entrepreneur has signalled his or her project value by retaining equity investors should be willing to purchase the remaining equity however if entrepreneurs with bad projects foresee this they too may wish to retain equity initially and render themselves indistinguishable from entrepreneurs with good projects the current paper develops a model with two trading periods to capture the impact of having repeat sales of equity there is a public offering in the first period then the entrepreneur can make an open market sale in the second period however there is exogenous price risk which makes it costly for the entrepreneur to wait to sell in this context the value of the entrepreneur s project may not be revealed in the first period retaining equity is not very costly when uncertainty is small and there will only be pooling equilibria in this case in such a situation no information is revealed in the first period when the level of uncertainty is great there does exist a separating equilibrium however the pooling equilibria pareto dominate the separating equilibrium throughout the analysis the focus will be on paretooptimal equilibria the idea that an informed agent can profitably trade over time has been examined in related contexts kyle 1985 looked at the optimal trading strategy for an insider whose sequence of purchases is hidden in the aggregate order flow in equilibrium the insider s information is not completely incorporated into the market price until the close of trading

competitive search equilibrium in this paper i construct an equilibrium for markets with frictions which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters i show that the equilibrium allocation is socially optimal i also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay

two who called the great depression an initial formulation of the monetary origins view the consensus view in the economics profession today is that the genesis of the great depression was the tightening of policy by the fed in 1928 and 1929 mainly to stem the stock market boom nevertheless monetary historians have not provided evidence that any economist writing prior to the stock market crash of october 1929 foresaw that the fed s actions would lead to a major depression this paper shows that two economists william foster and waddill catchings co authored a paper in july 1929 containing arguments strikingly similar to the present consensus view their critique of fed policy supports the view that the genesis of the great depression had monetary origins and was preventable

the scope and limits of financial liberalisation in developing countries a critical survey this article reviews the growing literature on financial reform in developing countries we draw both on the theoretical contributions outlining the case for and against liberalisation as well as on the experience of many developing countries with liberalisation we argue that the existence of market failures in financial markets hampers the liberalisation process and indeed suggests that the simple liberalising strategy envisaged in much of the literature is inappropriate we argue instead for an alternative strategy which integrates some aspects of liberalisation with the development of appropriate financial institutions designed to serve best the needs of the real economy

financial constraints and firm post entry performance abstract firms finance production by internally generated funds and external loans the benefits of leverage however come with a cost this cost is related to the uncertainty banks face about the firm s quality and output price as time evolves banks learn about the firm and adjust the terms of the loan contract because of this firms do not have equal access to credit small young firms face greater binding debt constraints than more mature firms with well known prospects the firm survival rate as well as the firm rate of growth are therefore important issues in analyzing firm post entry performance

equilibrium interest rates and financial liberalisation in developing countries it is a central argument of the financial repression literature that interest rates should be determined by the market to reflect the true cost of capital this article suggests that the notion of an equilibrium interest rate may be undefined since the rate required to balance financial markets differs from that required to equilibrate savings and investment thus liberalisation introduces an intrinsic instability into the financial system as a result of portfolio adjustment the article examines the chilean and korean experiences and concludes that a sustainable reform requires positive but low real interest rates and broad regulation of the financial system to ensure macroeconomic stability

avoiding default the role of credit in the consumption collapse of 1930 high consumer indebtedness threatens future consumption spending if default is expensive consumer spending collapsed in 1930 turning a minor recession into the great depression households were shouldering an unprecedented burden of installment debt down payments were large contracts were short equity in durable goods was therefore acquired quickly missed installment payments triggered repossession reducing consumer wealth in 1930 because households lost all acquired equity cutting consumption was the only viable strategy in 1930 for avoiding default institutional changes lowered the cost of default by 1938 when recession began again indebted households chose to default rather than reduce consumption

new perspectives on public finance recent achievements and future challenges abstract the advances in the economics of the public sector during the past quarter century have been as pronounced as in any field within economics public finance has become a rigorous branch of applied microeconomics incorporating the best thinking and most advanced tools of both theoretical economics and econometrics in the remarks below i will focus on a few key areas in applied and theoretical tax and expenditure policy drawing both upon the academic work of myself and others and my experiences in the policy arena both as chairman of the council of economic advisers and as chief economist of the world bank i shall address both the questions of what we have learned in the past few decades as well as the questions where further research is needed

