some empirical evidence on the effects of shocks to monetary policy on exchange rates this paper investigates the effects of shocks to u s monetary policy on exchange rates we consider three measures of these shocks orthogonalized shocks to the federal funds rate orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the romer and romer index of monetary policy in sharp contrast to the literature we find substantial evidence of a link between monetary policy and exchange rates specifically according to our results a contractionary shock to u s monetary policy leads to i persistent significant appreciations in u s nominal and real exchange rates and ii significant persistent deviations from uncovered interest rate parity in favor of u s interest rates

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

financial crises unconventional monetary policy exit strategies and agents expectations a central bank may purchase assets during a financial crisis and then exit from those purchases agents have rational expectations about financial crises as rare events the probability the central bank purchases assets and the exit strategy selling off assets quickly produces a double dip recession while slowly unwinding generates a smooth recovery expectations about the exit strategy influence the initial effectiveness of purchases increasing the probability of purchases during crises distorts the pre crisis economy and depends upon the exit strategy the welfare benefits of unconventional policy may differ ex ante versus ex post as can the preferred exit strategy

safe assets as commodity money this paper presents a model in which safe assets are systemic because they are the medium of exchange in risky assets it connects the literature from banking and finance on safe assets to the monetary literature on alternative monetary systems involving commodity money interest bearing money and private money creation because safe assets have intrinsic value changes in their supply lead to changes in market efficiency additionally because safe assets are costly to produce there is overproduction of safe assets relative to the social optimum when the model is calibrated to plausible liquidity premiums the resulting inefficiencies are not large

bond finance bank credit and aggregate fluctuations in an open economy corporate sectors in emerging markets have noticeably increased their reliance on foreign financing presumably reflecting low global interest rates the evidence also shows a rebalancing from bank loans towards bonds to study these developments we develop a dynamic open economy model where these modes of finance are determined endogenously the model replicates the stylized facts following a drop in world interest rates in particular rebalancing towards bonds occurs because bank credit becomes relatively more expensive reflecting the scarcity of bank equity more generally the model is suitable for studying interactions between modes of finance and the macroeconomy

financial globalization financial crises and contagion abstract two observations suggest that financial globalization played an important role in the recent financial crisis first more than half of the rise in net borrowing of the u s non financial sectors since the mid 1980s has been financed by foreign lending second the collapse of the u s housing and mortgage backed securities markets had worldwide effects on financial institutions and asset markets using an open economy model where financial intermediaries play a central role we show that financial integration leads to a sharp rise in net credit in the most financially developed country and to large asset price spillovers of country specific shocks to bank capital the impacts of these shocks on asset prices are amplified by bank capital requirements based on mark to market

the interaction of monetary and macroprudential policies i analyze a new keynesian dynamic stochastic general equilibrium dsge model where the financing of productive investment is affected by a moral hazard problem i solve for jointly ramsey optimal monetary and macroprudential policies i find that when a financial friction is present in addition to the standard nominal friction the optimal policy can replicate the first best allocation if the social planner can conduct both monetary and macroprudential policy using monetary policy alone is not enough a policy trade off between stabilizing inflation and output gap emerges when policy follows simple rules the source of fluctuations is relevant for the choice of the appropriate policy mix

dynamics of urban land use sequential location of an office firm and residence abstract the objective of this paper is to depict the transition in the land use pattern of the suburbanization of workers and the concentration of business firms by considering a sequential entry of a firm and its worker who minimize the total cost under monopsony in the land market the equilibrium development process of the urban land use pattern under a height restriction is derived it is shown that the first replacement of a residence with a firm always takes place at an intermediate location and successive replacements take place inwardly with alternations of right and left and then outward replacements begin when the height regulation is removed the equilibrium density function of firms is shown to be a duocentric cosine truncated curve symmetrical with respect to the city center and the equilibrium density function of residence is linear it is also demonstrated that the optimum density distribution of the firms and the workers becomes identical to the equilibrium distribution except for a difference in a parameter value and that the optimum central business district cbd and city lengths are shorter than the equilibrium cbd and city lengths respectively

the determinants of global bank lending evidence from bilateral cross country data this paper finds that factors determined outside of a country at the quarterly frequency and especially after 2008 are more closely related to the global bank loans it receives these loans are generally more stable when global banks face more competition and have a higher presence in the recipient country we obtain our results by using bilateral lending data from 15 countries and a unique methodology to identify and compare the independent effects of external and internal factors we identify theoretical mechanisms that can explain our empirical findings and draw more detailed inferences for competition and global bank presence by solving a simple model of global banking

