scarce collateral the term premium and quantitative easing abstract a model of money credit and banking is constructed in which the differential pledgeability of collateral and the scarcity of collateralizable wealth lead to a term premium an upward sloping nominal yield curve purchases of long maturity government debt by the central bank are always a good idea but for unconventional reasons a floor system is preferred to a channel system as a floor system permits welfare improving asset purchases by the central bank

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

dynamic efficiency in overlapping generations models with stochastic production abstract we consider an overlapping generations economy as in diamond amer econ rev 55 1965 1126 1150 with stochastic production we define two types of efficiency for feasible production consumption allocations using first and second degree stochastic dominance we obtain a complete characterization of inefficiency of type i in this model for each given sequence of strictly concave utility functions for all generations the existence of a competitive equilibrium is proved it is shown that each competitive allocation is short run efficient of type ii

characterizing efficiency in stochastic overlapping generations models abstract we introduce uncertainty about production in diamond s olg model we compare any two feasible consumption production allocations using stochastic ordering and define two types of efficient allocations given initial capital stock for stationary allocations it is shown that a necessary and sufficient condition for efficiency type i is that e log r is greater or equal to log 1 n where r generates the stationary interest factors corresponding to this allocation n is the population growth rate a complete characterization of type ii efficient allocations is derived using the property of cyclical monotonicity between each generation s consumption allocation and the relevant interest rates

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

money and credit in liquidity provision abstract this paper studies the liquidity provision in a model where the roles of money are challenged by other financial instruments alternative to money credit can be used as means of payment and rate dominating assets are available to serve as stores of value two features are found to be crucial in rendering money valuable in this environment information asymmetry in credit trading relationship and uncertainty in individuals liquidity demand in general the model economy can display a payment mechanism of money only credit only or mixed use of money and credit in transactions depending on the severity of the information asymmetry the optimal quantity of money in our paper is shown to contrast those in other monetary models

adverse selection in the overlapping generations model the case of pure exchange abstract we examine the general equilibrium consequences of credit rationing that results from an adverse selection problem relative to a full information benchmark economy static incentive problems result in reductions in the rate of return at inside money equilibria and hence can cause dynamic inefficiency these problems also create a role for outside money and may convert otherwise classical into samuelsonian economies however even the presence of money does not support steady state equilibria with constrained optimality properties policies that do support constrained optima are outlined as are the consequences of credit rationing for the financing of government deficits journal of economic literature classification numbers e13 e40 e44 e50 g14

optimal monetary policy in a cash in advance economy i introduction this paper addresses the issue of optimal monetary policy within a particular general equilibrium model of the monetary transmission mechanism the model analyzed is a member of the recent class of liquidity models of the monetary business cycle 1 these liquidity models are something of a growth industry partly because they are potentially consistent with a monetary equilibrium in which monetary injections drive down nominal rates of interest and stimulate real activity stylized facts supported by evidence presented in for example christiano and eichenbaum 1992 an unexplored question is the role of monetary policy in these models this paper makes an attempt at remedying this deficiency by analyzing optimal monetary policy in a model with liquidity effects as in the liquidity models mentioned above the model analyzed here is constructed by imposing two trading frictions on an otherwise frictionless arrow debreu environment 2 the first is a requirement that all transactions be carried out in a decentralized fashion with the use of cash this friction is the well known cash in advance constraint first suggested by clower 1967 but now quite commonplace in models of monetary equilibrium as in lucas and stokey 1987 and cooley and hansen 1989 i impose this constraint because it is a tractable way of introducing a transactions demand for cash the qualitative results would be unaffected if a more general transactions technology was employed the second friction is unique to the liquidity models i assume that private agents cannot quickly move cash across markets this assumption of sluggish cash flow presumably motivated by transactions costs that are not explicitly modeled implies that cash may not be equally valued across markets with its value in a particular market determined by the amount of cash or liquidity contained in the market this friction introduces the so called liquidity effects on asset prices and real activity the paper proceeds as follows the next section develops the basic model and discusses the effects created by the assumed trading frictions section iii explores optimal monetary policy the nature of the trading frictions introduces a role for activist monetary policy in particular to the extent that the central bank can adjust liquidity more rapidly than the private sector there is a welfare improving role for monetary policy in some cases interest rate smoothing is a good idea while in others optimal policy will increase interest rate variability section iv links the results to the optimum quantity of money literature and offers up a few conclusions ii a model of monetary non neutrality the economy is populated with three types of agents households firms and financial intermediaries there are numerous identical agents of each type so that all behave as atomistic competitors given this assumption i will confine my discussion to a representative agent of each type the representative household is made up of two members a shopper and a worker the shopper s role is to use the household s assets to acquire consumption goods during each period while the worker supplies some portion of the household s time endowment equal to 1 each period to firms in exchange for payment the household s preferences over uncertain consumption and leisure streams are given by e summation of beta sup t u c sub t v 1 l sub t where t 0 to infinity where beta is an element of 0 1 c sub t and l sub t are time t consumption and work effort respectively v is increasing and concave and mathematical expression omitted the expectation is over realizations of the economy wide shocks the expression s sub t is an element of s subset r denotes the state of the world at time t where s is a compact set these states are i i d across time with a distribution function given by