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

how institutions create historically rooted trajectories of growth this paper is concerned with approaches to growth theory that argue for historically created institutionally rooted national development trajectories there are varied ways of organizing market economies and there is more than just one kind of capitalism the institutional approach begins with the observation that markets embedded in political and social institutions are the creation of government and politics indeed all economic interchange takes place within institutions and groups markets do not exist or operate apart from the rules and institutions that establish them and that structure how buying selling and the very organization of production takes place consequently there are multiple market capitalisms and in a global economy international competition among members must be understood as an interplay of these various national market systems focus is on the historically rooted national institutions which frame the choices of individuals and structure the terms on which issues such as agency problems and contract problems are confronted the approach proposed in this paper is a necessary complement to an institutionalism more familiar in economics this historical institutionalism frames problems and provides answers to puzzles that concern microeconomic based institutionalism the particular historical course of each nation s development creates a political economy with a distinctive institutional structure for governing the markets of labor land capital and goods the institutional structure induces particular kinds of corporate and government behavior by constraining and by z laying out a logic to the market and policy making process that is particular to that s political economy these typical strategies routine approaches to problems and shared o decision rules create predictable patterns in the way governments and companies go v about their business in a particular national political economy the paper then applies 1 these notions to the debate about national systems of innovation empirically there is evidence of distinct national technological trajectories the questions are why the j trajectories exist and why they have particular form national systems arguments need an institutional theory that would permit us to apply both evolutionary and new growth arguments about economic development to particular national cases

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

corporate governance and efficiency in banking evidence from emerging economies abstractthis article investigates the impact of corporate governance on bank efficiency across a sample of 139 commercial banks from 17 countries of central and eastern europe during the period 200

financial liberalisation institutional transformation and credit allocation in developing countries the world bank and the internationalisation of banking the paper documents and analyses the world bank s promotion of foreign ownership of banking in developing countries in the wake of two decades of financial crises following exercises of orthodox financial reform the world bank has not only continued to push privatisation but now sees foreign banks as the missing component that will deal with the downside risks of financial liberalisation concerns that foreign banks might reduce small and medium enterprise sme loan access because of information problems are largely dismissed by the bank in fact the world bank argues for the very opposite the existence of foreign banks is likely to have the effect of pushing local banks into sme markets where they have a greater comparative advantage the question of access to credit for the private sector particularly the locally owned small and medium size enterprises is central to the issue of employment generation and poverty reduction in developing countries where the bulk of new jobs are typically created by these companies this article traces the development of the world bank s agenda on foreign ownership it critically assesses the arguments and empirical work underlying the world bank analysis and draws on alternative empirical testing and case studies to raise serious questions about the downside risks associated with the internationalisation of banking copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

financial restriction and the developmental state in east asia toward a more complex political economy recent financial crises in asia have renewed debates over the appropriate degree and scope of government intervention in financial markets governments in two countries affected by financial crises

sistema financeiro e desenvolvimento regional um estudo sobre o financiamento bancario da atividade industrial no brasil this paper aims in analyzing the interaction between the productive and financial economic spheres it discusses the characteristics of the brazilian financial system and examines the evolution of bank financing of the industrial activity by brazilian region stressing the importance of banking to development a principal component analysis confirms the existence of spatial correlation between financial and industrial variables and a panel data test for the brazilian states demonstrated the existence of different regional impacts of financial variables over the level of industrial employment by different sectors

the equilibrium effort wage elasticity in efficiency wage models abstract it has been objected that the equilibrium effort wage elasticity of unity in the standard efficiency wage model is quite high and that many of the results in the efficiency wage theory depend critically on the existence of some region of increasing returns of work effort to wages these two objections do not appear in the presence of fixed employment costs which e g implies that the equilibrium effort wage elasticity is less than unity finally some comparative static results are derived

rethinking macroeconomics what failed and how to repair it the standard macroeconomic models have failed by all the most important tests of scientific theory they did not predict that the financial crisis would happen and when it did they understated its effects monetary authorities allowed bubbles to grow and focused on keeping inflation low partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth after the crisis broke policymakers relying on the models floundered notwithstanding the diversity of macroeconomics the sum of these failures points to the need for a fundamental re examination of the models and a reassertion of the lessons of modern general equilibrium theory that were seemingly forgotten in the years leading up to the crisis this paper first describes the failures of the standard models in broad terms and then develops the economics of deep downturns and shows that such downturns are endogenous further the paper argues that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis contrary to what the standard models argued finally the paper contrasts the policy implications of our framework with those of the standard models

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

uncertainty and the employment dynamics of small and large businesses we examine the impact of uncertainty on employment dynamics alternative measures of uncertainty are constructed based on the survey of professional forecasters and regression based forecasting models for gdp growth inflation sp the impact on large businesses are generally non existent or weaker our results suggest that to truly understand the effects of uncertainty on employment dynamics we need to focus on the relatively smaller and entrepreneurial businesses we discuss implications for the framing of economic policy

the pandemic economic crisis precautionary behavior and mobility constraints an application of the dynamic disequilibrium model with randomness this article analyzes the economic impact of the pandemic providing insights into the consequences of alternative policies our framework focuses on three key features i covid 19 is a sectoral shock of unknown depth and duration affecting some sectors and technologies more than others ii there are constraints in shifting resources across sectors and iii there is a high level of uncertainty about the disease and its economic aftermath inducing a high level of precautionary behavior by some agents and leading to others facing more severe credit constraints because of macroeconomic externalities precautionary behavior exacerbates the downturn and even sectors where covid 19 does not directly affect consumption or production may face unemployment multipliers associated with different government expenditure programs differ markedly the article describes policies that can mitigate precautionary behavior leading to reduced unemployment greater wage flexibility may lead to increased unemployment the precautionary behavior is the antithesis of equilibrium behavior suggesting that standard equilibrium approaches may not provide the appropriate framework for analyzing the pandemic individuals know that they don t know the future that existing and newly made contracts and plans may be broken and that they need to be able to respond to these unknowable contingencies

