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

monetary transmission through bank loans or bank liabilities interest in the transmission of monetary fluctuations to real output has dominated macroeconomics since at least the eighteenth century since then many observers have noted the tendency of a monetary expansion to be followed initially by an expansion of real output and later by an increase in prices while the reason for the long run price change is well understood understanding the short run impact of money on nominal output remains an active unresolved research topic most theoretical models explain the transmission of monetary fluctuations to real output as a consequence of sticky prices or expectations the stickiness is either due to informational imperfections or to contractual rigidities while the policy implications of the two types of stickiness differ both types of model predict a transitory response of real output to a shock in nominal money balances neither the informational imperfection nor the contractual rigidity story is completely compelling and both rely on the central role played by movements in real balances and perceived real interest rates yet for thirty five years following world war ii neither significant movements in the anticipated real rate nor large interest elasticities of spending were apparent despite this the empirical correlation of money and output fluctuations has been found in most time periods and countries consequently the need for alternative explanations of monetary transmission or a credible reverse causation story remains strong

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

the effects of military spending on economic activity evidence from state procurement spending the authors use state data from the period 1963 94 to estimate the response of employment growth to military procurement spending the state year panel provides greater variation in both variables than aggregate data there are two main findings first military procurement spending does explain a statistically significant degree of the variation in employment growth across states even in the presence of fixed effects for time and state and other controls second the authors find evidence in support of a nonlinear relationship between procurement spending and employment growth in particular large adverse state procurement shocks have proportionately larger effects on state employment growth rates copyright 1997 by ohio state university press

trade credit bank lending and monetary policy transmission this paper investigates the role of trade credit in the transmission of monetary policy most models of the transmission mechanism allow the firm to access only financial markets or bank lending according to some net worth criterion in our model we introduce trade credit as an additional source of funding we predict that when monetary policy tightens there will be a reduction in market and bank lending and an increase in trade credit this is confirmed with an empirical investigation of 16 000 manufacturing firms

financial integration and business cycles in a small open economy abstract the purpose of this study is to examine a dynamic stochastic general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy the existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy moreover there is uncertainty involved in the production process which leads to collateralized borrowing by firms and therefore has to be taken into account in the design of the loan contracts between firms and financial intermediaries it is shown that increasing financial integration amplifies the effect of a positive temporary monetary shock on output consumption investment labor demand and loans whereas it has barely any implication for the impact of a positive temporary technology shock on the economy

the allocation of credit and financial collapse this paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders it illustrates that 1 the allocation of credit is inefficient and at times can be improved by government intervention and 2 small changes in the exogenous risk free interest rate can cause large discontinuous changes in the allocation of credit and the efficiency of the market equilibrium these conclusions suggests a role for government as the lender of last resort

alternative theories of the rate of interest in this paper i shall develop a framework which may be used to examine several alternative theories of the rate of interest the four most widely accepted approaches are the neo classical loanable funds keynes s liquidity preference neoclassical synthesis islm and basil moore s horizontalist or endogenous money i will use the framework developed here to present a fifth an integration of liquidity preference theory with an endogenous money approach i first briefly set forth the primary alternative approaches then develop an analytical framework based on an asset or stock approach and use it to discuss several theories of the interest rate those advanced by keynes by moore by neoclassical theory and the monetarists by kregel and by tobin finally i shall use the framework to reconcile liquidity preference theory with an endogenous money approach

a framework for monetary and banking analysis one of the benefits of monetary instability is that it reminds us both by inducing change in financial institutions and by bringing out the monetary cranks that the monetary arrangements we take for granted are not immutable in this paper i set out and analyse a simple model of money banking and price level determination the model is first used to illustrate recent developments in the theory and analysis of banking the assumptions are then extended to analyse price level determination in an economy becoming an inside money economy as high powered money goes out of use the paper concludes by raising the major unresolved questions about banking money and price level determination the topics i shall discuss have only recently again become popular in the united states but they have a long history at the centre of monetary and macro economics the contributions of wicksell 1936 original in 1898 patinkin 1965 the radcliffe commission 1960 tobin 1963 and gurley and shaw 1963 are the best known of the classic analyses more recently black 1970 fama 1980 and others have returned to the questions of what if anything distinguishes banks from other financial intermediaries how an inside money economy would operate and what monetary arrangements other than current fiat money systems might be developed

misintermediation and macroeconomic fluctuations abstract individuals plan consumption and production for different point in the future using interest rates of various maturities as a guide however the financial intermediaries individuals work through traditionally do not match the maturity structure of their assets and liabilities as a result aggregate production plans and aggregate consumption plans for each period in the future need not coincide the resulting discrepancy will eventually appear as a recession or boom involving an unanticipated change in interest rates and production inside the original intertemporal production possibilities frontier maturity transformation is therefore not an essential function of financial intermediation but rather a mis function one which we call misintermediation

stock markets corporate finance and economic growth during the past decade the capitalization of emerging markets increased twentyfold in 1994 trading on these markets accounted for about 17 percent of the 9 6 trillion of shares traded on the world s stock markets up from a mere 3 percent of the much smaller 1 6 trillion in 1985 this rapid growth in emerging stock market activity raises critical questions for developing country policymakers what effect do stock markets have on economic growth how does stock market development affect firms financing decision and if stock markets are good for growth what policies can governments adopt to foster their development this note summarizes answers to these questions drawn from a recent research project