endogenous growth and the emergence of equity finance abstract this paper characterises the development of equity markets as a dynamic process that both influences and is influenced by the development of the real sector of the economy in overlapping generations economy borrowers seek funds to run risky investment projects by drawing up contracts which may take the form of either equity or debt issue in the presence of information asymmetry between borrowers and lenders the optimal contract is determined by trading off information dilution costs against bankruptcy costs significantly the equilibrium choice of contract depends on the state of the economy which in turn depends on the contracting regime based on this analysis the paper provides a theory of the joint determination of real and financial development with the ability to explain the emergence of a stock market along the path of real development

tax evasion the underground economy and financial development abstract we study the relationship between the underground economy and financial development in a model of tax evasion and bank intermediation agents with heterogeneous skills seek loans in order to undertake risky investment projects asymmetric information between borrowers and lenders implies a menu of loan contracts that induce self selection in a separating equilibrium faced with these contracts agents choose how much of their income to declare by trading off their incentives to offer collateral against their disincentives to comply with tax obligations the key implication of the analysis is that the marginal net benefit of income disclosure increases with the level of financial development thus in accordance with empirical observation we establish the result that the lower is the stage of such development the higher is the incidence of tax evasion and the greater is the size of the underground economy

why doesn t technology flow from rich to poor countries what determines the technology that a country adopts while there could be many factors the e ciency of the country s nancial system may play a signi cant role to address this question a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation the ability of an intermediary to monitor and control the cash ows of a rm plays an important role in a rm s decision to adopt a technology can such a theory help to explain the

switching bubbles from outside to inside bubbles abstract the united states has recently experienced two asset price bubbles the dot com and the housing bubbles these bubbles had very different effects on investment and debt of manufacturing firms in this paper i develop a framework to understand the differential effect of two types of rational bubbles i distinguish between i outside bubbles which i define as savers purchasing and selling costless assets not attached to inputs of production and ii inside bubbles which i define as savers buying an input of production e g land or houses only as a store of value the model is an olg economy with savers and entrepreneurs savers save to consume when they are old entrepreneurs can borrow to invest but they face a collateral constraint in this environment rational bubbles can emerge i show that the size of an inside bubble is larger i also find that when the economy switches from an outside to an inside bubble manufacturing or non housing investment and debt is lower consistent with the u s experience finally i show that even though steady state consumption is higher with an outside bubble a social planner would prefer an inside bubble when the productivity of entrepreneurs is low

public capital asymmetric information and economic growth we investigate the provision of public capital in an endogenous growth model with asymmetric information in a credit market with costly screening we show that the equilibrium contracts are characterized by the self selection of borrowers through identifying an additional adverse effect of taxation on growth we show that the optimal tax rate in our model is smaller than the output elasticity of public capital therefore our analysis justifies a more conservative tax policy in the presence of asymmetric information furthermore our model suggests a number of implications that appear to be well supported by preliminary evidence in cross country data jel classification d82 h21 041

symmetrical information and credit rationing graphical demonstrations as this article shows the pro debtor u s bankruptcy code alone can cause credit rationing even without asymmetrical information in the market because the code entails substantial costs to lenders if borrowers file for bankruptcy in the absence of bankruptcy cost lenders are always justified in raising interest rates and clearing markets if the bankruptcy cost is nontrivial however lenders profits are concave in the relevant range of interest rates thus lenders cannot always clear the market by using higher rates the study reported here also found that the use of collateral in debt contracts can reduce rationing but that even 100 percent collateral does not eliminate all rationing possibilities a positive relationship was found between credit risk and the amount of pledged collateral which is not necessarily true with models based on asymmetrical information

how good are standard debt contracts stochastic versus nonstochastic monitoring in a costly state verification environment the authors investigate ex ante efficient contracts in an environment in which implementation is costless in this environment standard debt contracts will typically not be optimal optimal contracts may involve defaults even in states in which the borrower is fully able to repay the authors then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts when model parameters are calibrated to realistic values the welfare loss from exogenously imposing this restriction is extremely small thus if implementation costs are actually nontrivial as seems likely standard debt contracts will be very close to optimal copyright 1994 by university of chicago press