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

the economics of workout lending lenders are forced to consider a workout loan when a borrower loses access to financial markets and must seek loans from existing creditors to continue servicing outstanding loans a model of the loan decision is developed that distinguishes socially useful from socially wasteful workout loans the analysis is extended to examine two collective action problems that may arise when many lenders have claims on a troubled borrower the paper concludes with a consideration of the implications of the model for the establishment of prudential lending limits and of policies to stimulate new lending to troubled debtor countries copyright 1989 by ohio state university press

informal financial markets under liberalization in four african countries abstract this paper presents survey evidence from four countries on how informal financial agents serve market niches that banks cannot readily reach their methodologies are effective in keeping down transaction costs and default risk relative to banks although informal agents exercise monopoly power in dualistic markets liberalization of repressive financial policies has had little effect on formal financial deepening while informal finance has continued to grow the paper concludes that informal financial institutions are an important vehicle for mobilizing household savings and financing small businesses and it recommends that informal finance be better integrated into financial development strategies

the contributions of the economics of information to twentieth century economics in the e eld of economics perhaps the most important break with the past one that leaves open huge areas for future work lies in the economics of information it is now recognized that information is imperfect obtaining information can be costly there are important asymmetries of information and the extent of information asymmetries is affected by actions of e rms and individuals this recognition deeply affects the understanding of wisdom inherited from the past such as the fundamental welfare theorem and some of the basic characterization of a market economy and provides explanations of economic and social phenomena that otherwise would be hard to understand i introduction the century coming to a close has seen vast changes in economics in both ideas and methodology upon ree ection it is remarkable however how many of the seeds of advances in this century were sowed in the previous i would argue that perhaps the most important break with the past one that leaves open huge areas for future work lies in the economics of information the recognition that information is imperfect that obtaining information can be costly that there are important asymmetries of information and that the extent of information asymmetries is affected by actions of e rms and individuals has had profound implications for the wisdom inherited from the past and has provided explanations of economic and social phenomena that otherwise would be hard to understand in this essay i wish to argue that information economics has had directly and indirectly a profound effect on how we think about economics today eighteenth and nineteenth century antecedents to be sure marshall and other nineteenth century economists talked about problems of imperfect information but with one exception discussions of information were obiter dicta caveats at the end of the analysis they were never at the center

adverse selection in dynamic moral hazard this paper studies a multiperiod moral hazard problem under two assumptions i contracts are subject to renegotiations ii the agent s action has long term effects the action is also interpreted as a choice of characteristic or type renegotiation proof contracts that implement various actions including random ones are characterized under appropriate conditions the equilibrium involves the principal implementing a random action therefore the equilibrium has standard properties of adverse selection models

monetary and exchange rate policies for international financial stability a proposal w v ithout a common monetary standard the remarkable integration of western european north american and the industrialized asian economies in both commodity trade and financial flows is less efficient and becoming untenable dissatisfaction with wildly fluctuating relative currency values euphemistically called floating or flexible exchange rates is a prime cause of the resurgence in protectionism in 1986 87 the overvalued yen forced japanese industrialists to close factories retire workers and write off once valuable investments in plant and equipment this parallels what their american counterparts were forced to do between 1981 and 1985 when the dollar suddenly became overvalued similarly the paring down of the british manufacturing base was precipitated when the pound unexpectedly became a strong petrocurrency in 1979 81 in agriculture japan and european countries are determined to insulate their domestic prices of farm products from unsettling international influences including volatile fluctuations in the yen dollar or mark dollar exchange rates thus unless exchange stability is first achieved the american government s attempt to broaden the general agreement on tariffs and trade to encompass agriculture and services is likely to fail but what keeps the three major industrial blocs from developing a common monetary standard to prevent exchange rate fluctuations although many people

animal spirits financial crises and persistent unemployment this article uses a rational expectations model with multiple equilibrium unemployment rates to explain financial crises the model has equilibria where asset prices are unbounded above i argue that this is an important feature of any rational agent explanation of a financial crisis since for the expansion phase of the crisis to be rational investors must credibly believe that asset prices could keep increasing forever with positive probability i explain the sudden crash in asset prices that precipitates a financial crisis as a large shock to expectations that leads to a permanent increase in the unemployment rate

unions role in argentine and chilean pension reform abstract the 1981 privatization of chilean pensions created immediate winners and observable benefits it also created a model for latin american pension reform this study compares the chilean and argentine experiences by using political economy models of social welfare development as a framework for discussion we suggest privatizing pensions could divide workers or create opportunities for unions to garner control over financial capital investments the argentine pension reform may diverge substantially if unions increase their participation in the pension fund management and worker education