fiscal policy banks and the financial crisis this paper studies the effectiveness of euro area ea fiscal policy during the recent financial crisis using an estimated new keynesian model with a bank a key dimension of policy in the crisis was massive government support for banks that dimension has so far received little attention in the macroeconomics literature we use the estimated model to analyze the effects of bank asset losses of government support for banks and other fiscal stimulus measures in the ea our results suggest that support for banks had a stabilizing effect on ea output consumption and investment increased government purchases helped to stabilize output but crowded out consumption higher transfers to households had a positive impact on private consumption but a negligible effect on output and investment banking shocks and increased government spending explain half of the rise in the public debt gdp ratio since the onset of the crisis

liquidity infinite horizons and macroeconomic fluctuations abstract this paper develops a computable dynamic general equilibrium model in which corporate demand for liquidity is endogenously determined in the model liquidity demand is motivated by moral hazard as in holmstrom and tirole j politic econom 106 1998 1 as a result of incorporating agency cost and endogenously determined liquidity demand the model can replicate an empirical business cycle fact the hump shaped dynamic response of output which is seldom observed in standard rbc dynamics further in the model the corporate demand for liquidity from a financial intermediary credit line for instance is pro cyclical while the degree of liquidity dependence defined as liquidity demand divided by corporate investment is counter cyclical these business cycle patterns are consistent with a stylized fact empirically verified in the lending view literature

money liquidity and monetary policy in a market based financial system banking and capital market developments are inseparable and funding conditions are closely tied to fluctuations in the leverage of market based financial intermediaries offering a window on liquidity the balance sheet growth of broker dealers provides a sense of the availability of credit contractions of broker dealer balance sheets have tended to precede declines in real economic growth even before the current turmoil for this reason balance sheet quantities of market based financial intermediaries are important macroeconomic state variables for the conduct of monetary policy

taking financial frictions to the data we estimate a dynamic stochastic general equilibrium dsge model with various financial frictions and analyze how well the model explains the great recession predictive analysis shows that the model can only slightly better explain the large deviation from trend during the crisis relative to a model without financial frictions specifically the risk premium shock which is a shock to the external finance premium of the entrepreneurs leverage explains the largest part of the investment downfall during the crisis however the balance sheet channel of financial frictions in the model which structurally links balance sheet conditions of financial intermediaries and nonfinancial borrowers to their borrowing rates is estimated to be weak we examine alternative prior specifications for how the financial frictions enter the model and continue to find a limited role for these frictions rolling window estimation provides evidence for substantial time variation in parameters governing financial frictions we conclude that the well known financial frictions studied in this paper are not able to explain the financial crisis in a linearized and estimated model

macroeconomic factors and microlevel bank behavior we analyze the link between banks and the macroeconomy using a model that extends a macroeconomic var for the u s with a set of factors summarizing conditions in about 1 500 commercial banks we investigate how macroeconomic shocks are transmitted to individual banks and obtain the following main findings backward looking risk of a representative bank declines and bank lending increases following expansionary shocks forward looking risk increases following an expansionary monetary policy shock there is however substantial heterogeneity in the transmission of macroeconomic shocks which is due to bank size capitalization liquidity risk and the exposure to real estate and consumer loans

the anatomy of standard dsge models with financial frictions abstract we compare two standard extensions to the new keynesian framework that feature financial frictions the first model originating from kiyotaki and moore 1997 is based on collateral constraints the second developed by carlstrom and fuerst 1997 and bernanke et al 1999 accentuates the role of external finance premia we tweak the models and calibrate them in a way that allows for both qualitative and quantitative comparisons next we thoroughly analyze the two variants using moment matching impulse response analysis and business cycle accounting overall we find that the business cycle properties of the external finance premium framework are more in line with empirical evidence in particular the collateral constraint model fails to produce hump shaped impulse responses and generates volatilities of the price of capital and rate of return on capital that are inconsistent with the data by a large margin

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

capital regulation and credit fluctuations we provide a rationale for imposing counter cyclical capital ratios on banks in our simple model bankers cannot pledge the entire future revenues to investors which limits borrowing in good and bad times complete markets do not sufficiently stabilize credit fluctuations as banks allocate too much borrowing capacity to good states and too little to bad states as a consequence bank credit output capital prices or wages are excessively volatile imposing a stricter capital ratio in good states corrects the misallocation of the borrowing capacity increases expected output and can be beneficial to all agents in the economy although in our economy all agents are risk neutral counter cyclical capital ratios are an effective stabilization tool to ensure this effectiveness capital ratios have to be based on ex ante equity capital as classical capital ratios can be bypassed