credit rationing and the demand for owner occupied housing abstract this study applies cross sectional data to test whether default risk induced credit constraints affect the demand for owner occupied housing credit constrained households are argued to exhibit different elasticities of demand for housing than less constrained households housing demand elasticities are then estimated separately for households obtaining va insured and non va loans the government guarantee on va loans insures lenders against default enabling lenders to apply easier nonprice terms of credit results indicate that observed demand elasticities differ significantly across va and conventional mortgage holders that marginal changes in credit constraints affect housing demand and that fha financing mitigates the effect of mortgage constraints

asymmetric information and demand for money in an overlapping generations economy this paper studies a pure exchange overlapping generations economy in which agents have asymmetric information pertaining to their income realizations such an information asymmetry introduces a role for fiat money that would otherwise be absent this information asymmetry can also drastically alter the equilibrium properties of the analogous model with perfect information in general the more severe the information asymmetry the greater the demand for fiat money

technology imports and r d efforts of korean manufacturing firms abstract this paper analyzes the relationship between technology imports and r d efforts of korean manufacturing firms by a two stage method in the first stage using a sample representing the whole population of firms the paper shows that firms importing technology tend to commit themselves to r d efforts through having formal r d institutes in the second stage it shows that among firms with formal r d institutes technology imports have non complementary relationship with r d efforts moreover when technology imports are considered interactively with international inventive activity they turn out to have rather a substitutive relationship with r d efforts

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

size and performance of banking firms testing the predictions of theory abstract in recent years two important literatures on the theory of banking firms have developed one examines the economic functions of banks in environments in which agents are asymmetrically informed another considers the incentive effects moral hazard resulting from deposit insurance both theories make predictions about the relation between banking firm size and performance an empirical analysis of large bank holding companies investigates measures of market valuation and risk of failure limited support is provided for either set of theoretical predictions

agglomeration advantages and capability building in industrial clusters the missing link accumulation of technological capability is crucial for industrial growth and competitiveness of firms particularly in the context of liberalisation and increasing international economic integration the article sheds new light on the forces driving capability building by complementing the micro economic perspective on learning with a meso economic perspective that takes account of interaction effects arising from firms embeddedness in regional networks the missing link at the interface between the two levels is explored by means of a taxonomy linking various agglomeration advantages to investments in technological effort the framework results in new policy relevant insights about the factors underpinning the acquisition of capabilities in comparison to conventional studies a case study about farm equipment manufacturing in pakistan s punjab province is used as an empirical illustration

technological effort and disembodied technology exports an econometric analysis of inter industry variations in india abstract this paper attempts a preliminary test of the determinants of indian technological capability as measured by disembodied technology exports by a sample of the largest private sector quoted companies in india after placing the study in the context of research on the nature of technological activity in developing countries the authors describe the variables which they have used to explain inter industry variation in technology exports the results of a preliminary statistical investigation are presented despite acknowledged limitations of data the authors are able to suggest some interesting tendencies which could be the subject of further investigation a formal rd b skill and scale requirements appear to promote technological development rather than retard it c the presence of foreign ownership does not seem to inhibit technological development or technology exports

financial intermediary capital we propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households that is have a collateralization advantage intermediaries require capital as they have to finance the additional amount that they can lend out of their own net worth the net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity such as investment and financing the accumulation of net worth of intermediaries is slow relative to that of the corporate sector the model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch namely their severity their protractedness and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns the model captures the tentative and halting nature of recoveries from crises

increasing returns to scale in financial intermediation and the non neutrality of government policy a general equilibrium model of imperfectly competitive financial intermediaries is constructed and used to study the effects of some standard policy experiments one time increases in the growth rate and in the level of the stock of money have non neutral and sometimes surprising effects on interest rates the quantity of intermediated borrowing and lending the number of intermediary firms inflation and the price level optimal government macroeconomic policy is shown to reflect a tradeoff between public sector frictions and the capital market distortion created by increasing returns to scale and imperfect competition in private intermediation

the dynamics of credit markets in a model with learning abstract a dynamic credit market is modeled in which the production and processing of information leads to alternating and persistent periods of growth and contraction in the model the number of projects engaged in determines the precision of estimates of future returns obtained from current investment shocks to underlying returns to risky projects are magnified and prolonged by the learning process multiple equilibria may exist and the magnification effect may be even larger since shocks can move the credit market to a new equilibrium the allocation of credit is generally not a constrained pareto efficient allocation