the incentive effects of dismissals efficiency wages piece rates and profit sharing the relation of several incentive schemes to productivity is studied with a particular emphasis on the effects and determinants of dismissals dismissals turn out to be positively but in a nonlinear way associated with productivity similarly profit sharing raises productivity wages and piece rates are insignificant profit sharing decreases the number of dismissals made by firms copyright 1991 by mit press

financial frictions and employment during the great depression abstract we provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the great depression using a novel hand collected dataset of large industrial firms our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze local bank failures inhibited firms ability to substitute public debt for private debt which exacerbated financial constraints we estimate a large and negative causal effect of financing frictions on firm employment we find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933

is work special justice and the distribution of employment i investigate from an egalitarian welfarist standpoint the issue of whether state guaranteed employment should be offered as a matter of right to able bodied poor citizens who suffer chronic or persistent unemployment an affirmative answer is defended one consideration supporting this right to work is that provision of transfer aid in the form of jobs rather than cash screens nonneedy bohemians from the class of beneficiaries the main conclusion of the essay is defended from one objection based on efficiency wage models of the labor market and from another based on the alleged impossibility of maintaining the self respect and self esteem of able bodied individuals who fail to earn their own keep independently in a market economy

investment and uncertainty precipitating the great depression in the united states a severe collapse of fixed capital formation distinguished the onset of the great depression from other investment downturns between the world wars using a model estimated for the years 1890 2000 we show that the expected profitability of capital measured by tobin s q and the uncertainty surrounding expected profits indicated by share price volatility were the chief influences on investment levels and that heightened share price volatility played the dominant role in the crucial investment collapse in 1930 investment did not simply follow the downward course of income at the onset of the depression rather its slump helped to propel the wider collapse

from central planning to market economy some microeconomic issues the economies that we are concerned with here fall somewhere between the two extremes of a very traditional centrally planned economy and a wellestablished market type economy recent and on going reforms are moving hungary and poland and in due course probably some of the other eastern european countries too to a position somewhat closer to the market economy end of the spectrum though with important qualifications that we come to later in the light of such reform intentions it is important not only to consider the particular measures that have been taken or are envisaged but to examine them within a framework that helps to throw some light on the most effective sequencing priority for economic reform since some reforms will in the short term be accompanied by highly unpopular outcomes for certain groups of the population e g high unemployment for a time increases in food and other consumer goods prices and so on it is clearly also important to examine future reforms in the context of the political social environment within which they must take place this necessarily includes taking account of each country s current economic situation partly because it is one of the factors creating pressure for economic reforms partly because present difficulties might constrain what reforms are actually feasible in this paper much of the more detailed discussion concerns hungary largely because it is the economy which has already moved furthest towards a market type economy it therefore sets out the path which other eastern european countries are likely to follow very soon however section 2 outlines some general issues of microeconomic reform while sections 3 and 4 then deal with some specific topics development of competition privatisation the position of large enterprises in the hungarian context on this basis section 5 widens the discussion again to consider the question of transition to a market economy section 6 provides some concluding observations

the roles of corporate governance in bank failures during the recent financial crisis abstract this paper analyzes the roles of corporate governance in bank defaults during the recent financial crisis of 2007 2010 using a data sample of 249 default and 4 021 no default us commercial banks we investigate the impact of bank ownership and management structures on the probability of default the results show that defaults are strongly influenced by a bank s ownership structure high shareholdings of outside directors and chief officers managers with a chief officer position such as the ceo cfo etc imply a substantially lower probability of failure in contrast high shareholdings of lower level management such as vice presidents increase default risk significantly these findings suggest that high stakes in the bank induce outside directors and upper level management to control and reduce risk while greater stakes for lower level management seem to induce it to take high risks which may eventually result in bank default some accounting variables such as capital earnings and non performing loans also help predict bank default however other potential stability indicators such as the management structure of the bank indicators of market competition subprime mortgage risks state economic conditions and regulatory influences do not appear to be decisive factors in predicting bank default

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

credit layering in informal financial markets abstract informal lenders with access to markets or capital often find it attractive to delegate loan provision to downstream lenders who have an information or enforcement advantage in dealing with particular borrowers in this paper we examine the conditions under which such an arrangement is preferred by two informal lenders a landlord and a merchant who compete in loan provision to tenant farmers differentiated by wealth we show that credit layering is preferred only when tenants are sufficiently poor in this case the trader lends to tenant farmers via a contract with their landlord otherwise only the trader lends as a consequence a pattern of borrowing emerges in which relatively wealthy tenants borrow from merchants while poor tenants borrow mainly from their landlords interlinkage between land and credit thus arises only for a subset of tenants and purely as a consequence of credit layering this pattern is shown to be supported empirically

