equilibrium unemployment search behaviour and unemployment persistency unemployment persistency and high equilibrium unemployment is often assumed to be caused by rigidities and low search efficiency in the labour market especially in european welfare states with generous income replacement schemes these arguments are tested on data from sweden an old welfare state with a long period of full employment that has changed into a situation with high unemployment data show a clear and very strong unemployment duration dependency but it is not possible to prove that this is a result of low employability among the long term unemployed getting a job is most of all associated with relative qualifications recall expectations and local labour market conditions and not with search behaviour or high wage demands it is argued that unemployment duration when unemployment is high can best be understood as a selection process rather than a search process and that econometric estimations of equilibrium unemployment are too pessimistic about the potential for an expansive economic policy it is also argued that an active labour market policy is a more efficient compliment to such a policy than changes in income replacement ratios copyright 2001 by oxford university press

interbank contagion at work evidence from a natural experiment this article tests financial contagion due to interbank linkages for identification we exploit an idiosyncratic sudden shock caused by a large bank failure in conjunction with detailed data on interbank exposures first we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals second the magnitude of contagion is higher for banks with weaker fundamentals third interbank linkages among surviving banks further propagate the shock finally we find results suggesting that there are real economic effects these results suggest that interbank linkages act as an important channel of contagion and hold important policy implications jel g01 g21 g28 e58 since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity this has resulted in a significant decline of trading in the interbank money markets jean claude trichet president of the european central bank december 2008

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

the real effects of liquidity during the financial crisis evidence from automobiles illiquidity in short term credit markets during the financial crisis might have severely curtailed the supply of nonbank consumer credit using a new data set linking every car sold in the united states to the credit supplier involved in each transaction we find that the collapse of the asset backed commercial paper market reduced the financing capacity of such nonbank lenders as captive leasing companies in the automobile industry as a result car sales in counties that traditionally depended on nonbank lenders declined sharply although other lenders increased their supply of credit the net aggregate effect of illiquidity on car sales is large and negative we conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market these results also imply that interventions aimed at arresting illiquidity in short term credit markets might have helped contain the real effects of the crisis

long term unemployment the invention of hysteresis and the misdiagnosis of structural unemployment in the uk this paper investigates the empirical basis for the belief that unemployment makes people less employable and that the existence of a pool of long term unemployed people is therefore in itself a barrier to full employment drawing on data for great britain from the 1940s to the present day it shows that this idea has arisen through misinterpretations of the statistical evidence the resulting policies besides diverting resources from the demand side pro grammes appropriate to the true situation of structural unemployment appear to have created a problem of the kind they were intended to address by encouraging unemployed people to move onto sickness benefits

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

how debt markets have malfunctioned in the crisis the financial crisis that began in 2007 is especially a crisis in debt markets a full understanding of what happened in the financial crisis requires investigation into the plumbing of debt markets during a financial crisis when funds often cannot be raised easily or quickly the fundamental values for certain assets can become separated for a time from market prices with consequences that can echo into the real economy this article will explain in concrete ways how debt markets can malfunction with deleterious consequences for the real economy after a quick overview of debt markets i discuss three areas that are crucial in all debt markets decisions risk capital and risk aversion repo financing and haircuts and counterparty risk in each of these areas feedback effects can arise so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral i will document the remarkable rise in the premium that investors placed on liquidity during the crisis next i will show how these issues caused debt markets to break down indeed fundamental values and market values seemed to diverge across several markets and products that were far removed from the toxic subprime mortgage assets at the root of the crisis finally i will discuss briefly four steps that the federal reserve took to ease the crisis and how each was geared to a specific systemic fault that arose during the crisis

self fulfilling fire sales fragility of collateralised short term debt markets this paper shows that collateralised short term debt although privately optimal for reducing borrowers moral hazard can cause fragility multiple equilibria when the collateral market is illiquid a new form of coordination failure between borrowers ex ante margin and risk taking decisions engenders a systemic run in the collateralised debt market large changes in credit rationing margins repo spreads etc the model also captures the large small crosssectional differences between safe and risky collateral in bad good times finally i show that asset price guarantees could improve welfare and promote stability but repealing repo contracts automatic stay exemption might do the opposite