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

a reapraisal of the capital goods sector in hong kong the case for free trade abstract this paper was provoked by an earlier one by fransman 1982 in which he examined the functioning of the capital goods sector in hong kong and came to the conclusion that it needed special protection by the government to allow it to reap the benefits of externalities essential for increasing its design and production capabilities statistical evidence is provided indicating that the capital goods sector as conventionally defined is prospering even following fransman 1982 and equating the capital goods sector with the machine producing sector the latest survey of production indicates considerable dynamism his case for infant industry protection is further weakened by consideration of the nature of the particular industrial structure of hong kong and the quality of the social relations that prevail between entrepreneurs it is argued that the costs of singling out the capital goods sector for special treatment in terms of the impact of the highly competitive export oriented manufacturing sector are likely to be high while the theoretical benefits from externalities are liable to be illusory in a small economy

empirical evidence on recycling and trade of paper and lead in developed and developing countries empirical evidence on recycling at a global scale is scant often data on recycling are provided on national levels only the few obtainable cross country studies on recycling are mostly focussed on one particular material or region therefore it is difficult to draw general conclusions on recycling in developed and developing countries an aggregated overview of trade and recycling in both regions was presented in chapter 1 it was recognised that trade in secondary materials from developed to developing countries has increased significantly in the last three decades this typical trade pattern is a strong indication for specialisation in the recycling sector of both regions

promoting technological capability in the capital goods sector the case of singapore abstract this paper contributes to the new interest in technological change in semi industrial countries by examining technological capability in the machine producing sector in singapore the difficulties involved in conceptualizing and measuring technological capability in less developed countries are discussed and the case study material is then presented particular attention is paid to the role of government promotion in the development of technological capability in this connection the present study provides a useful contrast with the position in hong kong studied in an earlier paper while both singapore and hong kong have instituted a near free trade regime there is a far greater degree of government intervention in the former than in the latter case by contrast the governments of both south korea and taiwan have granted selective protection in order to encourage some kinds of domestic machine production the paper ends with some critical comments regarding the singapore government s policy towards the machine producing sector

monitoring the monitor an incentive structure for a financial intermediary this paper studies financial intermediation i e delegated monitoring in a costly state verification model there are a finite number of agents thus the intermediary cannot fully diversify its portfolio and is subject to default risk the role of the intermediary is to satisfy simultaneously the different portfolio preferences of borrowers and lenders two questions arise when a delegated monitor is subject to non trivial default risk a what arrangement solves the problem of monitoring the monitor b what intermediary portfolio accomplishes optimal asset transformation between borrowers and lenders unlike previous delegated monitoring studies the law of large numbers is not sufficient to obtain our results instead we appeal to a stronger results the large deviation principle which establishes that convergence in the law of large numbers is exponential

exhaustible resources and secondary materials a macroeconomic analysis abstract in this paper we have developed an endogenous growth model to deal with exhaustible resources and secondary materials together under the assumptions that these two inputs are or are not technologically perfect substitutes of each other in order to compare the results obtained under both hypotheses we highlight the implication of these two assumptions on the rate of growth of total output and upon the flow of exhaustible resources extracted there are also some other interesting findings related to the spill over on welfare of the waste recycling process and the dynamics of shadow prices of both inputs considered finally some implications on hotelling s rule also emerge in our analytical framework

is the business cycle characterized by deterministic chaos abstract tests are conducted on u s macroeconomic data for the presence of low dimensional deterministic chaos where deterministic chaos is defined as in grandmont s 1985 walras bowley lecture or in brock 1986 the idea is to test for evidence of endogenous instability causing the business cycle low order autoregressions are hard to reject with our methods evidence of chaos is weak but our tests may be too weak to detect it evidence of nonlinearity is present in employment 1950 i to 1983 iv unemployment 1949 i to 1982 iv monthly post war industrial production and pig iron production 1877 1937

moral hazard under commercial and universal banking many claims have been made about the potential benefits and the potential costs of adopting a system of universal banlcing in the united states we evaluate these claims using a model where there is a moral hazard problem between banks and borrowers a moral hazard problem between banks and a deposit insurer and a costly state verification problem under conditions we describe allowing banks to take equity positions in firms strengthens their ability to extract surplus and exacerbates problems of moral hazard the incentives of universal banks to take equity positions will often be strongest when these problems are most severe for many decades commercial banks in the united states have been prohibited from making equity investments in the firms they serve rather they are restricted to providing them with loans in the form essentially of debt contracts this longstanding regulatory restriction1 results in distinctly different roles for bank lenders and equity investors and has had important implications for the entire financial sector the american system of commercial banking presents a sharp contrast with the banking systems of some other countries most notably germany in which banks are permitted to take equity positions under such universal banking arrangements banks can make equity investments as well as loans vote their equity shares and even hold seats on the boards of directors of nonfinancial firms in general they can be actively involved in all aspects of firm decision malqing in germany the control rights the authors have benefitted from the helpful comments of doug diamond joe haubrich ross levine stan longhofer joao santos and an anonymous referee the views expressed herein are those of the authors and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system 1 the key legislation which constrains u s banks equity investments is the glass steagall act of 1933 however a number of other laws also pertain to this issue particularly the bank holding company act of 1956 and its 1970 amendments incidentally there are some important exceptions to the equity investment prohibition in default situations banks are perrnitted to restructure loans into equity positions with the requirement of divestiture after a few years see james 1993 also bank holding companies are permitted to form separately capitalized venture capital subsidiaries for the expressed purpose of investing in start up enterprises john h boyd is a professor of finance in the carlson school of management at the university of minnesota and an adjunct consultant with the federal reserve bank of minneapolis chun chang is an associate professor of finance in the carlson school of management at the university of minnesota bruce d smith is a professor of economics at the university of texas ataustin