debt overhang in a business cycle model abstract we study the macroeconomic implications of the debt overhang distortion on firms investment and labor decisions we show that the distortion arises when the levels of investment and labor are non contractible and chosen after the signing of the debt contract the financial friction manifests itself as investment and labor wedges that move counter cyclically increasing during recessions when the risk of default is high their dynamics amplify and propagate the effects of shocks to productivity government spending volatility and funding costs both the size and the persistence of these effects are quantitatively important

industry s response to market liberalization in china evidence from jiangsu province introduction more than a decade has passed since china s communist party endorsed major economic reform at the third plenum of the eleventh central committee in december 1978 the reforms have addressed many problems but efficiency has been the focus of concern to improve efficiency china has introduced market mechanisms and reversed its import substitution policies the purpose of this article is to investigate whether industrial productivity has increased as a result using jiangsu province as a case study the background of market liberalization in china is years of development centered on a radical import substitution strategy which was both international and regional china is not alone in its reconsideration of import substitution and the role of the market versus the public sector the oil price increases in the 1970s resulted in serious debt problems for many developing countries forcing them to turn to market liberalization and export promotion the former eastern bloc countries are also in the process of radical domestic and international market reorientation as they restructure their formerly planned systems that had favored import substitution some discussions in the development literature have also been critical of import substitution in favor of outward looking strategies 1 while others argue that markets and export promotion are not a panacea 2 in these discussions the example of china is often raised with respect to its particular experience with import substitution followed by an open door policy with market liberalization but while it is clear that reforms have caused radical changes in china s economic system well beyond what might have been expected to ensue in 1978 the question remains as to whether economic performance improved during the 1980s as a result of the reform efforts

the international transmission of financial shocks the case of japan one of the more dramatic financial events of the late 1980s and early 1990s was the surge in japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent while the unprecedented fluctuations in japanese stock prices were domestic financial shocks the unique institutional characteristics of the japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the japanese banking system the large size of japanese bank lending operations in the united states enables us to use u s banking data to investigate the extent to which this domestic japanese financial shock was transmitted to the united states as well as to identify a supply shock to u s bank lending that is independent of u s loan demand we find that binding risk based capital requirements associated with the decline in the japanese stock market resulted in a decline in commercial lending by japanese banks in the united states that was both economically and statistically significant this finding has added importance given the severe real estate loan problems currently faced by japanese banks how japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the united states as well as in other countries with a significant japanese bank presence

liquidity effects monetary policy and the business cycle this paper presents a flexible price quantitative general equilibrium model with the property that a positive money supply shock drives the nominal interest rate down and aggregate employment output and the real wage up these implications are broadly consistent with postwar u s data the two key features of the model that are responsible for its properties are 1 money shocks have a heterogeneous impact on agents and 2 ex post inflexibilities in production give rise to a very low short run interest elasticity of money demand in our model the extent of the drop in the interest rate after a positive money supply shock depends on the degree to which production is ex post inflexible given sufficient ex post inflexibility the model conforms well with the view widely held within the u s federal system that the short run interest rate elasticity for total reserves is very close to zero copyright 1995 by ohio state university press

the welfare cost of bank capital requirements abstract capital requirements are the cornerstone of modern bank regulation yet little is known about their welfare cost this paper measures this cost and finds that it is surprisingly large i present a simple framework which embeds the role of liquidity creating banks in an otherwise standard general equilibrium growth model a capital requirement limits the moral hazard on the part of banks that arises due to deposit insurance however this capital requirement is also costly because it reduces the ability of banks to create liquidity the key insight is that equilibrium asset returns reveal the strength of households preferences for liquidity and this allows for the derivation of a simple formula for the welfare cost of capital requirements that is a function of observable variables only using us data the welfare cost of current capital adequacy regulation is found to be equivalent to a permanent loss in consumption of between 0 1 and 1

bank intermediation over the business cycle a model is developed in which banks engage in valued asset transformation by converting illiquid assets working capital loans into highly liquid demand deposit accounts that households use for transactions purposes consumption smoothing behavior induces countercyclicality in the degree to which firms rely on bank borrowings to finance their working capital expenses which is consistent with u s data the importance of financial markets that provide alternative sources of short term funds to firms is also illustrated absent these markets nominal interest rates become nearly perfectly positively correlated with output which is counterfactual and monetary shocks induce perhaps artificially large aggregate employment responses