financial fragility and over the counter markets abstract this paper studies the interaction between financial fragility and over the counter otc markets i model the financial sector as a large number of investors divided into different groups which i interpret as financial institutions and a large number of dealers financial institutions and dealers trade assets in an otc market a la duffie et al 2005 and lagos and rocheteau 2009 investors receive privately observed preference shocks and financial institutions use the balanced team mechanism proposed by athey and segal 2013 to implement an efficient risk sharing arrangement among their investors when the market is liquid in the sense that search and bargaining are small frictions i show that the economy is likely to have a unique equilibrium and therefore is not fragile when these frictions are severe a run equilibrium exists investors announce low valuation of assets because they believe everyone else in their financial institution is doing the same conditional on bank runs existing the welfare impact of the search friction is ambiguous during runs trade is inefficient and as a result a friction that reduces trade during runs has the potential to improve welfare this result is in sharp contrast with the existing literature which suggests that search friction has a negative impact on welfare

do depositors punish banks for bad behavior market discipline deposit insurance and banking crises this paper empirically investigates two issues largely unexplored by the literature on market discipline we evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline we focus on the experiences of argentina chile and mexico during the 1980s and 1990s we find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates deposit insurance does not appear to diminish the extent of market discipline aggregate shocks affect deposits and interest rates during crises regardless of bank fundamentals and investors responsiveness to bank risk taking increases in the aftermath of crises

a comparison of cost based pricing rules for natural gas distribution utilities abstract partial equilibrium social welfare deadweight losses under uniform ramsey pricing a cost allocation pricing method and the actual average revenues by customer class for two natural gas distribution utilities are calculated and compared marginal cost estimates are derived from a multiple output translog variable cost function and used along with three sets of demand elasticities to generate the ramsey prices and welfare losses the actual and cost allocation prices are taken directly from rate case files the largest social welfare losses are associated with the cost allocation rule as high as 10 25 of revenue despite suggestions in the literature to the contrary

the modern view of macroeconomics some critical reflections david romer has proposed a new basic macroeconomic framework the is mp ia model its proponents claim that it represents the modern view of macroeconomics we show that the new framework remains closely attached to the neoclassical synthesis and in addition does not take account of i the empirical evidence on the output inflation trade off ii the evidence on the interdependence of aggregate demand and supply iii the institutional limits of monetary policy and iv the implications for macroeconomic policy of i ii and iii once these aspects have been incorporated short run stabilisation policy is not neutral in the long run the notion of a natural rate of interest becomes untenable and aggregate demand turns into the crucial exogenous variable copyright 2005 oxford university press

fundamentals panics and bank distress during the depression we assemble bank level and other data for fed member banks to model determinants of bank failure fundamentals explain bank failure risk well the first two friedman schwartz crises are not associated with positive unexplained residual failure risk or increased importance of bank illiquidity for forecasting failure the third friedman schwartz crisis is more ambiguous but increased residual failure risk is small in the aggregate the final crisis early 1933 saw a large unexplained increase in bank failure risk local contagion and illiquidity may have played a role in pre 1933 bank failures even though those effects were not large in their aggregate impact

the evolution of a financial crisis collapse of the asset backed commercial paper market this paper documents runs on asset backed commercial paper abcp programs in 2007 we find that one third of programs experienced a run within weeks of the onset of the abcp crisis and that runs as well as yields and maturities for new issues were related to program level and macro financial risks these findings are consistent with the asymmetric information framework used to explain banking panics have implications for commercial paper investors degree of risk intolerance and inform empirical predictions of recent papers on dynamic coordination failures

dynamic debt runs and financial fragility evidence from the 2007 abcp crisis we use the 2007 asset backed commercial paper abcp crisis as a laboratory to study the determinants of debt runs our model features dilution risk maturing short term lenders demand higher yields in compensation for being diluted by future lenders making runs more likely the model explains the observed tenfold increase in yield spreads leading to runs and the positive relation between yield spreads and future runs results from structural estimation show that runs are very sensitive to leverage asset values and asset liquidity but less sensitive to the degree of maturity mismatch the strength of guarantees and asset volatility