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

is subsidising tourism firms an effective use of public funds abstract this study assesses the impact of state aid on firms in the tourism sector by implementing an accurate micro econometric evaluation of their causal effect analyses consider subsidies allocated by the main regional policy in italy the law 488 1992 during the period 1999 2003 a matching difference in difference mdid estimator is applied considering the presence of selection on observable and non observable factors effects on the tourism sector are compared with those in the manufacturing industry the impacts with respect to different types of tourism destinations where tourism firms operate are also evaluated the results show higher output and employment growth but lower labour productivity dynamics in subsidised firms relative to non subsidised ones the impacts are diverse across types of tourism destinations

north south lending and endogenous domestic capital market inefficiencies abstract we develop an open economy model of intertemporal trade under asymmetric information capital market imperfections are endogenous and depend on a country s stage of economic development relative to the perfect information benchmark north south capital flows are dampened and possibly reversed and world interest rates are lower whereas riskless rates are equalized across borders the domestic loan rate is higher in poorer countries the model can be applied to a number of policy issues including the debt overhang problem the indexation of foreign public debts and the effect of income distribution on growth

the impact of cash flows and firm size on investment the international evidence abstract this paper examines the degree to which cash flow availability influences firm investment in six oecd countries in particular we are interested in the extent to which the reliance on internal funds is affected by firm size since there is general agreement that smaller firms have less access to external capital markets and thus should be more affected by the availability of internal funds earlier work has concluded that the documented positive relationship between cash flow and investment is evidence of the existence of financial constraints we first examine all firms regardless of size in each country and we find that the amount of corporate investment is affected by internal resources in all six countries that is internal financing affects firm investment we then repeat the analysis segmenting the sample using three measures of firm size contrary to our a priori expectations we find that the cash flow investment sensitivity is generally highest in the large firm size group and smallest in the small firm size group we deduce that the explanations for these findings are grounded in managerial agency considerations and in the greater flexibility enjoyed by large firms in timing their investments thus we conclude that the degree of sensitivity of a firm s investments to its cash flows cannot be interpreted as an accurate measure of its access to capital markets as do kaplan s zingales l 1997 the quarterly journal of economics 169 215 since small firms are known to have less access to external markets

les liaisons dangereuses a minskyan approach to the relation of credit and investment in argentina during the 1990s we classify firms according to their financial behaviour in the short term using a minskyan taxonomy that classifies firms as hedge speculative and ponzi we measure financial constraints across that taxonomy using panel data for argentina during 1992 2001 after controlling for profitability we find that firms with an oppressed financial structure in the short term had to rely on their internal funds for long term investment we interpret this finding from a minskyan keynesian framework arguing that credit allocation followed conventional rules about the quality of borrowers and not necessarily about the quality of the project because of being a highly unstable country argentinean firms quality is defined on a short term basis

inside money and real output abstract an example shows that anticipated non neutral monetary policy disturbances can result in correlation between real output and lagged inside money that is observationally equivalent to the real business cycle interpretation

tax policy and urban development evidence from the indiana enterprise zone program abstract this paper analyzes the effect of the indiana enterprise zone ez program on local employment and investment using a panel of local taxing jurisdictions as in other ez programs indiana s incentives favor capital relative to labor but the target of the capital incentive is unusual the stock of inventories using various estimation methods i estimate that zone designation initially reduces the value of depreciable personal property by about 13 percent but also reduces unemployment claims in the zone and surrounding community by 19 percent the value of inventories in indiana zones is 8 percent higher than it would be without the program

estimating the intrahousehold incidence of illness child health and gender inequality in the allocation of time in this paper the authors develop and implement a method for estimating the effects of infant morbidity on the differential allocation of time of family members based on discrete indicators of health and activity participation commonly available in survey data and within the context of a household model in which health is determined endogenously their estimates that take into account the simultaneity of health activity associations indicate that increased levels of infant morbidity significantly exacerbate existing differentials in the accumulation of human capital across teenage boys and girls in indonesia copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