flight to liquidity and the great recession abstract this paper argues that counter cyclical liquidity hoarding by financial intermediaries may strongly amplify business cycles it develops a dynamic stochastic general equilibrium model in which banks operate subject to agency problems and funding liquidity risk in their intermediation activity importantly the amount of liquidity reserves held in the financial sector is determined endogenously balance sheet constraints force banks to trade off insurance against funding outflows with loan scale a financial crisis simulated as an abrupt decline in the collateral value of bank assets triggers a flight to liquidity which strongly amplifies the initial shock and induces credit crunch dynamics sharing key features with the great recession the paper thus develops a new balance sheet channel of shock transmission that works through the composition of banks asset portfolios

macro financial linkages the role of the institutional framework abstract in this paper we assess the quantitative impact of various financial shocks on the real activity and explicitly address the issue of heterogeneity in the macro financial linkages for that purpose we use var models as well as the local projection method for 18 oecd countries based on quarterly data between 1995 and 2014 we take into account three main dimensions of the institutional framework likely to explain the observed cross country heterogeneity in the propagation of financial shocks the product market regulation the employment protection and the financial structure our main findings indicate that financial shocks have a stronger impact in countries characterized by a higher competition friendly regulatory stance a stronger employment protection and a more market oriented financial structure we also show that the varieties of capitalism described by the particular mix of different institutional arrangements do not play a significant role in shaping the macro financial linkages this result suggests that although considered individually goods labor and financial markets regulations are robustly linked to macroeconomic fluctuations there is no prima facie evidence for superior performance of any given mix of institutional arrangements observed in oecd countries

bayesian evaluation of dsge models with financial frictions we evaluate two most popular approaches to implementing financial frictions into dsge models the bernanke gertler and gilchrist 1999 setup where frictions affect the price of loans and the kiyotaki and moore 1997 model where they concern the quantity of loans we take both models to the data and check how well they fit it on several margins overall comparing the models favors the bernanke gertler and gilchrist framework however even this model does not make a clear improvement over the new keynesian benchmark in terms of marginal likelihood and similarity of impulse responses to those obtained from a var

identification of financial factors in economic fluctuations we estimate demand supply monetary investment and nancial shocks in a var identified with a minimum set of sign restrictions on us data we find that financial shocks are major drivers of fluctuations in output stock prices and investment but have a limited effect on inflation in a second step we disentangle shocks originating in the housing sector shocks originating in credit markets and uncertainty shocks in the extended set upfinancial shocks are even more important and a leading role is played by housing shocks that have large and persistent effects on output

monetary policy bank leverage and financial stability abstract this paper shows that with limited liability banks lever up excessively to finance new loans lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out when this constrained is relaxed but the bank faces costly dividend adjustment lower monetary policy rates always worsen risk taking incentives and the effect is persistent the reason is that costly dividend adjustment lowers the opportunity cost of lending in this model capital requirements are closer to the source of the distortion and thus work better than loan to value caps in reducing excessive risk taking

an empirical study of credit shock transmission in a small open economy in this paper we identify and estimate the dynamic effects of foreign us and national canadian credit shocks in a small open economy we use standard credit spreads as proxies to the external finance premium our first result suggests that the us and canadian credit spreads contain substantial forecasting power for several measures of the canadian real economic activity especially during the recent financial crisis and its aftermath secondly an adverse us credit shock generates a significant and persistent economic slowdown in canada the national external finance premium rises immediately while interest rates credit aggregates output and employment indicators decline variance decomposition reveals that credit shocks have a sizeable effect on real activity measures leading indicators and credit spreads yet the unexpected shocks in domestic credit spreads are not able to generate any significant dynamic response of the real activity once we control for the us credit market conditions

a macroeconomic model with a financial sector this paper studies a macroeconomic model in which financial experts borrow from less productive agents we pursue four sets of results i the economy is prone to instability and occasionally enters volatile episodes as volatility spikes agents precautionary motive increases depressing prices even further log linear approximations fail to capture these non linear effects that can cause economies to be significantly depressed for long periods of time ii endogenous risk during volatile episodes increases asset price correlations iii financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion and funding structure iv while risk sharing within the financial sector through securitization and derivatives contracts reduces many inefficiencies it can also amlify systemic risks

financial integration and international business cycle co movement international business cycle transmission through integrated financial markets occurs through wealth and balance sheet effects balance sheet effects lead to business cycle convergence but wealth effects lead to divergence this paper shows empirically that debt market integration has a positive effect on co movement implying that balance sheet effects are the main conduit for international transmission through integrated debt markets equity market integration has a negative effect implying that wealth effects are the main channel for international transmission through integrated equity markets distinguishing between wealth and balance sheet effects resolves some key discrepancies between empirical and theoretical findings in international macroeconomics