money creation and the shadow banking system many explanations for the rapid growth of the shadow banking system in the mid2000s focus on money demand this paper asks whether the short term liabilities of the shadow banking system behave like money we rst present a simple model where households demand money services which are supplied by three types of claims deposits treasury bills and asset backed commercial paper abcp the model provides predictions for the price and quantity dynamics of these claims as well as the behavior of the banking system in terms of issuance and the monetary authority in terms of open market operations consistent with the model the empirical evidence suggests that the shadow banking system does respond to money demand

reflections on northern rock the bank run that heralded the global financial crisis in september 2007 television viewers and newspaper readers around the world saw pictures of what looked like an old fashioned bank run that is depositors waiting in line outside the branch offices of a united kingdom bank called northern rock to withdraw their money the previous u k bank run before northern rock was in 1866 at overend gurney a london bank that overreached itself in the railway and docks boom of the 1860s bank runs were not uncommon in the united states up through the 1930s but they have been rare since the start of deposit insurance backed by the federal deposit insurance corporation in contrast deposit insurance in the united kingdom was a partial affair funded by the banking industry itself and insuring only a part of the deposits at the time of the run u k bank deposits were fully insured only up to 2 000 pounds and then only 90 percent of the deposits up to an upper limit of 35 000 pounds when faced with a run the incentive to withdraw one s deposits from a u k bank was therefore very strong for economists the run on northern rock at first seemed to offer a rare opportunity to study at close quarters all the elements involved in their theoretical models of bank runs the futility of public statements of reassurance the mutually reinforcing anxiety of depositors as well as the power of the media in galvanizing and channeling that anxiety through the power of television images however the storyline of the northern rock bank run does not fit the conventional narrative on september 13 2007 the bbc s evening television news broadcast first broke the news that northern rock had sought the bank of england s support the next morning the bank of england announced that it would provide emergency liquidity support it was only after that announcement that is after the

the optimality of boiteux ramsey pricing consider an economy with one public enterprise that is subject to a budgetary constraint and charges prices according to the first order necessary conditions suggested by boiteux 1956 or in another context by ramsey 1972 we state restrictive conditions sufficient to ensure that the resulting allocation is second best author s abstract

regulator preferences and utility prices evidence from natural gas distribution utilities abstract we investigate the determinants of regulators relative weighting of the social welfare of customer groups and utilities using panel data on natural gas distribution utilities in the us state of tennessee in contrast to previous empirical work on cross sections of electric utilities our results are statistically robust and consistent with the interest group theory of regulation intervention in rate cases settlement vs litigation of cases and prices of alternative energy sources as well as the size characteristics of customer groups and the firm are significant determinants of the elasticity weighted price cost margin ramsey number for each group

an assessment of tarp assistance to financial institutions six years after the passage of the 2008 troubled asset relief program commonly known as tarp it remains hard to measure the total social costs and benefits of the assistance to banks provided under tarp programs tarp was not a single approach to assisting weak banks but rather a variety of changing solutions to a set of evolving problems tarp s passage was associated with significant improvements in financial markets and the health of financial intermediaries as well as an increase in the supply of lending by recipients however a full evaluation must also take into account other factors including the risks borne by taxpayers in the course of the bailouts moral hazard costs that could result in more risk taking in the future and social costs related to perceived unfairness our evaluation is organized in five parts 1 what did policymakers do 2 what are the proper objectives of interventions like tarp assistance to financial institutions 3 did tarp succeed in those economic objectives 4 were tarp funds allocated purely on an economic basis or did political favoritism play a role 5 would alternative policies either alongside or instead of tarp and alternative design features of tarp have worked better

a macintyrean perspective on the collapse of a money market fund this paper conducts an ethical analysis of the 2008 closure of a us money market fund entitled the reserve primary fund rpf which triggered the first run in the money market sector and a resultant liquidity crisis that harmed the entire us financial system although many academics and regulators have studied and written about rpf the question whether the decision that caused the fund to collapse represented any ethical dilemma has not been addressed to date with this purpose in mind the paper will examine the events that culminated in the closure of rpf according to alasdair macintyre s virtue ethics approach in so doing the paper aims to extend the applicability of macintyre s concepts to the finance industry in general and to provide a framework to predict and so potentially prevent crises like that exemplified by the rpf case

