prices and investment with collateral and default abstract this paper uses the framework of an olg economy with three period lived agents in which a durable good serves as collateral for loans to study the effect of an unanticipated income shock when the economy is in a steady state equilibrium we focus on the consequence of default on loans when the value of the collateral falls below the value of the debt it secures we analyze the impulse response functions of the price and production of the durable good and show that there is an asymmetry between the response of the price and investment of the durable good to a positive and a negative income shock arising from default on the collateralized loans we show that this asymmetry can be seen in the data on housing prices and construction and is attributable to the default on mortgages in periods of decreasing prices which acts as a turbo mechanism magnifying the decline in investment

contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

globalization and emerging markets with or without crash we analyze the effects of financial and trade globalization on the likelihood of financial crashes in emerging markets while trade globalization always makes crashes less likely financial globalization may make them more likely especially when trade costs are high pessimistic expectations can be self fulfilling and lead to a collapse in demand for goods and assets such a crash comes with a current account reversal and drops in income and investment lower income countries are more prone to such demand based financial crises a quantitative evaluation shows our model is consistent with the main stylized facts of financial crashes in emerging markets

global factors and emerging market spreads this paper shows that a large fraction of the variability of emerging market bond spreads is explained by the evolution of global factors such as risk appetite as reflected in the spread of high yield corporate bonds in developed markets global liquidity measured by the international interest rates and contagion from systemic events like the russian default this link has remained relatively stable over the history of the emerging market class is robust to the inclusion of country specific factors and helps provide accurate long run predictions overall the results highlight the critical role played by exogenous factors in the evolution of the borrowing cost faced by emerging economies

sovereign debt as a contingent claim a quantitative approach abstract we construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt in the model benefits of defaulting are tempered by higher future interest rates for a wide set of parameters the only equilibrium is one in which the sovereign defaults in all states additional output losses however sustain equilibria that resemble the data we show that due to the adverse selection problem some countries choose to delay default to reduce loss of reputation moreover although equilibria with no default imply greater welfare levels they are not sustainable in highly indebted and volatile countries

collateral avoids ponzi schemes in incomplete markets without introducing either debt constraints or transversality conditions to avoid the possibility of ponzi schemes we show the existence of equilibrium in an infinite horizon incomplete markets economy with a collateral structure

a model of financial crises in emerging markets recent events in mexico asia russia and brazil have underscored that a satisfactory explanation of financial crises in emerging markets remains elusive not too long ago the prevailing view was that crises were the inevitable outcome of ongoing fiscal imbalances coupled with fixed exchange rates but this first generation view pioneered by krugman 1979 has fallen out of fashion because in many crises the crucial fiscal disequilibria were absent and as obstfeld 1994 has argued currency crises have sometimes occurred even though central banks had more than enough resources to prevent them witness much of europe in the early 1990s obstfeld put forward a second generation view in which central banks may decide to abandon an exchange rate peg when the unemployment costs of defending it become too large this new perspective implied that crises could be driven by self fulfilling expectations since the costs of defending the peg may themselves depend on anticipations that the peg will be maintained but obstfeld s emphasis on mounting unemployment and domestic recession while appropriate for the erm 1992 crisis was at odds with the facts in mexico in 1994 and east asia in 1997 asian

regulating collateral requirements when markets are incomplete in this paper we examine the eects of default and collateral on risk sharing we assume that there is a large set of assets which all promise a risk less payo but which distinguish themselves by their collateral requirements in equilibrium agents default the assets have dierent payos and there are as many linearly independent assets available for trade as there are states of the world we derive necessary and sucient conditions for equilibria to be pareto ecient in the presence of uncertainty we explore some examples for which the collateral equilibrium allocation is identical to the arrow debreu allocation either when agents have a high preference for the durable good or when the endowment distribution of the durable good is relatively homogeneous we examine a series of examples to understand which collateral levels prevail in equilibrium and under which conditions there is scope for regulating margin requirements that is restricting the sets of tradable assets through government intervention in these examples equilibrium is always sub optimal but regulation never leads to a pareto improvement while the competitive equilibria are constrained ecient there do exist regulations which make large