the coevolution of the real and financial sectors in the growth process the role of debt and equity changes over time and with the level of development what are these changes and why should they systematically occur across different countries and time periods this article characterizes financial innovation as a dynamic process that both influences and is influenced by the development of the real sector it focuses on the emergence and development of equity markets using a model that allows for growth and for capital accumulation that is financed externally through a combination of debt and equity as an economy develops the aggregate ratio of debt to equity will generally fall yet debt and equity remain complementary sources for the financing of capital investments the results suggest how various government policy actions might affect capital accumulation and equity market activity

globalization and financial development a model of the dot com and the housing bubbles abstract in the last decade the united states experienced the burst of the dot com and the housing bubbles i develop a model to study the relationship between globalization and the emergence of rational bubbles i also analyze how the effect of globalization on house prices depends on the type of bubble i show that bubbles cannot arise in a financially developed country in autarky in contrast as globalization progresses bubbles are more likely to appear in the financially developed country i also show that house prices increase with globalization only when the bubble is attached to houses this prediction is consistent with empirical evidence for u s metropolitan areas

bubbles and inefficiencies abstract we study speculative behavior in a stochastic overlapping generations model and we show how the link between the existence of bubbles and dynamic inefficiency which has been established for the deterministic case is broken when risk related factors such as risk premia and capital gains are explicitly taken into account

economic growth with bubbles this paper presents a stylized model of economic growth with bubbles this model views asset price bubbles as a market generated device to moderate the effects of frictions in financial markets improving the allocation of investments and raising the capital stock and welfare the model illustrates various channels through which asset price bubbles affect the incentives for innovation and economic reforms and therefore the rate of economic growth the model also offers a new perspective on the effects of financial development on asset price bubbles and economic growth

money intermediation and banking the business of money creation is conceptually distinct from that of intermediation yet these two activities are frequently but not always combined together in the form of a banking system we develop a simple model to examine the question when is banking essential there is a role for money due to a lack of record keeping and a role for intermediation due to the existence of private information both money and intermediation are essential when monitoring costs associated with intermediation are sufficiently low the two activities can be separated from one another however when monitoring costs are sufficiently high a banking system that combines these two activities is essential

financial development and economic growth the role of stock markets utilizing time series methods and data from five developed economies we examine the relationship between stock market development and economic growth controlling for the effects of the banking system and stock market volatility our results support the view that although both banks and stock markets may be able to promote economic growth the erects of the former are more powerful they also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross country growth regressions

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

learning and the capital goods sector under free trade the case of hongkong abstract attention is focused on technological change and attendant learning processes in the more industrialized third world countries the importance of relatively simple learning processes is stressed and the conditions necessary for facilitating more complex forms of learning particularly protection and promotion are examined here it is shown that the capital goods sector is of central importance the case study material deals with the machine producing sector in hong kong chosen as the representative case of free trade and minimal government intervention and comparison is made with learning processes in a number of other more industrialized third world countries including india argentina and taiwan in the final section the implications of the discussion of learning for theories and techniques of investment allocation including social cost benefit analysis the effective rate of protection and the related domestic cost of foreign exchange are examined

in defense of usury laws usury law is often criticized by economists for curtailing lending and thus creating deadweight costs this paper shows that if moral hazard leads to credit rationing a just binding usury law creates a deadweight gain this property also holds in most market clearing equilibria independent of social insurance benefits or curbing present biased preferences interest rate caps have merit

fostering the capital goods sector in ldcs abstract the conventional arguments in favour of the production of capital goods by ldcs are based on comparative advantage the possibility of designs appropriate to indigenous factor proportions and the externalities conferred on other sectors these and other arguments are inducing the governments of many middle income countries to more intensively foster the development of the machinery sector this paper examines the analytic and empirical bases of the conventional arguments and finds a considerably more complex picture than that contained in earlier studies