global banks financial shocks and international business cycles evidence from an estimated model this paper estimates a two country model with a global bank using us and euro area ea data and bayesian methods the estimated model matches key us and ea business cycle statistics empirically a model version with a bank capital requirement outperforms a structure without such a constraint a loan loss originating in one country triggers a global output reduction banking shocks matter more for ea macro variables than for us real activity during the great recession 2007 09 banking shocks accounted for about 20 of the fall in us and ea gdp and for more than half of the fall in ea investment and employment

financial intermediation business failures and real business cycles in this paper a general equilibrium business cycle model is construct ed that when subjected to real disturbances mimics observed qualita tive comovements among real output money business failures risk pr emia intermediary loans and prices in contrast monetary disturban ces generate cycles that have several inconsistencies with empirical evidence thus providing support for real business cycle theory at th e expense of monetary theories of the business cycle financial inter mediation arises endogenously in the model and intermediation matters for business cycle behavior a credit supply mechanism acts in tande m with an intertemporal substitution effect in propagating stochastic disturbances copyright 1987 by university of chicago press

chained credit contracts and financial accelerators sufficiently high net worth of financial intermediaries fis is considered a necessary condition for financial and macroeconomic stability in this paper we explore why the net worth of fis is important as compared to that of nonfinancial firms using a dynamic general equilibrium model in which both fis and nonfinancial firms rely on costly external debt we find that an exogenous disruption of the fis net worth has a greater aggregate impact than does the same sized disruption of the nonfinancial firms net worth the key reason is that the net worth of the fis in the united states is small jel e22 e44 g21

socially optimal and equilibrium distributions of office activity models with exogenous and endogenous contacts abstract two models of the location of office activities within a city are developed in the first model the pattern of interoffice contacts is specified exogenously as has been traditional in the literature in the second model the contact patterns as well as the distribution of firms are endogenous for both models the market equilibrium distribution of office activities is not socially optimal two sources for this market failure are identified in these models 1 agglomeration economies and 2 transactional externalities arising from firm interdependence and mobility

optimal dynamic capital requirements we characterize welfare maximizing capital requirement policies in a macroeconomic model with household firm and bank defaults calibrated to euro area data we optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk we find that getting the level right so that bank failure risk remains small is of foremost importance while the optimal sensitivity to default risk is positive but typically smaller than under basel irb formulas when starting from low levels initially both savers and borrowers benefit from higher capital requirements at higher levels only savers are in favour of tighter and more time varying capital charges

what does a financial shock do first international evidence in this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions we focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis we estimate a panel var for 21 advanced economies based on quarterly data between 1985 and 2011 where financial shocks are identified through sign restrictions we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as gdp and particularly investment but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact the financial development and structure of a given country is found not to matter much for the intensity of the propagation of financial shocks moreover we generally find that these shocks play a role not only in crisis times but also in normal conditions finally we discuss the implications of our findings for monetary policy fabio fornari and livio stracca

financial in stability supervision and liquidity injections a dynamic general equilibrium approach we develop a dynamic stochastic general equilibrium model with an heterogeneous banking sector we introduce endogenous default probabilities for both firms and banks and allow for bank regulation and liquidity injection into the interbank market our aim is to understand the interactions between the banking sector and the rest of the economy as well as the importance of supervisory and monetary authorities to restore financial stability the model is calibrated against real us data and used for simulations we show that basel regulation reduces the steady state but improves the resilience of the economy to shocks and that moving from basel i to basel ii is procyclical we also show that liquidity injections relieve financial instability but have ambiguous effects on output fluctuations

bank assets liquidity and credit cycles abstract we study how bank collateral assets and their pledgeability affect the amplitude of credit cycles to this end we develop a tractable model where bankers intermediate funds between savers and borrowers if bankers default savers acquire the right to liquidate bankers assets however due to the vertically integrated structure of our credit economy savers anticipate that liquidating financial assets i e loans is conditional on borrowers being solvent on their debt obligations this friction limits the collateralization of bankers financial assets beyond that of real assets i e capital in this context increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate thus attenuating capital misallocation as it typically emerges in credit economies a la kiyotaki and moore 1997 we uncover a close connection between the collateralization of bank loans macroeconomic amplification and the degree of procyclicality of bank leverage

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

on the relationship between openness and growth in china evidence from provincial time series data the effect of increasing openness on real output growth in china is examined the framework of analysis is a regression model that uses time series data for each province for east coastal provinces increasing openness is found to have positive effects on real output growth and some of the effects are statistically significant the results appear to be broadly consistent with the new growth theories that openness enhances long run growth through its impact on technological improvement however inland provinces in china have been isolated from world trade for several decades and their economies devastated an increased openness in these provinces is found to have in most cases negative effects on real output growth