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

toward a neo schumpeterian theory of the firm this article offers a sketch of what an economic theory of the firm would look like if it were founded on the thought of joseph schumpeter particularly on chapters 1 and 2 of his theory of economic development schumpeterian analysis requires an intuitively appealing and realistic conceptualization of the distinction between routine and innovative behavior and in particular a conceptualization relevant to complex organizations and complex tasks it is argued that the production theory found in mainstream economics does not meet this requirement particularly because its characterization of productive knowledge involves an overly sharp distinction between technically possible and technically impossible a distinction which has no counterpart in the realities of organizational knowledge the main elements of a schumpeterian view are described and contrasted with those in the mainstream view copyright 2006 oxford university press

econometric regime shifts and the us subprime bubble using aggregate quarterly data for the period 1975 q1 2010 q4 i find that the us housing market changed from a stable regime with prices determined by fundamentals to a highly unstable regime at the beginning of the previous decade my results indicate that these imbalances could have been detected with the aid of real time econometric modeling with reference to stiglitz s general conception of a bubble i use the econometric results to construct two bubble indicators which clearly demonstrate the transition to an unstable regime in the early 2000s the indicators are shown to granger cause a set of coincident indicators and financial in stability measures finally it is shown that the increased subprime exposure during the 2000s can explain the econometric breakdown i e the housing bubble may be attributed to the increased borrowing to a more risky segment of the market copyright 2013 john wiley sons ltd

dynamic competitive economies with complete markets and collateral constraints in this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints we show that provided the sets of asset pay offs and of collateral levels are sufficiently rich the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in arrow debreu markets subject to a series of limited pledgeability constraints we provide both necessary and sufficient conditions for equilibria to be pareto efficient and show that when collateral is scarce equilibria are not only pareto inefficient but also often constrained inefficient in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off we derive sufficient conditions for the existence of markov equilibria and for the case of two agents for the existence of equilibria that have finite support these equilibria can be computed with arbitrary accuracy and the model is very tractable

reflections of david teece s profiting from technological innovation abstract this paper builds on teece s 1986 paper to consider how appropriability conditions affect the ability of an industry and the economy as a whole to progress in particular it offers a careful discussion of the broader costs and benefits of patenting can too much appropriability actually work against the broader interests of society in fostering economic growth and technical advance in the market

efficient competitive equilibria with adverse selection do walrasian markets function orderly in the presence of adverse selection in particular is their outcome efficient when exclusive contracts are enforceable this paper addresses these questions in the context of a rothschild stiglitz insurance economy we identify an externality associated with the presence of adverse selection as a special form of consumption externality consequently we show that competitive equilibria always exist but are not typically incentive efficient however as markets for pollution rights can internalize environmental externalities markets for consumption rights can be designed to internalize the consumption externality due to adverse selection with such markets competitive equilibria exist and incentive constrained versions of the first and second welfare theorems hold

persistent gaps and default traps we show how vicious circles in countries credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks in such an environment default signals the borrower s vulnerability to adverse shocks and creates a pessimistic growth outlook this translates into higher interest spreads and debt servicing costs relative to income raising the cost of future repayments thereby creating default traps we build a long and broad cross country dataset to show the existence of a history dependent default premium and of significant effects of output persistence on sovereign creditworthiness consistent with the model s predictions