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

systemic risk and bank size abstract in this paper we analyse firm level systemic risk for us and european banks from 2004 to 2012 we observe that common systemic risk indicators are primarily driven by firm size which implies an overriding concern for too big to fail institutions however smaller banks may still pose considerable systemic threats as exemplified by the northern rock debacle in 2007 by introducing a simple standardisation we obtain new risk measures that often prove to be superior predictors of financial distress during the 2007 2009 subprime crisis we conclude that the new measures could be a valuable addition to the existing indicators employed in basel iii to identify systemically important banks

environmental accidents under moral hazard and limited firm liability we study optimal government policy when firms operations involve a risk of a large environmental accident firms do not have sufficient assets to cover such costs and the risk is affected by firms efforts which are unobservable to outsiders when firms profits and government revenues have equal weights in the social welfare function a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident and all its assets confiscated in the event of an accident with a lower weight on firm profits the solution is always second best with lower subsidies to the firm and a firm effort lower than at the first best solution when firm investments affect both the required accident preventing effort for given risk and the work effort required for a given output the first best never involves specific investment subsidies while a second best solution generally always does

cartels in an nth best world the wholesale foodstuff trade in ibadan nigeria abstract the purpose of this paper is to develop an understanding of the economic functions and associated welfare implications of the cooperative associations that dominate the wholesale trade in two staple foods questionnaire responses lead to several conclusions individual traders face incomplete markets imperfect information and little government provided institutional and physical infrastructure the associations are sophisticated coase like responses to this market environment they focus on reducing their members transaction costs and hence the marginal private costs of trading thus it is likely that these associations enhance efficiency we conclude with a critique of current government policy with respect to this trade

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

hungary in transition to a market economy hungary began its transition to a market economy as long ago as 1968 with the adoption of the new economic mechanism when detailed central planning was abandoned and the economy was regulated by means of financial and economic levers hare radice and swain 1981 however after a period of re centralization in the 1970s and further marketoriented reforms during the 1980s it became evident that the country was still far from achieving a successful transition nevertheless hungary s attempts at economic reform over the last 20 years are remarkably instructive both for the present government s program of transition and for other eastern european nations for some general discussion of reform attempts and approaches see hare 1987 moreover many of the measures now being implemented in hungary were prepared and in many cases began to be implemented prior to the country s political transformation hence there is much stronger continuity in the hungarian reforms than one can find elsewhere in the region

theoretical foundations for sticky wages abstract the paper compares three different types of theoretical explanation of sticky wages they are implicit contracts efficiency wage models and insider outsider models it then reconsiders keynes rationale for sticky wages which focuses on relative wage issues finally the paper considers possible directions for future research

does the volatility of commodity prices reflect macroeconomic uncertainty abstract while there exists numerous studies on the macroeconomic effects of oil and commodity shocks the literature is quite silent on the impact of macroeconomic uncertainty on oil and commodity prices and especially on their volatility this paper tackles this issue through the estimation of a structural threshold vector autoregressive tvar model on a sample of 19 commodity markets we aim at i assessing whether the effect of macroeconomic uncertainty shocks on commodity price returns depends on the degree of uncertainty and ii investigating the transfer from macroeconomic uncertainty to price uncertainty using a newly developed measure of commodity price uncertainty our findings show that both agricultural and industrial markets are highly sensitive to the variability and the level of macroeconomic uncertainty while the impact on precious metals is more parsimonious given their well identified safe haven role in time of economic turmoil in addition we find evidence that the recent 2007 09 recession has generated an unprecedented episode of high uncertainty in numerous commodity prices interestingly our analysis further reveals that volatility and uncertainty in prices can be disconnected this is especially true for the oil market as most important shocks in the 1990s and the beginning of the 2000s that lead to price volatility do not generate price uncertainty highlighting the relevance of our uncertainty measure in linking uncertainty to predictability rather than to volatility

the great crash and the onset of the great depression this paper argues that the collapse of stock prices in october 1929 generated temporary uncertainty about future income which led consumers to forgo purchases of durable goods that the great crash generated uncertainty is evidenced by the decline in surety expressed by contemporary forecasters that this uncertainty affected consumer behavior is shown by the fact that spending on consumer durables declined drastically in late 1929 while spending on perishable goods rose slightly this effect is confirmed by the fact that there is a significant negative relationship between stock market variability and the production of consumer durables in the prewar era

peer monitoring and credit markets a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced one partial solution is peer monitoring having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt peer monitoring is largely responsible for the successful financial performance of the grameen bank of bangladesh and of similar group lending programs elsewhere but peer monitoring has a cost it transfers risk from the bank which is in a better position to bear risk to the cosigner in a simple model of peer monitoring in a competitive credit market this article demonstrates that the transfer of risk leads to an improvement in borrowers welfare