small businesses and liquidity constraints in financing business investment evidence from shanghai s manufacturing sector abstract when firms experience financial hierarchy external finance if at all available is substantially more expensive than internal finance factors such as transaction costs agency problem and asymmetric information have created such a hierarchy stiglitz and weiss 1981 argue that asymmetric information between firms and potential suppliers of external finance creates adverse selection and moral hazard problems in the credit market in developed market economies this problem of a higher cost of external finance is commonly thought to be more serious for small firms because they are more disadvantaged than their larger counterparts in accessing external finance due to several factors 1 public information on small firms is generally not available and leads to the even greater problem of asymmetric information i e more severe adverse selection and moral hazard problems these information problems have excluded small firms from bond and share markets 2 due to the lack of available means of external finance small firms rely more heavily on bank loans than their larger counterparts in addition as small firms are more interested in cultivating stable relationships with a few banks in order to secure a stable supply of credit these banks become virtual monopolies by lending to small businesses and exercise their market power in lending to small firms most of existing research considers only small firms in market economies little research has been done to understand the relationship between firm size and investment financing in any economy in transition this paper makes a contribution to the literature by studying the relationship between firm size and liquidity constraints by using a firm level data of manufacturing enterprises in shanghai during the period of 1989 1992 we consider whether small manufacturing firms in shanghai are constrained by the availability of liquidity compared with their larger counterparts when they are financing their fixed investment in a transforming economy such as china or other similar transition economies external finance relies heavily on loans from banks that are fully owned by the state due to historical reasons allocations of credit are always biased in favor of state owned enterprises such a lending bias imposes an extra cost on small chinese enterprises in financing investment as the majority of them are not state owned in such an environment our empirical results show that small manufacturing firms in shanghai are actually less liquidity constrained than their larger counterparts in financing their fixed investment this surprising result is rather different from what people normally predict based on the experience in market economies we suggest three possible explanations for this peculiar finding 1 the composition of various firm size classes plays an important role in explaining the result non state enterprises which are fast growing and efficient dominate the small firm classes their successes in the markets helps them to generate enough internal funds to smooth their investment over time 2 the presence of heavy indebtedness of large state owned enterprises may deprive them of sufficient cash available for investment decision given that state owned enterprises have been making heavy losses the central and regional governments have a liquidity problem in satisfying their huge liquidity demands 3 small enterprises in non state sectors can rely on the informal credit market to obtain funds for investment although they are excluded from the state banking system however the further trade liberalization in terms of eliminating tariffs and quotas caused by china s bid of joining the wto will erode the profits of these small enterprises as imported goods will be supplied at lower prices in addition further reforms in financial sectors may also affect the supply of external finance to small enterprises in nonstate sectors the consequence may lead to a tight liquidity constraint for small enterprises in china

industrial policy evaluation in the presence of spillovers the shortage of studies on spatial spillovers of capital subsidy policies is rather surprising considering that such policies are usually designed to generate spatial externalities we propose a new framework that allows positive agglomeration effects to be contrasted with the negative cross sectional substitution and the crowding out effect the global evaluation of the att and the spillover parameters shifts the spotlight from the policy effect on subsidised firms to the global effect of capital subsidy policies on the targeted territory the empirical evaluation of a policy in italy mainly directed towards small and medium sized firms shows that the impact on investments turnover and employment is positive and large but is negative on tfp however the employment growth is partially determined to the detriment of the untreated firms

adverse selection and the financial accelerator many economists believe that credit market distortions create a financial accelerator which destabilizes the economy this paper shows that when credit market distortions arise from adverse selection they sometimes stabilize the economy rather than destabilize it the stabilizing forces are closely related to forces that cause overinvestment in static models when investment projects are equity financed or when contracts are written optimally the distortions always stabilize the economy thus stabilizing equilibria are a robust feature of the model the empirical distinction between accelerator and stabilizer equilibria is subtle many empirical tests are unable to distinguish between accelerator and stabilizer equilibria

unobserved household and community heterogeneity and the labor market impact of schooling a case study for indonesia studies have claimed that schooling investments have high rates of return in developing countries researchers however fail to control for all of the unobserved household and community effects which may affect estimates of returns using data from the 1986 indonesian labor force survey wage functions are estimated for indonesia with and without fixed effects to see if controls for outside factors which might be correlated with years of schooling and wages make a difference the impact of schooling on wage rates and hours supplied to the paid labor market is assessed with separate consideration given to males and females results suggest that estimates of the impact of schooling on wage rates and hours supplied to the paid labor market which do not control for household fixed effects are quite misleading the directions and magnitudes of biases caused by failing to take control measures differ according to sex between wage rates and hours supplied and among schooling levels specifically ordinary least squares estimates of the impact of schooling are biased to overestimate returns to school returns to lower schooling levels relative returns of schooling for males relative to females and the positive impact of schooling on hours supplied to the paid labor force advocating schooling investments in other societies based upon the standard estimates may therefore create unrealistic expectations

the loanable funds fallacy saving finance and equilibrium the loanable funds controversy cannot be settled without prior agreement on the meanings of income and equilibrium the essential claim of loanable funds theory is that disequilibrium in the goods market affects the rate of interest this paper introduces financial accounting concepts and a new understanding of the principle of effective demand to clarify that loanable funds theory relies on a concept of income other than current income namely yesterday s income in the case of robertson or full employment equilibrium income in the case of hicks in robertson s case this is a matter of bad accounting a confusion between an income statement and a balance sheet in hicks s more subtle case it is about the inapplicability of walras law to a monetary economy keynes s principle embodies a marshallian concept of system equilibrium under which the goods market is treated as never in disequilibrium in the sense required by loanable funds theory copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

do capital market imperfections exacerbate output fluctuations abstract we develop a dynamic general equilibrium macroeconomic model where a proportion of firms are credit constrained due to asymmetric information in general a macroeconomic shock has additional effects created by a reallocation of funds between credit constrained and unconstrained firms as they have different marginal productivities we show however that the output response to shocks is not necessarily amplified and can be dampened by the presence of asymmetric information this depends on the impact of the shock on the composition of external and internal funds for credit constrained firms