the years of emerging market crises a review of feldstein early 1997 was a time of great optimism in the developing world the mexican crisis that had erupted in late 1994 was regarded as a hiccup that had been overcome with a v shaped recovery not many people knew or if they knew they didn t seem to care that mexican wages were still some 20 percent below their pre crisis level the flow of capital to emerging markets was hitting new highs the east asian miracle was regarded as a permanent part of the scenery see the enthusiastic report asian development bank 1997 which china and even india were in the process of emulating or bettering latin america had put the debt crisis behind it some of the transition economies had emerged from their years of purgatory and in most of the others there seemed at least to be light at the end of the tunnel only africa and perhaps the middle east spoiled the picture of a developing world that really was developing this dream started to implode on july 2 1997 when the thai baht was set free to float following strong speculative pressures and promptly lost about 17 percent of its value the crisis was not initially assumed to be unduly serious after all it had an obvious cause the thai baht had long looked overvalued and thailand had been running dangerously large current account deficits for years 3 i recall rudi dornbusch returning from thailand and reporting that thailand s public debt was so low it was 9 3 percent of gdp at the end of 1996 that they would have no trouble recapitalizing the financial system and i know that when my thai secretary went off for her summer vacation i told her not to worry that it would all have been sorted out long before she got back i was of course tragically wrong my optimism failed to allow for two factors the dollar denomination of so much of the debt in thailand and the panic in financial markets as contagion took hold the dollar denomination meant that devaluation of the baht resulted in the liabilities of many firms and banks increasing spectacularly relative to the value of their assets so that many others besides the finance companies that were known to be a problem became insolvent before long currency mismatches had been elevated to a third theory of currency crises 1 martin feldstein ed economic and financial crises in emerging market economies chicago university of chicago press for the national bureau of economic research 2003 pp x 530 isbn 0 226 24102 2 2 senior fellow institute for international economics the author is indebted to nancy birdsall william cline morris goldstein howard pack and edwin truman for comments on a previous draft and to fabrizio lacobellis for competent research assistance 3 i had forgotten the incident but a friend reminded me that when he asked me soon after the mexican crisis which country was next i had named thailand as the most likely candidate

the unholy trinity of financial contagion over the last 20 years some financial events such as devaluations or defaults have triggered an immediate adverse chain reaction in other countries which we call fast and furious contagion yet on other occasions similar events have failed to trigger any immediate international reaction we argue that fast and furious contagion episodes are characterized by the unholy trinity i they follow a large surge in capital flows ii they come as a surprise and iii they involve a leveraged common creditor in contrast when similar events have elicited little international reaction they were widely anticipated and took place at a time when capital flows had already subsided

financial development and the instability of open economies this paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies our basic model is a dynamic open economy model with a tradeable good produced with capital and a country specific factor we also assume that firms face credit constraints with the constraint being tighter at a lower level of financial development a basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies this is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles thus countries that are going through a phase of financial development may become more unstable in the short run similarly full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development phases of growth with capital inflows are followed by collapse with capital outflows on the other hand foreign direct investment does not destabilize

the value of intellectual property rights to firms and society economists view intellectual property rights iprs as policy tools for encouraging innovation but they recognize that they can also inhibit competition there are many types of iprs and institutions concerned with their administration we begin by outlining how these complex and varied rights are supposed to work and how they interact with other characteristics of firms and markets we then survey the available literature on patents trade marks and copyright to assess the value of these iprs to firms and the costs to firms of acquiring and defending their rights the paper concludes with suggestions for topics requiring further research to inform public policy better

a corporate balance sheet approach to currency crises this paper presents a general equilibrium currency crisis model of the third generation in which the possibility of currency crises is driven by the interplay between private firms credit constraints and nominal price rigidities despite our emphasis on microfoundations the model remains sufficiently simple that the policy analysis can be conducted graphically the analysis hinges on four main features i ex post deviations from purchasing power parity ii credit constraints a la bernanke gertler iii foreign currency borrowing by domestic firms iv a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short term lending facilities we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises we show that an interest rate increase intended to support the currency in a crisis may not be effective but that a relaxation of short term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

juvenile delinquent mortgages bad credit or bad economy abstract we study early default defined as serious delinquency or foreclosure in the first year among nonprime mortgages from the 2001 to 2007 vintages after documenting a dramatic rise in such defaults and discussing their correlates we examine two primary explanations changes in underwriting standards that took place over this period and changes in the economic environment we find that while credit standards were important in determining the probability of an early default changes in the economy especially a sharp reversal in house price appreciation after 2004 were the more critical factor in the increases in default rates that we observe an important additional result is that in spite of our rich set of covariates much of the increase remains unexplained even in retrospect thus the fact that the credit markets seemed surprised by the rate of early defaults in the 2006 and 2007 nonprime vintages becomes more understandable