financial intermediaries ownership structure and monitored finance evidence from japan this paper introduces new and unique data from 127 japanese private equity funds that enable a first ever direct comparison of individual owner manager structures versus financial intermediation structures in terms of the governance provided to investee companies through private equity funds the data indicate individual owner manager structures financial disintermediation give rise to much smaller portfolios of entrepreneurial firms and more advice to entrepreneurs across the scope of different financial intermediation structures including banks life insurance companies securities firms corporations and government bodies there are further differences in the provision of governance and value added advice provided to investees the data further indicate us affiliated funds in japan are more likely to have smaller portfolios and provide more advice to entrepreneurial companies possibly due to a greater skill set in providing advice to facilitate the development of small entrepreneurial firms

the response of mining investment to a decline in economic growth the case of copper in the 1970s abstract this paper analyses how an industry like mining where investments take long to complete adjusts to a permanent decline in demand growth optimal control theory is the method used it is shown that an extended period of excess capacity and low prices will follow after a slowdown in growth this is because profit maximizing firms will continue to complete projects to which large investment funds have already been committed even when they anticipate the price fall numerical solutions of the control problem obtained by using parameters relevant to the copper industry are compared with actual performance of this industry in the late 1970s

why do we have nominal government debt abstract we study the choice between nominal and indexed debt in a stochastic macroeconomic model with discretionary monetary and fiscal policy with distortionary taxes nominal debt provides valuable insurance against the budgetary effects of economic fluctuations we show that a welfare maximizing government always issues some nominal debt even though nominal debt increases inflation along the time consistent path of the economy the result is fairly robust with respect to changes in assumptions about policy constraints and about the macroeconomic setting

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

existence uniqueness and stability of equilibrium in an overlapping generations model with productive capital abstract this paper analyzes the existence uniqueness and stability of a steady state equilibrium in an overlapping generations model with productive capital it is shown that for any feasible set of well behaved preferences there exists a production function that satisfies the inada conditions under which the economy experiences global contraction and the steady state equilibrium is characterized by the absence of production and consumption the study establishes a strengthened inada condition which is necessary to preclude global contraction and sufficient conditions for the existence of a unique and globally stable non trivial steady state equilibrium

the beliefs of borrowers and lenders and investment decisions abstract this paper examines the role of beliefs in the determination of equilibrium in a standard model of credit markets and investment project choice with asymmetric information it is shown that with ex ante asymmetric information the beliefs of entrepreneurs are important for the equilibrium level of aggregate investment and with ex post asymmetric information the beliefs of creditors are important for the types of projects selected by entrepreneurs

stochastic inflation and government provision of indexed bonds abstract this paper examines the consequences of using indexed bonds as one of the government financing instruments along with money and taxes it is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money when provided by means other than open market operations indexed bonds can affect the allocation of resources but these reallocations cannot be pareto improving

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

confidence and the real value of money in an overlapping generations economy we demonstrate that stochastic bubbles which have a constant exogenous probability of collapsing may exist in general equilibrium on an intrinsically useless and unbacked asset money this may happen provided that the probability q that the bubble will persist next period is large enough and exceeds a threshold level q which we call the minimum rate of confidence this condition is always violated when the economy without bubble is dynamically efficient it is more likely to be satisfied in dynamically inefficient economies the larger the size of the inefficiency as measured by the excess of the growth rate over the no bubble interest rate we study both exchange and production economies

on the interaction between risk sharing and capital accumulation in a stochastic olg model with production abstract we analyze the interaction between risk sharing and capital accumulation in a stochastic olg model with production we give a complete characterization of interim pareto optimal competitive equilibrium allocations furthermore we provide tests of pareto optimality suboptimality based on risky rates of return only

acquisition of technological capability in development a quantitative case study of pakistan s capital goods sector there is by now a substantial body of literature that points to the importance of technological capability acquisition for industrial development this literature however is almost exclusively based on qualitative case studies this paper addresses the lack of objective quantitative measurement and testing using data from a survey among capital goods manufacturers in pakistan it develops quantitative proxies for technological capability and various learning mechanisms that are believed to contribute to its emergence these are used in a regression analysis aimed at finding statistical support for the contention in the literature that capability results from an effortful learning process and at analyzing the main dimensions of that process

could prometheus be bound again a contribution to the convergence controversy abstract this paper presents a neoclassical model of stochastic growth in which the probability of adverse shocks to production is inversely related to the aggregate stock of capital per capita postulating this endogenous relationship justified by empirical evidence the model yields predictions that are largely consistent with the recent findings of cross country club convergence differently from the standard explanation based on multiplicity of steady states this model is also able to yield predictions consistent with observable intra distribution dynamics thus accounting for phenomena such as economic miracles growth disasters and reversals of fortune

