what or who started the great depression abstract herbert hoover i develop a theory of labor market failure for the depression based on hoover s industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed i find that the theory accounts for much of the depth of the depression and for the asymmetry of the depression across sectors the theory also can reconcile why deflation low nominal spending apparently had such large real effects during the 1930s but not during other periods of significant deflation

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

precautionary saving over the business cycle we study the macroeconomic implications of time varying precautionary savings within a general equilibrium model with borrowing constraints aggregate shocks and uninsurable idiosyncratic unemployment risk our framework generates limited cross sectional household heterogeneity as an equilibrium outcome thereby making it possible to analyse the role of precautionary saving over the business cycle in an analytically tractable way the time series behaviour of aggregate consumption generated by our model is closer to the data than that implied by the hand to mouth and representative agent models and it is comparable to that produced by the krusell and smith 1998 model

redistributive shocks and productivity shocks abstract a productivity innovation reduces labor share at impact making it countercyclical it subsequently produces a long lasting increase that peaks five years later at a level larger in absolute terms than the initial drop before slowly returning to average i e labor share overshoots we estimate a bivariate shock process to the production function that under competition in factor markets accounts for this overshooting we pose this process in an otherwise standard real business cycle economy and we find that the contribution of productivity innovations to the variance of hours is 1 of that in the standard rbc model

income uncertainty and the onset of the great depression income uncertainty and the onset of the great depression income uncertainty contributes substantially to explaining the fall in consumption that marks the onset of the great depression consistent estimates of the variance of income measure income uncertainty from 1921 30 and are produced using a linear moment model this series provides a statistical link between the large erratic swings in income uncertainty after september 1929 and the great crash in the stock market comparison of the behavior of income uncertainty in the 1920s to the pre world war i and post world war ii eras suggests that the experience after the great crash was historically unique i introduction the great depression of 1929 41 can be broken down into several phases i the initial recessionary phase from october 1929 to october 1930 ii the first two waves of bank failures between november 1930 and december 1931 iii the incipient recovery of late 1932 and the impending collapse in march 1933 iv the recovery of the financial system and the economy from the cyclical trough and v the recession of 1937 38 among others many researchers have presented well articulated theories and extensive empirical analyses for each phase of the depression friedman and schwartz 1963 hamilton 1987 gordon and wilcox 1981 and burbidge and harrison 1985 have examined the role of money and monetary policy during the depression brown 1956 examined the stance of fiscal policy during this period bernanke 1983b provided an explanation of the role of the financial crisis in the propagation of the great depression most of this research has focused on the events that turned a recession in 1929 30 that was not historically unprecedented that is it is comparable to the recession of 1920 22 into the deepest slide in the history of the american business cycle explanations of the depression s initial phase from late 1929 to october 1930 however are much less satisfactory meltzer 1976 and mishkin 1978 examined this period and concluded that the fall in output can be attributed largely to the stance of monetary policy and the stock market s impact on the household balance sheet respectively the remainder of the existing literature centers around a debate between temin 1976 1981 and schwartz 1981 that has produced no consensus about the role of monetary and nonmonetary factors in providing the impetus for the great depression hence the period sometimes called the mysterious first year 1 is the least understood of all the phases of the depression we think that recent advances in our understanding of the influence of income uncertainty on consumption expenditures may help explain the onset of the great depression the theoretical work of leland 1968 sandmo 1970 dreze and modigliani 1972 and others has shown that an increase in uncertainty about future income measured as the variance of income results in a reduction in current consumption expenditures under standard assumptions regarding risk preferences recently flacco and parker 1990 included an estimate of the standard deviation of income in a conventional specification of the consumption function from blinder and deaton 1985 and found that this measure of income uncertainty is indeed negatively related to consumption this result estimated using post world war ii data holds up to a number of statistical significance and specification tests romer 1990 examined the relationship between consumer expenditure proxied by various disaggregate spending series and stock market volatility during the first year and a half of the great depression expanding on bernanke s 1983a analysis of investment under uncertainty romer estimates a model of consumer spending on durable goods in the face of temporary uncertainty empirical evidence reveals that inclusion of the volatility of the stock market as a proxy for income uncertainty dramatically reduces forecast errors for consumption of durable goods in 1929 and 1930