the determinants of financing obstacles the authors use survey data on a sample of over 10 000 firms from 80 countries to assess 1 how successful a priori classifications are in distinguishing between financially constrained and unconstrained firms and 2 more generally the determinants of financing obstacles of firms they find that older larger and foreign owned firms report less financing obstacles their findings thus confirm the usefulness of size age and ownership as a priori classifications of financing constraints while they shed doubts on other classifications used in the literature their results also suggest that institutional development is the most important country characteristic explaining cross country variation in firms financing obstacles

iylm a general theory compatible replacement for islm the islm model introduced in 1936 37 to provide interpretations of keynes s general theory subsequently emerged in its hicks hansen form as the workhorse and trained intuition of post war macroeconomists however islm is an essentially orthodox model based on neoclassical foundations and fails completely as an adequate representation of central elements of keynes s macroeconomic thought this article proposes iylm as a replacement for islm the new model being general theory compatible in that it is grounded only on key propositions in that work its purpose is to contribute within the constraints of a two market framework to the resuscitation of keynes s macroeconomics as an alternative to the inadequacies of much current macroeconomics the first part of the article derives the model and argues that those sympathetic to the general theory can accept the iylm framework whilst simultaneously rejecting islm the second part shows that hicks hansen islm is based on an income augmented form of orthodox loanable funds theory

growth of small size enterprises in india its nature and content abstract the paper highlights the nature of growth of small size enterprises in india and discusses how far the growth is accompanied by the fulfillment of objectives such as poverty eradication and the removal of regional imbalances without hampering the long term growth prospects of the economy to facilitate the discussion village cottage and handcrafts enterprises of the small scale sector are separated from its modern component the available evidence as is based on a number of studies in this area suggests that the somewhat unusual and high growth of the small scale sector is not accompanied by efficiency innovativeness and social justice policy bias against largeness seems to explain the growth whereas an elaborate system of subsidies and incentives has had only a marginal role

investment subsidies and regional welfare a dynamic framework and its application to the european regional policy this paper focuses on the question of the effectiveness of subsidies to private and public investment which are a key component of european regional policy given mixed findings from empirical stu

evaluating the impact of investment incentives the case of italy s law 488 1992 abstract italy s law 488 1992 allows firms willing to invest in lagging areas to receive a public subsidy by comparing subsidized firms with firms with rejected applications this paper evaluates whether the program made investments possible that otherwise would not have been made we find evidence that financed firms brought forward investment projects originally planned for the post intervention period to take advantage of the incentives we also find some support that subsidized firms may have taken some of the investment opportunities that unsubsidized firms would have exploited in the absence of incentives

a new theory of aggregate supply macroeconomic theory contains two competing explanations of business cycle fluctuations according to the intertemporal substitution mechanism its observed variations in employment represent the optimal response of labor supply to misperceived variations in the expected real rate of interest a competing theory is offered by the literature on overlapping contracts that attributes employment variations to contracted nominal wage rigidities such rigidities prevent prices from adjusting in a way that would allow quantities to mimic the theoretical predictions of the walrasian marketclearing model both of these theories incorporate the property that employment converges in the long run to a natural rate of employment this paper develops an alternative theory it presents a model of an economy in which agents are rational utility maximizers with perfect foresight of future prices nevertheless the competitive equilibrium is pareto inefficient this situation arises because the economy does not contain a complete set of markets perfect capital markets do not exist because of asymmetric information ai a complete set of futures markets does not exist because agents have finite lives and trades cannot be negotiated with the unborn these two sources of market failure are modeled by embedding a theory of ai contracts into an overlapping generations model olg in which a critical role is played by the additional assumption that in some states of nature bankruptcy may be a binding constraint the nonexistence of futures markets generates a model with the property that government debt is real wealth which implies that fiscal policy can have a permanent effect on the real rate of interest the bankruptcy constraint translates changes in the rate of interest into changes in the frequency of contract default simply stated a high interest rate increases the probability that a firm will go bankrupt or that it will layoff workers in sharp contrast to either the new classical or the sticky price contract explanations of business cycle fluctuations this theory is not a natural rate theory even in the long run it predicts that the steady state employment level is an endogenous variable which varies systematically with fiscal policy

asymmetric information financing constraints and investment the results of a number of theoretical papers lead to the hypothesis that financial variables affect capital sp ending because of asymmetric information in capital markets the auth ors review the relevant theory and test this hypothesis with a large sample of firm data the results show that financial variables such a s cash flow and interest expense add significant explanatory power to investment equations based on dale jorgenson s neoclassical model w ith a capm specification for the firm s cost of capital and a sales accelerator model the analysis therefore links recent theoretical work on capital markets to long standing empirical debates in the inv estment literature copyright 1987 by mit press