deposit competition and financial fragility evidence from the us banking sector preliminary and incomplete please do not cite without permission we develop and estimate an empirical model of the u s banking sector using a new data set covering the largest u s banks over the period 2002 2013 our model incorporates insured depositors and run prone uninsured depositors who have rich preferences over dierentiated banks banks compete for deposits in the spirit of matutes and vives 1996 and can endogenously default we estimate demand for uninsured

basel iii leverage ratio requirement and the probability of bank runs abstract a new argument for the basel iii leverage ratio requirement is proposed the need to limit the risk of a bank run when there is imperfect information on the value of a bank s assets in addition to screening and monitoring borrowers banks provide liquidity insurance with the supply of short term deposits withdrawable on demand the maturity mismatch creates the risk of a disorderly bank run which can be exacerbated by imperfect information about the value of bank assets it is shown in a stylized basel iii framework that capital regulation should incorporate a liquidity risk component credit risk diversification and or a reduced probability of loan default which lead to a reduction of basel iii regulatory capital will increase the probability of a bank run the leverage ratio rule puts a floor on the basel iii risk weighted capital ratio allowing the limitation of such a risk

portfolio disclosures and year end price shifts commercial paper sells at an extra discount if it matures in the next calendar year but treasury bills do not the discount is apparent in downward price shifts before the year end and upward price shifts at the turn of the year that are significantly correlated with the simultaneous returns to small stocks and that cannot reflect tax loss selling cross sectional and time series tests on prices as well as flow of funds evidence on trades by institutional investors indicate that both the debt and equity patterns reflect agency problems related to portfolio disclosures financial research has brought considerable analysis to bear on the turn of the year in the equity market but not the money market extant literature starting with keim and stambaugh 1986 reports similarities between equity market and money market price shifts in january but has not examined time series and cross sections of money market prices at the high resolution common in studies of the equity market repeating tests from the equity literature on money market prices this article finds a more precise and robust characterization of the price shifts this characterization combined with observations of year end shifts in money market holdings supports the view that intermediaries move prices with strategic responses to portfolio disclosures the main empirical result is that commercial paper pays a higher yield if it matures across the end of the year that is it imputes a forward premium for the holding period from the last trading day of one year to the first trading day of the next this premium is even higher for issues with more default risk and longer maturity as measured at the end of the year and has a substantial impact on yield spreads i argue that the forward premium reflects an abnormally high market price for bearing risk across the year end and that this high price reflects the disutility to intermediaries of showing risky portfolios to claimholders or regulators the connection between portfolio disclosures and price shifts was proposed by haugen and lakonishok hl 1988 as an explanation of the equity market january effect as originally documented by keim 1983 with monthly data

dynamic debt runs we develop a dynamic model of debt runs on a rm which invests in an illiquid asset by rolling over staggered short term debt contracts i e dierent contracts mature at dierent times we derive a unique threshold equilibrium in which creditors coordinate their asynchronous rollover decisions based on the rm s publicly observable and time varying fundamental the coordination problem ampli es the creditors concerns about the rm s future rollover risk created by its time varying fundamental and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability our model provides a set of implications on the roles played by volatility illiquidity and debt maturity in driving debt runs as well as on rms capital adequacy standards and credit risk

interbank liquidity crunch and the firm credit crunch evidence from the 2007 2009 crisis we study the credit supply effects of the unexpected freeze of the european interbank market using exhaustive portuguese loan level data we find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis the credit supply reduction is stronger for firms that are smaller with weaker banking relationships small firms cannot compensate the credit crunch with other sources of debt furthermore the impact of illiquidity on the credit crunch is stronger for less solvent banks finally we find no overall positive effects of central bank liquidity but instead higher hoarding of liquidity

the concept of employability the concept of employability plays a crucial role in informing labour market policy in the uk the eu and beyond this paper analyses current and previous applications of the term and discusses its value as an exploratory concept and a framework for policy analysis it then traces the development of the concept discusses its role in current labour market and training strategies with particular reference to the uk and seeks to identify an approach to defining employability that can better inform labour market policy by transcending explanations of employment and unemployment that focus solely on either supply side or demand side factors although the literature offers a range of definitions of employability many policy makers have recently used the term as shorthand for the individual s employability skills and attributes it is argued that this narrow usage can lead to a hollowing out of the concept of employability the paper concludes by presenting a broad framework for analysing employability built around individual factors personal circumstances and external factors which acknowledges the importance of both supply and demand side factors