a characterization of ramsey equilibrium abstract consider a perfect foresight equilibrium model with a single capital good a borrowing constraint and many infinitely lived households with fixed but different discount factors the steady state capital stock is held by the most patient household quart j econ 95 1980 375 382 econ j 38 1928 543 559 an example shows the total capital can exhibit an equilibrium cycle in contrast to the stability property of the one household case in the example only the most patient household saves and his income deceases in capital we give a condition implying income is increasing in capital and use it to show any equilibrium converges to the steady state

uninsured countercyclical risk an aggregation result and application to optimal monetary policy we consider an incomplete markets economy with capital accumulation and endogenous labor supply individuals face countercyclical idiosyncratic labor and asset risk we derive conditions under which the aggregate allocations and price system can be found by solving a representative agent problem this result is applied to analyze the properties of an optimal monetary policy in a new keynesian economy with uninsured countercyclical individual risk the optimal monetary policy that emerges from our incomplete markets economy is the same as the optimal monetary policy in a representative agent model with preference shocks when price rigidity is the only friction the optimal monetary policy calls for stabilizing the ination rate at zero

who is credit constrained in the u s economy an important assumption of the life cycle model of consumption is the postulate of perfect capital markets this hypothesis has recently been challenged by substantial empirical evidence hall and mishkin 1982 using the panel study of income dynamics estimate that 20 percent of united states families are liquidity constrained mariger 1986 derives a life cycle model with endogenous liquidity constraints and using a cross section estimates this fraction to be 19 4 percent hubbard and judd 1986 simulate a model with a constraint on net worth which shows that with reasonable assumptions about preferences 19 0 percent of united states consumers are liquidity constrained the emerging consensus points therefore to a fraction of approximately 20 percent of the population behaving in a manner that is inconsistent with the pure life cycle model in addition hayashi 1985 and zeldes 1989 investigate the correlation among consumption wealth and income for various population groups and infer that liquidity constraints are more important for younger families with low levels of wealth and saving the main limitation of these studies is that in their data sets constrained consumers are not observable and have to be identified via indirect evidence thus there is as yet little firm evidence about the characteristics of the consumers who are likely to be credit constrained this paper adopts an approach that differs from previous tests for liquidity constraints because it makes use of data where constrained consumers are observable and explicitly links their existence to credit market imperfections and personal characteristics the data drawn from the 1983 survey of consumer finances scf and described in section ii provide information on individuals whose request for credit has been rejected by financial intermediaries in section iii a model is developed in which consumers and lenders behavior jointly determines the probability that a consumer is rationed in the credit market this probability is then

borrowing during unemployment unsecured debt as a safety net this paper examines whether unsecured credit markets help disadvantaged households supplement temporary shortfalls in earnings by investigating how unsecured debt responds to unemployment induced earnings losses results indicate that very low asset households those in the bottom decile of total assets do not borrow in response to these shortfalls however other low asset households do borrow increasing unsecured debt by more than 11 cents per dollar of earnings lost in contrast wealthy households do not increase unsecured debt during unemployment the evidence suggests that very low asset households do not have sufficient access to unsecured credit to smooth consumption over transitory unemployment spells

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

a tractable model of precautionary saving in continuous time abstract this letter derives an analytical solution to the following saving problem an individual chooses the path of consumption that maximises a time separable von neumann morgenstern utility function subject to a standard intertemporal budget constraint labour income follows a poisson process the consumer is both prudent and impatient and accumulates financial wealth as a buffer against the risk of income loss

how does future income affect current consumption this paper tests a straightforward implication of the basic life cycle model of consumption that current consumption depends on expected lifetime income the paper projects future income for a panel of households and finds that consumption is closely related to projected current income but unrelated to predictable changes in income however future income uncertainty has an important effect consumers facing greater income uncertainty consume less the results are consistent with buffer stock models of consumption like those of deaton 1991 or carroll 1992a 1992b where precautionary motives greatly reduce the willingness of prudent consumers to consume out of uncertain future income

consumption and labor supply with partial insurance an analytical framework we develop a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing closed form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption hours and wages we prove identification and demonstrate how labor supply data are informative about risk sharing the model estimated with us data over the period 1967 2006 implies that i 39 percent of permanent wage shocks pass through to consumption ii the share of wage risk insured increased until the early 1980s and iii preference heterogeneity is important in accounting for observed dispersion in consumption and hours jel e21 e23 e31 e52