rational bubbles and public debt policy a quantitative analysis abstract do empirically plausible dynastic general equilibrium models admit bubbles and ponzi schemes under rational expectations contrary to conventional wisdom the answer is affirmative the central assumption is that current securities do not represent claims to all future profits calibrating the model to u s data we find that it is consistent with the presence of rational bubbles the observed level of public debt is entirely a ponzi scheme there are large welfare gains from eliminating bubbles on private assets and lodging all the non fundamental asset value in public debt paying off public debt benefits only a small group of wealthy individuals

the demand for scrap and primary metal ores after a decline in secular growth old scrap and primary metal ores are substitute raw materials in metal production the paper explores the changing composition in their use following a permanent deceleration in economic growth the cases of copper and iron steel are employed to track the usage of scrap after a secular slow down in the rate of growth of finished metal demand such as occurred in the mid 1970s the conclusions suggest that the expanding role of scrap will result in stagnant demand for primary metal ores in the 1980s and 1990s la demande deferraille et de minerai de metaux primnaires apres une chute dans la croissance economique seculaire la ferraille et le minerai de m6taux primaires sont des matieres premieres qui sont des substituts dans la production du m6tal ce m6moire examine le changement dans la composition de l usage de l un et de l autre apres une decel6ration permanente dans la croissance 6conomique on examine en d6tail les cas du cuivre et du fer acier pour calibrer l usage de la ferraille apres la sorte de d6clin dans la croissance de la demande de m6tal fini qu on a v6cu dans le milieu des annees 1970 l auteur conclut que le role plus grand de la ferraille va vouloir dire une stagnation de la demande de minerais de metaux primaires dans les annees 1980 et 1990 carl van duyne 1946 1983 my professional colleague and personal friend carl van duyne died at the end of february 1983 as work on the present paper was drawing to a close though physically he is not longer with us his spiritual presence will remain through his valuable contributions in various fields to the academic work of the institute

equilibrium cycles in an overlapping generations economy with production abstract perfect foresight equilibrium trajectories of an overlapping generations model with production may include stable or unstable invariant closed curves these orbits are detected using the hopf bifurcation theorem where the parameter of bifurcation is purely technological the paper also proves that there is a stabilization policy that completely eliminates the cycle finally using a c e s production function it is shown that the range of values of the elasticity of substitution between capital and labor for which cycles may exist is bounded above

deficits and cycles abstract this paper shows that periodic equilibria may arise in a simple overlapping generations model with capital if the government follows a policy of fixing the value of the deficit rather than fixing the value of government debt then the difference equation that describes competitive equilibria may posses complex roots in the neighborhood of the golden rule stationary state one may show that if there exist parametric families of economies for which these roots change stability then locally there exists an invariant closed curve the paper provides two simple examples that generate such equilibria and it solves these examples numerically

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

the role of social security in an economy with asymmetric information and financial intermediaries abstract we study an overlapping generations model with production asymmetric information and competitive financial intermediaries social security may be beneficial even when it should not be used under full information unless credit rationing emerges with pooling contracts in this case social security could be welfare reducing even when the safe rate of return falls short of population growth we provide a full characterization of constrained pareto efficient allocations and prove that when the expected marginal product exceeds population growth and high risk firms have a low probability of default no tax transfer policy can support these allocations as competitive equilibria when equilibria are constrained inefficient optimal contracts are pooling and the optimal stock market value is zero

educational policy in a credit constrained economy with skill heterogeneity an overlapping generations model where agents choose whether to become educated when young is presented education enhances productivity but needs to be financed by borrowing because of the possibility of default lenders may ration credit we characterize the steady state equilibrium with and without credit constraints and show that credit constraints are associated with lower education and a lower real interest rate we then study the role of public policy in remedying the inefficiency which occurs with credit market imperfections and examine whether public education can improve on the constrained equilibrium

on the positive role of financial intermediation in allocation of venture capital in a market with imperfect information this paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information we consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions about which the investors are imperfectly informed it is shown that when all investors have positive search costs the entrepreneurs are induced to offer the unacceptable inferior projects lemons only and the investors will not enter the venture capital market but put their funds in other low return investments an undesirable allocation of resources beginning with an initial undesirable situation the financial intermediaries may evolve as informed agents that induce a pareto preferred allocation leading the investors to a higher welfare state we focus our analysis on the existence of intermediation equilibra when the market for intermediation services is competitive the distribution of returns on projects the fees charged by intermediaries and the fraction of institutional holdings are all endogenous in equilibrium it is shown that i there cannot be a competitive intermediation equilibrium with very high institutional holdings and ii in other cases multiple equilibra may exist but the one with the highest institutional holdings dominates the others in a pareto sense