money interest and capital a study in the foundations of monetary theory list of illustrations list of tables series preface preface 1 real analysis and monetary analysis an introduction part i real analysis critique 2 wicksellian monetary theory 3 neo walrasian monetary theory 4 the neoclassical synthesis revisited 5 keynesian and monetarists 6 friedman s monetary framework the quantity theory restated part ii monetary analysis foundations 7 re laying the foundations of monetary theory 8 some further questions of method and methodology 9 marshallian microfoundations of monetary equilibrium 10 macroeconomic analysis and monetary equilibrium 11 real analysis and monetary analysis the central arguments references index

testing uncertainty s effect in real options with multiple capital goods the irreversible investment theory with heterogeneous capital predicts a negative relationship between uncertainty and the investment extensive margin we empirically explore this prediction using plant level data for investment across multiple fixed assets and employ a discrete ordered choice model our results indicate that uncertainty even after controlling for financial constraints induces a negative effect on the extensive margin thereby decreasing the likelihood of investment triggering in more types of capital this effect takes the form of both a higher probability of investment inactivity but also a lower probability of investment triggering in a higher number of capital types

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

monetization financial liberalization and economic development barter sector in 1954 55 the monetized sector contributed 69 to the net national product of india the share of the monetized sector increased to 78 6 of the net national product by 1974 75 during this period the explicit objective of monetary policy in india was to help accelerate the pace of economic development in an environment of reasonable price stability there are several versions of the financial liberalization hypothesis but the one put forward by ronald mckinnon is chosen here because of its succinctness and easy amenability to empirical verification 2 mckinnon s theory in essence deals with the effect of financial liberalization on the accumulation of capital through a policy of high real interest rates this formulation has been made operational by estimating the response of real demand for money balances and private investment to alternative rates of return under the implicit assumption that these are the only two alternative forms of assets held by the private sector 3 all this is predicated on the assumption that the effective limitation on the rate of real capital formation is the supply of real savings and not the inadequate willingness to invest most underdeveloped countries have a significant barter sector a reduction in the share of the barter sector can help to further accelerate the accumulation of capital in a barter system a good share of the factors of production is tied up in distribution away from production to achieve the double coincidence required in such a system with the

has government any role in money abstract recent interest in monetary reform has been sparked by the emergence of a world irredeemable paper money system in light of this interest we review the current validity of four good reasons friedman advanced in 1960 to rationalize government intervention we conclude that the forces that produced government involvement in the past will persist deregulation of financial intermediaries is desirable on grounds of market efficiency though it is an open question whether government should continue as lender of last resort we expect that the present world fiat money standard will neither degenerate into hyperinflation nor revert to a commodity standard

corporate debt overhang and macroeconomic expectations one way in which corporate financial structure affects macroeconomic performance is by creating debt overhang debt overhang occurs when existing debt deters new investment because the benefits from new investment will go to the existing creditors not to the new investors if the economy is booming debt overhang will not bind because the returns to investing are high if the economy is stagnant debt overhang will bind because the returns to investing are low as a result high levels of debt can create multiple expectational equilibria in which animal spirits determine economy activity copyright 1995 by american economic association

local multipliers at work we measure the effects of a substantial place based policy shock on the local labor market systems exploiting as an instrumental variable the peculiar information necessary to apply for capital subsidies in italy during the period 1996 2006 the results show the presence of positive multipliers in the south of italy slightly lower than what was previously found for the us but much higher than those identified for european and asian countries the reasons for this finding lie in the greater accuracy of the data in the relevance of the instrument used and in the widespread underutilization of production factors

money credit constraints and economic activity when government expenditures exceed current tax revenues the resulting deficit must be financed either by issuing bonds which imply obligations to levy future taxes or by creating high powered money the choice between money and bonds is often thought to be of great moment for both real and nominal variables that is monetary policy matters there is by now a wide empirical consensus that monetary policy has effects on real variables like output and employment but there is far less agreement about why this is so the purpose of this paper is to take issue with some currently fashionable views of why money has real effects and to suggest a new theory or rather resurrect an old one the loanable funds theory and give it new improved microfoundations this abstract was borrowed from another version of this item

a reconsideration of sims evidence concerning monetarism abstract in var systems such as those of sims 1980 monetary policy surprises may be more accurately represented by interest rate than money stock innovations especially if the monetary authority uses an interest rate instrument

too much investment a problem of asymmetric information this paper shows that under plausible assumptions the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level raising the rate of interest above the free market level will restore optimality this conflicts with generally held views and is contrasted with the stiglitz weiss model it is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance however under the stiglitz weiss assumptions used to derive an underinvestment result equity is shown to be the equilibrium method of finance

do subsidies to private capital boost firms growth a multiple regression discontinuity design approach there is still little consensus among economists on the effectiveness of business support policies the evaluation of such policies requires a reliable identification procedure that is hardly achieved in empirical studies we analyse the impact of a policy instrument law 488 92 l488 the main italian regional policy that allocates subsidies to private firms by a multiple ranking system thanks to the peculiar l488 selection process that creates the conditions for a local random experiment we are able to assess the effectiveness of these types of incentives for a relevant subgroup of firms we propose a nonparametric multiple rankings regression discontinuity design that exploits the sharp discontinuities in the l488 rankings and extends the regression discontinuity design rdd approach to a context where the treatment is assigned by multiple rankings with different cut off points we find that the impact of the subsidies on employment investment and turnover is positive and statistically significant while the effect on productivity is mostly negligible the new subsidised capital is additional but non complementary with the owner financed investment the results are robust to different specifications and not due to intertemporal substitution