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

tariffs and growth in the late 19th century the paper estimates the correlation between tariffs and economic growth in the late 19th century in the context of three types of growth equation unconditional convergence equations conditional convergence equations and factor accumulation models it does so for a panel of ten countries between 1875 and 1914 tariffs were positively correlated with growth in these countries during this period economic theory is ambiguous as regards the relationship between trade policy and growth the growth literature of the past decade has produced an impressive array of models in which protection can either increase or reduce long run growth rates grossman and helpman 1991 rivera batiz and romer 1991 stokey 1991 young 1991 such theoretical ambiguity invites empirical research while new growth theory is ambiguous on the subject the new empirical growth literature has produced a consensus that free trade is positively associated with growth based on evidence from the late 20th century but see rodrlguez and rodrik 1999 for a sceptical review of the literature the clear

the role of bank capital in the propagation of shocks abstract the recent financial turmoil has underlined the importance of analyzing the link between banks balance sheets and economic activity we develop a dynamic stochastic general equilibrium model in which bank capital mitigates an agency problem between banks and their creditors as a result the capital position of banks affects their ability to attract loanable funds and therefore influences the business cycle through a bank capital channel of transmission we find that the bank capital channel greatly amplifies and propagates the effects of technology shocks on output investment and inflation moreover bank capital shocks create sizeable declines in output and investment

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

dynamics of banks capital accumulation we construct a dynamic neoclassical model of banking capital where the dynamics are governed by the process of financial capital accumulation and credit risk realizations in a structure where stylized banking characteristics are maintained this is aimed at focusing on how the profit maximizing capital ratio of banks evolves and how it reacts to exogenous shocks particularly so during periods of prolonged downturn of the economy we examine impulse responses of our model to credit risk shock business cycle shock and monetary policy shock the convergence of financial capital to its optimal level is also explored

bank leverage cycles and the external finance premium by combining the approaches of gertler and karadi 2011 and bernanke et al 1999 i develop a dsge model with leverage constraints both in the banking and in the non financial firm sector i calibrate this full model to us data in a world with only a monetary policy and a productivity shock the full model matches the relative volatility of the external finance premium while a bgg model generates too low volatility the full model also matches the procyclicality of bank leverage unlike the gk model for a reasonably calibrated combination shocks to the net worth of banks and non financial firms the model reproduces a substantial share of the contraction increase of investment the external finance premium observed during the great recession

impulse dynamics and propagation mechanisms in a real business cycle model abstract in a typical real business cycle model we find that output dynamics are determined primarily by impulse dynamics and that endogenous propagation mechanisms are weak consequently the model must rely on external sources of dynamics in order to replicate the univariate dynamics of u s per capita gnp

financial crises and recapitalizations we develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods producing firms since financial intermediaries are highly leveraged we show that the welfare gains from their recapitalization in response to large but rare net worth losses are as large as those from eliminating typical business cycle fluctuations we also find that these gains are increasing in the size of the net worth loss are larger when recapitalization funds are raised from the household rather than the real sector and can be larger when lower idiosyncratic risk leads to higher leverage

joseph schumpeter lecture the great moderation the great panic and the great contraction this lecture examines the causes of the recent financial crisis and subsequent recession on the macroeconomic side the great moderation encouraged an overly optimistic assessment of risk combined with low interest rates reflecting both loose monetary policy and relatively high asian savings rates that encouraged a build up of excessive leverage in the banking system on the microeconomic side distorted incentives led to a concentration and mispricing of risk informational complexities associated with new financial assets and the interconnectedness of financial institutions then resulted in the closure of funding markets and a flight to safety when loan defaults rose unexpectedly the episode indicates the need to focus on agency and information problems between banks and their funders in addition to those between the banks and their borrowers it also suggests that the process of financial intermediation should play a more prominent role in macroeconomic models jel e32 e44 e52 e58 f32 g01 g21

bank net worth asset prices and economic activity abstract a dynamic general equilibrium model is proposed to study the interactions between the banking sector asset prices and aggregate economic activity a durable asset serves as a productive input and as a collateral for loans the propagation mechanism of a negative productivity shock is enhanced and prolonged through the interaction of credit constraints and asset prices where the bank loan and the investment are squeezed by a higher bank capital asset ratio for lending and at the same time a stricter collateral requirement for borrowing the model explains why banking crises often coincide with depression in the asset markets the results also bear policy implications for the debates over regulatory bank capital adequacy and credit control policies