wage risk and employment risk over the life cycle we specify a structural life cycle model of consumption labour supply and job mobility in an economy with search frictions that allows us to distinguish between different sources of risk and to estimate their effects the sources of risk are shocks to productivity job destruction the process of job arrival when employed and unemployed and match level heterogeneity our model allows for four main social insurance programmes in contrast to simpler models that attribute all income fluctuations to shocks our framework allows us to disentangle the effects of the shocks from the responses to these shocks estimates of productivity risk once we control for employment risk and for individual labour supply choices are substantially lower than estimates that attribute all wage variation to productivity risk increases in productivity risk impose a considerable welfare loss on individuals and induce substantial precautionary saving increases in employment risk have large effects on output and primarily through this channel affect welfare the welfare value of government programs such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides partial insurance against employment risk and no insurance against persistent shocks

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

the unemployment volatility puzzle is wage stickiness the answer i discuss the failure of the canonical search and matching model to match the cyclical volatility in the job finding rate i show that job creation in the model is influenced by wages in new matches i summarize microeconometric evidence and find that wages in new matches are volatile and consistent with the model s key predictions therefore explanations of the unemployment volatility puzzle have to preserve the cyclical volatility of wages i discuss a modification of the model based on fixed matching costs that can increase cyclical unemployment volatility and is consistent with wage flexibility in new matches

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

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

heterogeneous agents and uninsurable idiosyncratic employment shocks in a linearized dynamic general equilibrium model this paper proposes an analytical solution method for a dynamic general equilibrium model with heterogeneous agents and uninsurable idiosyncratic employment shocks the solution method yields an approximate balanced growth path which depends on the unemployment rate and the unemployment risk but which is independent of the ever changing wealth distribution

how prudent are consumers using data from the consumer expenditure survey this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive the coefficient of relative prudence the test yields a fairly precise estimate of a small precautionary motive in fact the estimate is too small to be consistent with widely accepted beliefs about risk aversion the presence of liquidity constrained households does not appear to explain this finding and there is some evidence that self selection of households into risky environments also cannot explain the results

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

pathways out of rural poverty a case study in socio economic mobility in the rural philippines exploiting unique household panel data covering a 30 year period this paper attempts to analyse the patterns of poverty exits by examining socio economic mobility in a philippines village macroeconomic growth was a major factor explaining poverty exit probabilities until the early 1980s after the 1980s poverty exit paths through agricultural ladder narrowed schooling and growth became equally important factors owing to the increased returns to schooling and labour endowments also became important for the lower but not upper social strata providing an economic incentive to have more children for the poor surprisingly we find no evidence of state dependence in poverty spells once observable factors are taken into account copyright 2007 oxford university press

comments on gaussian demand and commodity bundling richard schmalensee s paper deals with commodity bundling that is the selling of goods or services in packages the paper is particularly interesting to those who study and or manage the marketing function indeed selling of goods or services in packages is a very common marketing strategy examples include vacation packages season tickets concerts sports theater etc and complete dinners there are two forms of bundling strategies pure bundling if goods are sold only in packages and mixed bundling if goods are sold separately as well as in packages e g ordering a la carte vs a whole dinner bundles sometimes include goods or services that cannot be sold separately luxury in a car is tied to transportation services a brand name cannot be sold alone see adams and yellen 1976 these authors also mention that selling different sizes is a form of commodity bundling if two sizes of a product are sold a small size s and a large size s the offering s s is a form of mixed commodity bundling the quantity s s is not offered separately but only as part of the bundle s in the past the explanation of commodity bundling focused on cost savings in production transactions or complementarity of bundle components stigler 1963 first articulated the idea that the profitability of commodity bundling can stem from its ability to sort customers into groups with different reservation price characteristics and hence to extract consumer surplus adams and yellen 1976 discussed this sorting of consumers figure 1 describes the case of selling each good independently any individual with reservation prices rl r2 for the two goods falls into one of four regions 0 are nonbuyers r1 pi r2 pi p2 finally mixed bundling is shown in figure 3 region 1 individuals buy 1 only because r pi but r2 pb