tobin s q and financial policy abstract recent research in macroeconomics has emphasized the importance of linking the financial and real sectors and working with optimizing models tobin s q model of investment would appear to provide a framework satisfying these two criteria in contrast to the original presentation of the q model the formal development has not recognized that the firm actively participates in a number of financial markets in this broader context q may be an uninformative and possibly misleading signal for investment expenditures we then endeavor to turn this negative theoretical result to positive advantage in resolving a number of empirical problems with q models

regional finance a survey the role of money and nancial markets in the regional matters 1 economy has been attracting increasing attention in we start with a review of the treatment of money recent years it has been a topic of interest for longer in regional economics and then turn to the much

internal funds and corporate investment in india abstract several economists have argued that capital markets in less developed countries are fragmented fragmented capital markets retard the efficient allocation of resources and force business firms to rely on internal sources of funds using firm level data the authors examine the importance of the accelerator internal funds and depreciation for investment by manufacturing firms in india the results indicate that internal funds and depreciation have significant explanatory power in a sales accelerator model of investment and that there exists heterogeneity among firms in the link between internal funds and investment in particular internal funds are relatively more important for large firms and firms that produce luxury goods

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

the declining credit quality of u s corporate debt myth or reality in recent years the number of downgrades in corporate bond ratings has exceeded the number of upgrades leading some to conclude that the credit quality of u s corporate debt has declined however an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings an ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent implying that at least part of the downward trend in ratings is the result of changing standards bond ratings play a key role in corporate financing and investment decisions a corporation that can issue higher rated bonds usually receives better terms than one that can issue only lower rated bonds by law or policy some investors can purchase only bonds with an investment grade rating a restriction which in some asset pricing models would affect the relative prices of financial assets numerous articles in the popular press have presumed that the credit quality of the debt of u s corporations has been declining over the last couple of decades the comprehensive study by lucas and lonski 1992 of moody s rating changes of corporate debt is consistent with this presumption to cite their statistics in 1970 moody s downgraded 21 issues and upgraded 23 issues but over the following years the number of bonds downgraded began to exceed by substantial margins the number of bonds upgraded and by 1990 moody s downgraded 301 issues and upgraded only 61 their study includes both investment and noninvestment grade bonds but internal data from donaldson lufkin jenrette confirm that this trend also applies to investment grade bonds alone in a somewhat different context grundy 1997 documents similar trends in the ratings of preferred shares over the 1965 to 1990 period as the credit quality of a firm s corporate debt decreases that firm will face a greater probability of financial distress which at the extreme translates into bankruptcy there is some debate as to the effect of financial dis

relationship lending and the transmission of monetary policy abstract repeated interactions allow lenders to uncover private information about their clients decreasing the informational asymmetry between a borrower and his lender but introducing one between the lender and competing financiers this paper constructs a credit based model of production to analyze how learning through lending relationships affects monetary transmission i examine how monetary policy changes the incentives of borrowers and lenders to engage in relationship lending and how these changes then shape the response of aggregate output the results demonstrate that relationship lending prevails in equilibrium smoothes the steady state output profile and induces less volatile responses to certain monetary shocks

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

interest rates and the channels of monetary transmission some sectoral estimates abstract we estimate a small sectoral var model of the uk macroeconomy this model is then used to simulate the effects of an exogenous monetary policy shock upon asset prices bank balance sheet variables and final target variables activity and prices for the personal and corporate sectors significant sectoral differences are found among the channels of monetary transmission in addition the use of sectoral data facilitates the identification of distinct money and credit channels in the transmission of monetary policy these results contrast with the ambiguous findings on the roles of money and credit in the literature to date

determinants of private investment in developing countries this paper examines a modified version of the flexible accelerator theory of investment with particular reference to developing countries the empirical results for five countries tend to confirm that government investment the change in bank credit to the private sector and capital inflow to the private sector play important roles in determining private investment the contributory effect and the crowding out effect of government investment are assessed within the context of a recursive model