continuous workout mortgages efficient pricing and systemic implications abstract this paper studies the continuous workout mortgage cwm a two in one product a fixed rate home loan coupled with negative equity insurance to advocate its viability in mitigating financial fragility in order to tackle the many issues that cwms embrace we perform a range of tasks we optimally price cwms and take a systemic market based approach stipulating that mortgage values and payments should be linked to housing prices and adjusted downward to prevent negative equity we illustrate that amortizing cwms can be the efficient home financing choice for many households we price cwms as american option style defaulting debt in conjunction with prepayment within a continuous time analytic framework we introduce random prepayments via the intensity approach of jarrow and turnbull 1995 we also model the optimal embedded option to default whose exercise is motivated by decreasing random house prices we adapt the barone adesi and whaley 1987 baw approach to work within amortizing mortgage context we derive new closed form and new analytical approximation methodologies which apply both for pricing cwms as well as for pricing the standard us 30 year fixed rate mortgage frm

dynamic microlending under adverse selection can it rival group lending we derive an optimal lending contract in a two period adverse selection model with limited commitment on the borrower side the contract involves penalty interest rates after default and favorable rates after success under some conditions it also charges first time borrowers higher rates than repeat borrowers as in relationship lending because the lender is constrained to keep borrowing attractive while using revealed information to price for risk we compare the efficiency of a group lending contract of the kind popularized by the microcredit movement to the dynamic individual contract both types of contracts reveal the same information but the contracts face different constraints on using the information to improve risk pricing as a result either type of contract can lead to greater efficiency depending on specifics of the environment opening the possibility that dynamic lending has played a role comparable to that of group lending in the success of microcredit we also characterize the optimal dynamic group contract when both lending techniques are feasible and find that it combines both approaches but with varying emphases a recurrent theme is that in more marginal environments dynamic lending performs relatively better than and is prioritized over group lending we also discuss a number of extensions including spatially and serially correlated risk and the effect of competition

measuring our ignorance one book at a time new indicators of technological change 1909 1949 abstract new indicators of technological change in the us based on information drawn from the catalogue of the library of congress for the period 1909 1949 are developed and used to pinpoint the relationship first between technical change and economic activity and second between fluctuations in innovative activity and the great depression although links between technological change output and productivity are found results suggest that the slowdown in technological progress in the early 1930s did not contribute significantly to the great depression on the other hand the remarkable acceleration in innovations after 1934 did play a role in the recovery

confidence crashes and animal spirits this article is an attempt to reformulate what i take to be two key insights from keyness general theory keynes 1936 the first is that there is something profoundly different about the labour market from most other markets in the economy the second is that the beliefs of participants in the asset markets have an independent influence on economic activity in the language of modern dynamic general equilibrium theory we would say that there is a continuum of labour market equilibria and that beliefs about the value of the stock market select an equilibrium the general theory contains many ideas some of which are internally inconsistent and keynes did not try to reconcile his theory with walrasian economics that task was carried out by a group of interpreters including hansen 1936 and hicks 1937 the current dominant paradigm new keynesian economics originated with the third edition of samuelson s 1955 undergraduate textbook in which he introduced the idea of the neoclassical synthesis according to this doctrine the economy is keynesian in the short run but classical in the long run the short run is defined as the period over which not all prices have had time to adjust to their walrasian levels this article introduces a different interpretation of the key ideas from the general theory 1 although my work is inspired by keynesian economics this article is not about the history of thought i offer a way of formulating the idea that market economies are not inherently self stabilising without assuming that prices or wages are prevented from adjusting to their equilibrium levels by some kind of friction instead i claim that high persistent unemployment is a potentially permanent feature of a market economy in a steady state equilibrium

the assessment microeconomics of transition in eastern europe the dramatic political events of 1989 and 1990 when almost all the communist governments of eastern europe collapsed and new democratic governments were elected into office gave rise to a brief spell of euphoria the dead or dying hand of communism was lifted from the region and a future of capitalist abundance was supposedly as sured this naive but perfectly understandable euphoria was quickly dispelled by the grim economic reality facing the new governments al though nearly everywhere there was a commit ment more or less strong to bring about a transition to a market type economy a transition typically requiring stabilization extensive liberalization and privatization there was far less agreement on the speed sequencing and precise modalities of the process at the same time in certain countries much needed reform programmes could neither be agreed nor implemented effectively because of political disputes over the very nature and existence of the states concerned table 1 summarizes the economic and political situation in the whole re gion as of summer 1991