savings asset scarcity and monetary policy abstract this paper analyzes optimal monetary policy regarding asset markets in a model where money and savings are essential and asset markets matter the model is able to explain why different regimes for the correlation of real interest rates and stock price dividend ratios exist and offers two explanations why the correlation vanished after 2007 a decrease in inflation or changes in the supply of risky and safe assets the results on optimal policy show that away from the friedman rule fiscal policy can improve welfare by increasing the amount of outstanding government debt if the fiscal authority is not willing or able to increase debt the monetary authority can improve welfare of current generations by reacting procyclically to asset return shocks

contagion and bank failures during the great depression the june 1932 chicago banking panic the authors examine the social costs of asymmetric information induced bank panics in an environment without government deposit insurance their case study is the chicago bank panic of june 1932 the authors compare the ex ante characteristics of panic failures and panic survivors despite temporary confusion about bank asset quality on the part of depositors during the panic which was associated with widespread depositor runs and bank stock price declines the panic did not produce significant social costs in terms of failures among solvent banks copyright 1997 by american economic association

rollover risk and market freezes the debt capacity of an asset is the maximum amount that can be borrowed using the asset as collateral we model a sudden collapse in the debt capacity of good collateral we assume short term debt that must be frequently rolled over a small transaction cost of selling collateral in the event of default and a small probability of meeting a buy to hold investor we then show that a small change in the asset s fundamental value can be associated with a catastrophic drop in the debt capacity the kind of market freeze observed during the crisis of 2007 to 2008 one of the many striking features of the crisis of 2007 to 2008 was the sudden freeze in the market for the rollover of short term debt from an in stitutional perspective the inability to borrow overnight against high quality but long term assets was a market failure that effectively led to the demise of a substantial part of investment banking in the united states more broadly it led to the collapse in the united states the united kingdom and other countries of banks and other financial institutions that had relied on signifi cant maturity mismatch between assets and liabilities and in particular on the rollover of short term wholesale debt in the asset backed commercial paper abcp and overnight sale and repurchase repo markets in this paper we are interested in developing a model of a sudden collapse in the ability to borrow short term against long lived assets in the absence of obvious problems of asymmetric information or fears about the value of col lateral we refer to this phenomenon as a market freeze more precisely a market freeze occurs when the debt capacity the maximum amount of collat eralized borrowing that can be supported by an asset is a small fraction of the fundamental value the economic value measured by the net present value npv of the stream of future returns an extreme form of a market freeze occurs when the fundamental value is close to the maximum possible value of the asset whereas the debt capacity is close to the minimum possible value of the asset

rollover risk as market discipline a two sided inefficiency abstract why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises this paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk however if assets are correlated a two sided inefficiency arises good aggregate states have intermediaries taking excessive risks while bad aggregate states suffer from costly fire sales the driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline in equilibrium financial intermediaries inefficiently amplify both positive and negative aggregate shocks

liquidity backstops and dynamic debt runs liquidity backstops can mitigate runs in this paper we develop a dynamic model of debt runs based on he and xiong 2012 to identify both conceptually and quantitatively the value of a liquidity backstop for its run mitigating role for the purpose of identification we focus on the municipal bond markets for variable rate demand obligations and auction rate securities based on the run episodes in these markets during the financial crisis of 2007 09 and the calibrated model we find that the value of a liquidity backstop is about 14 5 basis points per annum our findings have important policy implications regarding the effectiveness of liquidity backstops in ameliorating problems of financial instability

the term structure of commercial paper rates this paper tests the expectations hypothesis in the market for commercial paper our main dataset which is new to the literature consists of daily indexes constructed from the actual market yields for nearly all commercial paper issued by u s corporations between january 1998 and august 2003 we show that the term premia built into commercial paper yields rise dramatically at year end causing the expectations hypothesis to be rejected however once we control for these predictable year end eects we nd the reverse that commercial paper yields largely conform with the expectations hypothesis