are the effects of monetary policy asymmetric huntley schaller by building on the hamilton 1989 markov switching model we examine questions like does monetary policy have the same effect in expansions and recessions given that the economy is currently in a recession does a fall in interest rates increase the probability of an expansion does monetary policy have an incremental effect on the growth rate within a given state or does it only affect the economy if it is sufficiently strong to induce a state change e g from recession to expansion as suggested by models with sticky prices or finance constraints interest rate changes have larger effects during recessions jel e52 e32 much of the recent work in macroeconomics has proceeded under the assumption that variables follow linear stochastic processes with constant coefficients as a result some of the richness of the burns mitchell analysis such as its focus on asymmetries between recessions and expansions may well have been lost blanchard and fischer 1989 7 i introduction for decades macroeconomists have debated whether monetary policy has the same effect on real output in expansions and recessions as far back as the 1930s keynes and pigou debated whether monetary policy would have less effect on output during a severe economic downturn in the 1960s there were active debates on a very different proposition namely whether the rightward portion of the aggregate supply curve was vertical so that monetary policy would have less effect on real output during expansions in this article we provide a new type of evidence on whether monetary policy has different effects depending on whether the economy is in an expansion or recession empirical evidence on this issue is particularly relevant in light of new theoretical work in macroeconomics that predicts asymmetric effects of demand shocks conditional on the state of the economy two examples of this work are s s type models of price adjustment and models in which there are agency costs of financial intermediation 1 the intuition for the latter class of models is simple 2 when there is information asymmetry in financial markets agents may behave as if they were constrained for a variety of reasons these finance constraints are more likely to bind during recessions when the net worth of agents is low an increase in interest rates will then have two effects on investment the standard effect of increasing the cost of capital and therefore reducing investment demand and an additional effect of reducing liquidity e g by increasing debt service obligations and thus reducing investment demand for constrained agents as a result monetary policy actions that change interest rates will have greater effects during a recession 3 the s s type price adjustment models of ball and mankiw 1994 caballero and engel 1992 and tsiddon 1993 lead to a convex aggregate supply curve and therefore also imply that monetary policy will have stronger effects during recessions one of the more frequently cited empirical papers on the potentially asymmetric effects of monetary policy is cover 1992 which finds evidence that positive monetary shocks have different effects from negative monetary shocks we are looking at a different type of asymmetry namely between booms and recessions we study asymmetries using an extension of the markov switching model developed by hamilton 1989 estimated over the period 1955 93 in hamilton s econometric specification the growth rate of output depends on a state variable that corresponds to an expansion or recession this approach has several advantages first unlike linear projections it allows for nonlinearities and asymmetries second in estimating the recession coefficients it gives greater relative weight to observations that most clearly correspond to recessions and similarly for the expansion coefficients

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

accounting quality and the transmission of monetary policy abstract we examine how firms accounting quality affects their reaction to monetary policy the balance sheet channel of monetary policy predicts that the quality of firms accounting reports plays a role in transmitting monetary policy by affecting information asymmetries between firms and capital providers consistent with this prediction we find that accounting quality moderates firms equity market response and future investment sensitivity to unexpected changes in monetary policy moreover the former relation is amplified for firms with more growth opportunities and more financial constraints further consistent with accounting quality moderating the transmission of monetary policy

investment in segmented capital markets bankers screening devices are identified to determine firms probability of borrowing in the formal segment of the capital market in pakistan incorporating this information investment functions are estimated using a two stage switching regressions model with endogenous switching it is concluded that firms that borrow in the formal markets behave according to the flexible accelerator model of investment while non borrowing firms plough back profits furthermore the former have higher capital output ratios and find it less difficult to adjust to their desired capital stocks compared to the latter investment determinants related to entrepreneurial and firm features are also identified

impact of government intervention on employment change and plant closure in northern ireland 1983 97 harris r and trainor m 2007 impact of government intervention on employment change and plant closure in northern ireland 1983 97 regional studies 41 51 63 financial assistance to manufacturing industry is an important element of the industrial development policy in northern ireland this paper uses the individual plant level records of the annual respondents database ard for the northern ireland manufacturing sector 1983 97 matched to the plant level details of financial support provided by the industrial development board to examine the effect of selective financial assistance sfa on employment change and plant closure it is found that sfa concentrated on protecting existing rather than new enterprises in terms of employment change using a hazard model it is found that the receipt of sfa significantly reduced the probability of plant closure by on average between 15 and 24 harris r et trainor m 2007 l impact de l intervention gouvernementale sur l evolution de l emploi et la fe

the macroeconomic implications of financial deregulation abstract this paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking the central bank is supposed to maximize an objective function in which the probability of bank failure is an argument it is then shown that the usual tradeoffs between policy objectives imply that financial deregulation will lead to more interest rate smoothing than would otherwise take place and further that because of restricted entry into banking deregulation will call for some inflation the transition toward deregulation raises special problems which are likely to require a more gradual approach toward the stationary equilibrium

working capital and fixed investment new evidence on financing constraints this article presents new tests for finance constraints on investment by emphasizing the often neglected role of working capital as both a use and a source of funds the coefficient of endogenous working capital investment is negative in a fixed investment regression as expected if working capital competes with fixed investment for a limited pool of finance this finding addresses a criticism of previous research on finance constraints that cash flows may simply proxy shifts in investment demand in addition previous studies may have underestimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital

optimal leverage and aggregate investment we analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures optimal financial contracts can be implemented by a combination of debt and equity when the risk shifting problem is the most severe while stock options are also needed when the effort problem is the most severe worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level moreover aggregate leverage decreases with the risk shifting problem and increases with the effort problem

outward orientation investment and finance constraints a study of indian firms we investigate the presence of finance constraints on firms investment behaviour using indian manufacturing as a case study this question becomes particularly interesting in the post 1991 period when substantial market oriented reforms were undertaken we argue that in the indian institutional context especially the underdeveloped state of bankruptcy laws and restrictive exit procedures outward orientation rather than size is the relevant criteria for distinguishing firms that may be finance constrained from those that are not using panel data for 718 indian manufacturing firms for the period 1993 98 we find that exporting firms are less constrained in financial markets than firms which sell primarily to domestic markets

the source of fluctuations in money evidence from trade credit abstract this paper tests the relative importance of technology shocks and financial shocks as sources of fluctuations in money the model extends the theory of king and plosser 1984 by recognizing that both money and trade credit provide transactions services under certain conditions the co movements between money and trade credit can reveal the nature of the underlying shocks the empirical results strongly suggest that shocks to the financial system account for most of the fluctuations in money in the long run and at business cycle frequencies on the other hand technology shocks appear to be more important at seasonal frequencies