short term contracting and strategic oil reserves the effect of short term contracting on resource extraction is studied in a two country model of international trade in oil countries planners are assumed to be fully rational with perfect information and perfect foresight contracts are assumed perfectly enforceable and complete except that short term contracts do not allow commitments to actions taken beyond the contract period we show that short term contracting limits countries opportunities for intertemporal consumption smoothing reducing their collective tolerance for temporal variation in consumption this tends to make them extract more slowly than in the efficient plan that results from long term contracting contractual relationships often outlive the contracts that govern them it is therefore common for a long term relationship to be governed by a sequence of short term contracts when these contracts allow complete control of the organization of the relationship within each contract period any outcome that can be achieved in a long term contract covering the entire life of the relationship is also feasible with a sequence of short term contracts short term contracting can nevertheless have significant effects on resource allocation because each contract must be voluntarily negotiated in the environment created by its predecessors an allocation that is acceptable to both parties as a long term contract might not be voluntarily negotiable as a sequence of short term contracts because short term contracting is so prevalent it is worth asking what sorts of relationship can be organized efficiently only by long term contract and what kinds of distortion are caused by short term contracting two kinds of answers to these questions have been given in the literature one important line of investigation considers the use of memory in contracts designed to control parties incentives under asymmetric information baron and besanko 1985 rubinstein and yaari 1983 sanchez and zapater 1985 stiglitz and weiss 1983 tirole 1986 and townsend 1982 among others have shown how parties can use

information institutions and banking sector development in west africa i introduction banks and other financial intermediaries can perform an important developmental function especially in africa where alternative sources of finance are limited or nonexistent by providing firms with essential finance they help them to take advantage of productive investment opportunities which may not otherwise materialize by screening loan applicants they can help to address adverse selection in the credit market and channel funds toward productive uses by monitoring borrowers they can contain moral hazard behavior for example excessively risky investment activity that could undermine a borrower s ability to repay a loan through long term bank borrower relationships well established banks can address both adverse selection and moral hazard this not only helps banks to remain solvent but also ensures that bank finance is channeled toward productive and sound investments there is a large body of empirical evidence which suggests that the development of banking systems goes hand in hand with economic development see e g levine 2004 although the evidence on causality is mixed see e g demetriades and hussein 1996 there is broad consensus that well functioning banking systems promote economic growth demetriades and andrianova 2005 it is therefore a puzzle that so many countries remain financially underdeveloped this is particularly true of sub saharan africa which remains one of the most financially under developed regions in the world a recent study by the world bank has shown that african banking systems lack depth compared to other regions in the world but are also excessively liquid honohan and beck 2007 according to the world bank banks themselves complain that there is a lack of creditworthy borrowers while at the same time households and firms find finance to be a major constraint the evidence presented by the world bank also suggests that the least developed banking systems are also the most liquid suggesting that excess liquidity is a common feature of financial under development this article aims to shed light on these features of financial under development in africa utilizing a panel data set comprising the banks operating in the west african economic and monetary union uemoa during 2000 2005 the uemoa provides a uniform financial system across eight countries the structure of this system has changed little in the last 15 years therefore we can be sure that the variations in bank behavior we observe within the uemoa are not because of variations in the nature of public financial institutions which the banks face this makes feasible the identification of the institutional sources of the variations in bank behavior which are not correlated with variations in the quality of public financial institutions our data set includes balance sheet information on each bank in the uemoa including bank characteristics such as age and ownership type profitability and the number of urban and rural branches we also utilize country level data on loan defaults which provides information on the average quality of borrowers we use this as a proxy for the severity of information problems faced by banks in the credit market we combine this information with macroeconomic data including institutional quality indices constructed by the world bank our data set enables us to examine the extent to which informational and institutional factors and interactions between different factors can explain a bank s loans to assets ratio which is an inverse measure of bank liquidity our data set is also used to examine the microeconomic and macroeconomic determinants of the total volume of assets of an individual bank which is a good micro level indicator of overall banking sector development our results suggest that to a large extent financial under development including excess liquidity and low banking sector development can be attributed to severe informational problems

can neoclassical economics underpin the reform of centrally planned economies te here s a curious symmetry between the arguments propounded over the last century in advocacy of socialism and the present popular discussion of the reform of centrally planned economies in those old discussions the vision of socialism was utopian which was contrasted with the dickensian realities of capitalism now the disasters of central planning are contrasted with the benefits flowing from perfectly functioning markets in the conventional wisdom of reform the vision of markets is utopian and that of central planning concentrates on the awful reality what is largely missing in the conventional wisdom is a satisfactory attempt to come to grips with the central question that should be answered in formulating reform plans how does one explain the differences in performance of market capitalist and centrally planned economies of course capitalism has outperformed central planning the developed west is therefore an obvious source of ideas for reforms but the institutions of capitalism come in many varieties and cannot be put in place instantaneously there are many alternative reform paths depending upon the importance attributed to each of these institutions thus there remains the problem of tracing the source of the superiority of capitalist economies to specific characteristics this point was made clear to me on hearing a vietnamese official justify single party rule by noting the economic success of taiwan and singapore reformers need a filter that interprets the experience of capitalist and socialist systems this is exactly where economic theory plays a vital role

firm value in commonly uncertain times the divergent effects of corporate governance and csr economic uncertainty disrupts firms ability to create value most related literature examines how various organizational characteristics affect value under extreme conditions the global financia