fleshing out the monetary transmission mechanism output composition and the role of financial frictions financial frictions affect the way in which different macroeconomic series respond to a monetary policy shock we embed the financial accelerator of bernanke gertler and gilchrist 1999 into a medium scale dsge model and evaluate the relative importance of financial frictions in explaining monetary transmission specifically we apply minimum distance estimation based on impulse responses for the volcker greenspan period apart from providing estimates for structural parameters our procedure lends itself for specification tests that can be used to assess the relative fit of various restricted models financial frictions turn out to be of lesser importance for the descriptive success of our model

convergence and migration among provinces have regional disparities in canada changed over the past thirty years this paper assesses the robustness of earlier findings of convergence in the levels and growth rates of provincial per capita gdp and then estimates the extent to which interprovincial and international migration is being influenced by regional differences in incomes and employment excerpt

unintended consequences of the market risk requirement in banking regulation abstract we analyze a bank that operates under the basel credit and market risk requirements and that maximizes its value through recapitalizations dividends and liquid asset investments according to our model the market risk requirement may postpone recapitalization and this way increase the bank s default probability we show that this is indeed the case if the expected return and volatility of the liquid asset portfolio are high i e then the market risk requirement raises the default probability of the bank in this sense the market risk requirement is inefficient

risky bank lending and countercyclical capital buffers abstract we study the properties of a monetary economy with an essential role for risky bank lending banks issue deposits and lend to entrepreneurs because banks lending rate cannot be made contingent on aggregate shocks and because banks face capital adequacy regulations they require a capital buffer against loan losses capital adequacy regulations are modeled on the basel iii rules including a minimum capital adequacy ratio an endogenous capital conservation buffer and a countercyclical capital buffer we find that a countercyclical capital buffer leads to a significant increase in welfare it also reduces the need for countercyclical adjustments in policy interest rates

the role of sticky prices in an open economy dsge model a bayesian investigation in this paper we use a dynamic stochastic general equilibrium dsge model for an open economy to examine the role of sticky prices in explaining the joint behaviour of inflation and a fairly large set of macroeconomic variables we find that price stickiness is an important feature for firms active in the domestic export and import sectors even though the model embodies variable capital utilisation a working capital channel and a time varying inflation target we also document that price stickiness in all sectors is important even if the markup shocks are allowed to be autocorrelated although the implied average contract duration falls substantially under this assumption jel e40 e50 c11

optimal cities with indivisibility in production and interactions between firms abstract a fundamental question in urban economics is why cities exist we show that we can obtain agglomeration economies simply by combining the exchange of intermediate inputs with indivisibility in production in our model interactions between firms are market transactions and do not represent externalities in the usual sense combining them with indivisibility however creates locational externalities the optimal allocation requires pigouvian subsidies to firms and the externality version of the henry george theorem holds in our model we also obtain conditions for a monocentric configuration and perform comparative statics exercises

the procyclical effects of bank capital regulation we assess the procyclical effects of bank capital regulation in a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and as a precaution hold capital buffers we find that under cyclically varying risk based capital requirements e g basel ii banks hold larger buffers in expansions than in recessions yet these buffers are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession we show that cyclical adjustments in the confidence level underlying basel ii can reduce its procyclical effects on the supply of credit without compromising banks long run solvency targets

introducing financial frictions and unemployment into a small open economy model the current nancial crisis has made it abundantly clear that business cycle modeling no longer can abstract from nancial factors it is also becoming increasingly clear that the stylized modeling of labor markets without explicit unemployment that is the current standard approach has its limitations some questions which the dominating extant business cycle models are mute on but that we would like to answer are how important are nancial and labor market frictions for the business cycle dynamics of a

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

shadow banks and macroeconomic instability we develop a macroeconomic model in which in which commercial banks can o oad risky loans to a highly levered shadow banking sector and financial intermediaries trade in securitized assets we highlight the liquidity creation role played by securitization we show how an endogenous tightening of credit constraints can exacerbate the e ect of shocks by limiting the ability of shadow banks to supply collateral and of banks to securitize the model is able to reproduce the cyclical behavior of bank and non bank credit and leverage macroeconomic shocks that directly impact the worth of financial sector are particularly harmful to economic activity but purely redistributive intra financial shocks can also generate recessions we discuss how government policy can stabilize the securitization market when the shadow banking system becomes impaired

macroprudential policy and imbalances in the euro area abstract since its creation the euro area suffered from imbalances between its core and peripheral members this paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region to this end we build a two economy macrofinancial model and simulate the effects of macroprudential policy regulating the loan to value ratio when the core and the periphery are exposed to asymmetric shocks we find that macroprudential policy is able to substantially lower the amplitude of credit and output fluctuations in the periphery however for the policy to be effective it should be decentralized very similar conclusions hold when welfare is considered as the optimality criterion

excess reserves monetary policy and financial volatility abstract this paper examines the real and financial effects of reserves in a dynamic stochastic general equilibrium dsge model with monopoly banking and credit market imperfections the framework explicitly accounts for the fact that commercial banks hold excess reserves and they incur costs in holding these assets the model also accounts for imperfect substitutability between bank funding sources and it shows that this feature is an important channel through which reserve requirement shocks can affect real variables numerical experiments show that an increase in reserve requirements creates a countercyclical effect for real economic activity the results also indicate that the combination of an augmented taylor rule which responds to excess reserves and a countercyclical reserve requirement rule is optimal to mitigate macroeconomic and financial volatility associated with liquidity shocks