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

financial institution structures in a developing two tier banking system an empirical perspective from eastern europe abstract an empirical analysis of the structure of hungarian financial institutions reveals them to be very profitable across all groupings although capital and liquidity ratios are on average low in comparison to west german standards the capital adequacy problems appear to be concentrated in the former affiliates of the central bank the thinness and underdevelopment of the hungarian securities market may hinder the capacity of the institutions to raise liquidity and capital ratios as well as inhibit the emergence of competitors seeking high levels of profitability

private investment trends and determinants in thailand summary this paper examines patterns and determinants of private investment in an attempt to understand why levels of private investment in south east asia have not yet fully recovered using thailand as a case study the private investment equation is estimated during the period 1960 2005 we find that it was capital fund shortages rather than existing spare capacity that hindered short run investment recovery while the health of the financial institutions must be kept in check policy attention should be geared more toward credit availability to ensure that prudent investors can access credit adequately and accelerate investment recovery in the long run policy emphasis should be on promoting a conducive investment climate

monetary factors in the great depression this paper examines the role of monetary policy in the early stages of the great depression and considers the mechanism whereby this policy may have affected real activity i conclude that the depression was preceded by a dramatic shift towards a highly contractionary monetary policy the economic impact of this policy seems unlikely to have come through the conventional keynesian channels of a shortage of liquidity and high ex ante real interest rates but instead may have operated through unanticipated deflation and after 1930 through the disruption of financial intermediation as a consequence of the banking panics

evaluation of spatial effects of capital subsidies in the south of italy de castris m and pellegrini g evaluation of spatial effects of capital subsidies in the south of italy regional studies the spatial effects of capital subsidies are neglected in the literature even if several industrial policies have a strong spatial dimension this study disentangles the spillovers generated by subsidized firms from the spatial attraction across neighbour s areas that cannot be attributed to incentive the presence of specific spatial effects is tested on the reduced form of a spatial autoregressive model evaluating the implicit common factor restriction the empirical analysis considers the main regional policies in the period 1996 2001 in the south of italy the results suggest the presence of a modest spatial crowding out where subsidized regions attract employment from neighbouring areas de castris m et pellegrini g une evaluation des effets geographiques des subventions d equipement dans le sud de l italie regional studies la documentation ne fait aucune attention aux effe

financial determinants of domestic investment in sub saharan africa evidence from panel data abstract this study investigates the effects of financial development on domestic investment in a sample of 30 sub saharan african countries it is based on a dynamic serial correlation investment model including various indicators of financial development controlling for country specific fixed effects and nonfinancial factors of investment the results indicate a positive relationship between domestic investment total investment and private investment and various indicators of financial development higher financial development leads to higher future levels of investment implying a potent long run effect of financial development on domestic investment the findings imply that financial development can stimulate economic growth through capital accumulation

credit rationing and effective supply failures the topic of this paper is among the oldest and most fundamental in monetary theory how and why does monetary policy affect real economic activity traditional answers hold that the central bank can manipulate aggregate demand by engineering expansions or contractions of the medium of exchange in its monetarist variant this story posits a direct link between something called m and aggregate spending in its keynesian variant the story holds that adjustments in asset prices brought about by a change in m lead to more spending especially on capital goods in either case short run stickiness of prices is needed to translate some of the changes in demand into movements of real output in recent years these conventional stories have become increasingly implausible as stiglitz and i blinder and stiglitz i 983 have argued elsewhere with money becoming more and more difficult to define it is becoming increasingly difficult to believe that the central bank can cause a recession by contriving a shortage of an arbitrary subset of assets called m put differently the point seems both simple and compelling if there are ready substitutes for money control of money will not give the authorities much leverage over the real economy hence this paper develops an explanation for how central bank policy affects

investment finance and the business cycle evidence from the dutch manufacturing sector in this paper we analyse the impact of profits on investment using data from the dutch manufacturing sector in a simple kaleckian investment model profits and capacity determine the level of investment the empirical analysis of this non mainstream model confirms conclusions drawn in the context of financial accelerator models the impact of profits on investment is countercyclical apparently entrepreneurs use public capital markets primarily as a source of funds in booming periods

the causes of free bank failures a detailed examination abstract in this paper we propose and test a new explanation of bank behavior during the free banking era 1837 1863 arguing against the conventional view that free bank failures were due to wildcat banking we claim they were caused by falling asset prices confronting both explanations with our new and detailed data set developed from state auditor reports we find that the falling asset price explanation of free bank failures explains far more failures than does the wildcatting hypothesis