the life cycle of a microfinance institution the irish loan funds abstract ireland s loan funds were a long lived self sustaining large scale microfinance organization that made millions of loans without collateral to the poor during the first 100 years of their life cycle a period of growth ending in the 1840s they adapted constantly and obtained improvements to their legal structure because they were complementary to the banking system and seen as effective in relieving poverty in their 2nd century they became ossified in part because of competition with commercial banks the loan funds provide an example of sustainable microfinance under harsh economic conditions and illustrate how organizations change incrementally and when successful alter their institutional framework

financial market fragmentation and reforms in ghana malawi nigeria and tanzania this article reports the findings from surveys of formal and informal institutions and their clients in ghana malawi nigeria and tanzania it investigates the hypothesis that reforming financially repressive policies would not be sufficient to overcome fragmentation of financial markets because of structural and institutional barriers to interactions across different market segments the four countries have substantially fragmented financial markets with weak linkages between formal and informal segments and interest rate differentials that cannot be adequately explained by differences in costs and risks nevertheless the relatively low transaction costs and loan losses of informal institutions indicate that they provide a reasonably efficient solution to information transaction cost and enforcement problems that exclude their clients from access to formal banking services the findings imply that financial liberalization and bank restructuring in the african context should be accompanied by complementary measures to address institutional and structural problems such as contract enforcement and information availability and to improve the integration of informal and formal financial markets

informal credit markets and economic development in taiwan abstract taiwan is a case which shows how informal credit markets help to compensate for the limitations of the formal financial system especially in satisfying the needs of medium and small enterprises government regulations and policies affect the way participants in informal credit markets solve selection enforcement and incentive problems recent changes demonstrate the continued resilience and relevance of informal credit markets during a process of financial liberalization

enterprise ownership constraints and the role of equity markets in financial development the long standing controversy of the contribution of equity markets to economic development has been reactivated by the emerging markets phenomenon positive reassessments have emphasised diversification and liquidity gains for investors funding risky long lived projects the present analysis adopts instead the viewpoint of the issuer the owner controlled enterprise typical of ldcs owners wealth is a fundamental constraint on expansion when gearing is limited by bankruptcy risk and minority equity issue eases this constraint it is suggested that equity and debt are thus complementary and that stock markets may improve overall allocative efficiency if equities correctly value firm prospects

pareto inefficiency of market economies search and efficiency wage models this paper shows that market economies with search and in which wages are affected by efficiency wage considerations are not constrained pareto efficient wages are not set at pareto efficient levels nor is the level of employment unemployment pareto efficient we identify the nature of the biases and the welfare improving government interventions this abstract was borrowed from another version of this item

managerial incentives and capital management the paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors a model based on learning about managerial talent is developed to study second best contractual remedies we show that the optimal wage contract is an option of the value of the manager s human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager s resulting incentive to overinvest rationing is strictly superior to price decentralization offering one reason for the prevalence of centralized capital budgeting procedures

uncertainty irreversibility durable consumption and the great depression what was the role of uncertainty in the great depression this paper uses a calibrated general equilibrium model to show that in response to an increase in uncertainty agents increase expenditure on irreversible durable goods and reduce investment in irreversible physical capital these relative movements occur because durable goods provide a store of utility and are less irreversible than physical capital these substitutions are unclear at the start of the great depression but are clearly visible at the deep end of it in 1932 when the volatility of stock returns is consistently high coefficients on the variance which is consistent with the uncertainty hypothesis both the theoretical hypothesis and its empirical tests are of a partial equilibrium nature yet the great depression was a general equilibrium event this paper puts the uncertainty argument explicitly in a general equilibrium model with consumer durables and capital goods both subject to irreversibility constraints i associate income uncertainty with the stochastic process driving output fluctuations and an increase in uncertainty is modelled as a mean preserving spread on the distribution of this shock the general equilibrium setup also incorporates a specific notion of irreversibility namely that goods are irreversible if there are no buyers when one wants to sell the test of the uncertainty hypothesis in general equilibrium is a simulation of a calibrated version of the model what makes the reaction to a mean preserving spread nontrivial is the clash of the theoretical predictions of precautionary savings and irreversible investment in a general equilibrium context savings should increase and investment should fall to complicate matters durable goods have components of both consumption and investment so what was the role of uncertainty in the great depression in this setup a calibrated model provides a simple answer higher uncertainty makes agents cut capital investment and increase expenditure on durables there are two reasons for this the first is that durables are the least irreversible of the two assets in the model and the second is that durable goods act as a store of utility and thus as insurance the view of the uncertainty hypothesis that a cut in expenditure on durable goods is a key response to high uncertainty is not supported by a standard general equilibrium model there may however be some truth in itfbut for the wrong reasons and at the wrong time it is not a fall in durable expenditure per se but rather an increase relative to

separating the likelihood and timing of bank failure abstract we use a split population survival time model to separate the determinants of bank failure from the factors influencing the survival time of failing banks basic indicators of a bank s condition such as capital troubled assets and net income are important in explaining the timing of bank failure however many of the other variables typically included in bank failure models such as measures of bank liquidity are not associated with the time to failure the results also suggest that the closure of large banks is not delayed relative to the closure of small banks