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

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

microfoundations of macroeconomic price adjustment survey evidence from swedish firms this paper presents the results of a survey on price setting behavior conducted on a large random sample of swedish firms the median firm adjusts the price once a year state and time dependent price setting are about equally important the four highest ranked explanations for price rigidity in this study implicit contracts sluggish costs explicit contracts and the kinked demand curve have close correspondents among the top five places in two similar large scale surveys carried out in the uk and the u s the results point to the importance of the long term relations with customers for the rigidity of prices the estimated share of sales that go to regular customers is more than 80

explaining and forecasting bank loans good times and crisis abstractthis article aims to develop a parsimonious model to explain and forecast bank loans to nonfinancial companies during calm periods as well as in situations of financial turmoil it focuses on the french context over a period including financial banking and sovereign debt crises theoretical views and intuitions led us to gauge the marginal informational content of a large set of leading indicators in var and vecm models and to investigate potential nonlinearity in credit dynamics in accordance with firms and banks balance sheet effects the growth rate of equity prices appears to be one of the most interesting leading indicator as well as a significant threshold variable for explaining regime switching however it appears difficult to accurately predict the right credit dynamics regimes a simple var model finally performs better

do banking shocks matter for the u s economy abstract the quantitative significance of shocks to the financial intermediary fi has not received much attention up to now we estimate a dsge model with what we describe as chained credit contracts using bayesian technique in the model credit constrained fis intermediate funds from investors to credit constrained entrepreneurs through two types of credit contract we find that the shocks to the fis net worth play an important role in the investment dynamics accounting for 17 of its variations in particular in the great recession they are the key determinants of the investment declines accounting for 36 of the variations

big banks and macroeconomic outcomes theory and cross country evidence of granularity does the mere presence of big banks affect macroeconomic outcomes we develop a theory of granularity for the banking sector by modeling heterogeneous banks charging variable markups using data for a large set of countries we show that the banking sector is indeed granular as the right tail of the bank size distribution follows a power law we demonstrate empirically that the presence of big banks measured by a high degree of market concentration is associated with a positive and significant relationship between bank level credit growth and aggregate growth of credit or gdp

macroeconomic impact of basel iii evidence from a meta analysis abstract we present a meta analysis of the impact of higher capital requirements imposed by regulatory reforms on the macroeconomic activity basel iii the empirical evidence derived from a unique dataset of 48 primary studies indicates that there is a negative albeit moderate gdp effect in response to a change in the target capital ratio meta regression results suggest that the estimates reported in the literature tend to be systematically influenced by a selected set of study characteristics such as econometric specifications the authors affiliations and the underlying financial system finally we discuss the publication bias

the determinants of equilibrium unemployment the paper takes the search and matching model of the aggregate labor market to the data it tests the model s empirical validity and employs structural estimation to generate a characterization of the optimal behavior of firms and workers the model is applied to israeli data that are uniquely suited for this kind of empirical investigation the structural estimates are used to quantify the frictions embodied in the model including the costs of search the congestion and trading externality effects and the matching process a calibration simulation analysis then studies the effect of several key variables on equilibrium unemployment

capital regulation and monetary policy with fragile banks optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky a monetary expansion and a positive productivity shock increase bank leverage and risk risk based capital requirements amplify the cycle and are welfare detrimental within a class of simple policy rules the best combination includes mildly anticyclical capital ratios as in basel iii and a response of monetary policy to asset prices or bank leverage

financial frictions capital reallocation and aggregate fluctuations abstract we address an important business cycle fact i e the amplified and hump shaped responses of output to productivity shocks in a dynamic general equilibrium model with financial frictions models with financial frictions in the current literature have either the amplification mechanism or the propagation mechanism our model shows that the dynamic interaction of borrowing constraints endogenous capital accumulation and capital reallocation among agents with different productivity constitutes a mechanism through which the effects of productivity shock on aggregate output are amplified and propagated more in line with the empirical evidence than other related models in the literature