intermediaries and payments instruments abstract we study an economy in which intermediaries have incentives to issue circulating liabilities as part of an equilibrium we show that with arbitrarily small transactions costs only the liabilities of intermediaries will circulate and not those of other private sector agents therefore our model connects intermediation activity with the issuance of payments media a connection that has not been made in earlier literature we use our model to suggest a resolution of the banknote underissue puzzle of cagan in d carson ed banking and monetary studies richard d irwin publishing homewood il 1963

habit persistence in overlapping generations economies under pure exchange abstract this paper analyzes the implications of habit persistence preferences for savings and equilibrium dynamics in the context of an overlapping generations model under pure exchange we show that habit persistence can convert an economy which otherwise has no role for government currency into an economy where there does exist a role for such currency further the increased saving induced by habit persistence implies that governments are able to float higher levels of deficits in such economies relative to economies without habit persistence the paper also shows that relative to standard preferences habit persistence preferences cause the savings function to become decreasing in the rate of interest at lower values for relative risk aversion this is of particular interest since the paper demonstrates that this result is closely related to the relative success of models with habit persistence in explaining the equity premium puzzle journal of economic literatureclassification numbers e21 e32

intermediation and the equilibrium allocation of investment capital implications for economic development abstract we investigate several common assertions about intermediation and how it affects the allocation of investment capital we use a model with adverse selection and costly state verification in which both debt contracts and credit rationing are observed intermediaries arise due to a comparative advantage in information acquisition relative to the situation absent intermediation intermediaries reduce credit rationing and inefficient interest rate differentials the model also shows how large interest rate differentials can be observed when financial markets are not integrated and how the volume of intermediation is affected by changes in the environment

deposit insurance a reconsideration abstract this paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs the way in which they are priced and the way in which they fund revenue shortfalls in our economy the central issue in analyzing deposit insurance is how the government will make up any fdic losses deposit insurance premia matter only in so far as they affect the level of implied fdic revenue shortfalls moreover local variations in the magnitude of fdic losses will generically be irrelevant for the determination of any equilibrium quantities that affect agent welfare however large enough changes in these losses can matter there is no presumption that keeping these shortfalls low is a good idea finally we show that multiple pareto ranked equilibria can be observed the potential for multiplicity of equilibria may depend on components of fdic policy our analysis provides counterexamples to the following propositions 1 actuarially fair pricing of deposit insurance is always desirable 2 implicit fdic subsidization of banks through deposit insurance is always undesirable 3 large fdic losses are necessarily symptomatic of a poorly designed deposit insurance system 4 risk based deposit insurance premia can easily be used to reduce moral hazard problems associated with deposit insurance provision

stationary equilibria in an overlapping generations economy with stochastic production abstract this paper generalizes the analyses of the existence uniqueness and stability of a non trivial steady state equilibrium in galor and ryder j econ theory49 1989 360 375 to an overlapping generations economy with stochastic production the study establishes sufficient conditions for the existence of a non trivial stationary equilibrium as well as for the existence of a globally unique and stable non trivial stationary equilibrium it is shown that the existence of a non trivial stationary equilibrium is not assured by conventional regularity conditions on the production function and preferences furthermore multiplicity and indeterminacy of long run equilibria appear to be commonplace journal of economic literature classification numbers c62 e13 o41

interest rates in a credit constrained economy when households face credit constraints in an economy with inside as well as outside money stationary equilibrium real interest rates are below the household rate of time preference they also depend significantly upon household risk aversion the demand for inside versus outside money bank costs bank reserves inflation and the marginal productivity of capital and capital depreciation rates in addition changes in financial variables affect per capita capital and output to a greater extent when households are credit constrained copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

safe debt risky capital the author extends the diamond 1965 model of national debt in two directions she first introduces technological uncertainty and then she allows the stock of debt to vary the author studies the dynamical equilibria of the resulting stochastic system and she establishes conditions for the existence of stationary states that are expressed in terms of invariant distributions since conditions that ensure the existence of a stochastic stationary state with positive debt are very restrictive in this model financial instability is a pervasive phenomenon and allocations are in general dynamically inefficient copyright 1994 by the london school of economics and political science

refinancing mfis with market power theory and evidence this paper presents a model of the complete microcredit financing chain investor miv mfi micro borrower in which social minded mivs provide funds only to those mfis which do not exploit their bargaining power towards micro borrowers the mfis with the highest bargaining power do not use miv capital since eschewing their market power is most costly for them consistent with this prediction of the theoretical model we find empirically that the net interest margin as a measure of mfi market power negatively affects the likelihood of using miv finance this lends support to the view that social criteria play an effective role in mivs investment policies thereby also impacting mfis lending behavior