competitive pooling rothschild stiglitz reconsidered we build a model of competitive pooling which incorporates adverse selection and signaling into general equilibrium pools are characterized by their quantity limits on contributions households signal their reliability by choosing which pool to join in equilibrium pools with lower quantity limits sell for a higher price even though each household s deliveries are the same at all pools the rothschild stiglitz model of insurance is included as a special case we show that by recasting their hybrid oligopolistic competitive story in our perfectly competitive framework their separating equilibrium always exists even when they say it does not and is unique

should i default on my mortgage even if i can pay experimental evidence abstract we study strategic default in the laboratory i e in a controlled experiment subjects are initially endowed with a house and a mortgage we use neutral wording in the experiment and must decide at each period in which their mortgage is alive among three options making the mortgage payment selling the house or walking away from their house and defaulting on their mortgage at each point in time we can observe whether defaulters can afford to make the mortgage payment and thus directly compute the number of strategic defaulters subjects default in the right periods and quite fast learn what they should consume we find experimental support for the double trigger hypothesis individuals faced with low income and low house prices are more likely to default we observe that subjects default less than optimal and this decision is significantly affected by social norm concerns in the context of the experiment individuals under consume in the first periods of life they are cautious when indebted both introducing a 50 probability of recourse and a responsible homeowner reward are very effective in preventing default in the lab especially by individuals receiving a bad shock to income when house prices are low

gross substitutability in large square economies abstract this paper investigates the implications of gross substitutability of excess demand functions for the equilibria of exchange economies with countably many goods and arbitrarily many consumers we provide uniqueness theorems for general models we also show that the equilibrium trajectories of dynamic stationary overlapping generations economies satisfy strong turnpike properties in particular we are able to extend gale s characterization of the equilibrium dynamics of the model with one good per period one consumer per generation and two periods of life to models with many goods many consumers and many periods of life

a walrasian theory of markets with adverse selection the paper describes a walrasian theory of markets with adverse selection and shows how refinements of equilibrium can be used to characterize uniquely the equilibrium outcome equilibrium exists under standard conditions it is shown that under certain conditions a stable set exists and is contained in a connected set of equilibria for generic models there exists a stable outcome that is all the equilibria in the stable set have the same outcome these ideas are applied to markets with one sided and two sided uncertainty under standard monotonicity conditions it is shown that the stable outcome is separating and implies a particular pattern of matches of buyers and sellers

stationary equilibria in asset pricing models with incomplete markets and collateral we consider an infinite horizon exchange economy with incomplete markets and collateral constraints as in the two period model of geanakoplos and zame 2002 households can default on their liabilities at any time and financial securities are only traded if the promises associated with these securities are backed by collateral we examine an economy with a single perishable consumption good where the only collateral available consists of productive assets in this model competitive equilibria always exist and we show that under the assumption that all exogenous variables follow a markov chain there also exist stationary equilibria these equilibria can be characterized by a mapping from the exogenous shock and the current distribution of financial wealth to prices and portfolio choices we develop an algorithm to approximate this mapping numerically and discuss ways to implement the algorithm in practice a computational example demonstrates the performance of the algorithm and shows some quantitative features of equilibria in a model with collateral and default

margin regulation and volatility an infinite horizon asset pricing model with heterogeneous agents and collateral constraints can explain why adjustments in stock market margins under us regulation t had an economically insignificant impact on market volatility in the model raising the margin requirement for one asset class may barely affect its volatility if investors have access to another unregulated class of collateralizable assets through spillovers however the volatility of the other asset class may substantially decrease a very strong dampening effect on all assets return volatilities can be achieved by a countercyclical regulation of all markets