a theory of input output architecture individual producers exhibit enormous heterogeneity in many dimensions this paper develops a theory in which the network structure of production who buys inputs from whom forms endogenously entrepreneurs produce using labor and exactly one intermediate input the key decision is which other entrepreneur s good to use as an input their choices collectively determine the economy s equilibrium input output structure generating large differences in size and shaping both individual and aggregate productivity when the elasticity of output to intermediate inputs in production is high star suppliers emerge endogenously this raises aggregate productivity as in equilibrium more supply chains are routed through higher productivity techniques

economic culture and foreign policy the cognitive analysis of economic policy making political scientists researching economic foreign policy have generally taken one of two analytic approaches the first is based on realpolitik the traditional application of high politics to the low politics of economics this approach considers economics subordinate to politics the concept of the national interest dominates the pursuit of power what enables the state to achieve its goals of security welfare and other societal values is seen to underlie most actions the study of foreign economic policy is thus an analysis of the distribution of power among states within the international system by understanding a state s sources of strength and areas of vulnerability in relation to other states the analyst will better understand the creation of foreign policy hans morgenthau notes that while states may sometimes pursue economic policies for their own sake in which case they should take little interest in their success the more important economic policies they will favor are instruments of political power stephen krasner views the state as an autonomously motivated actor able to guide policy in pursuit of state priorities while resisting interest groups and ideologies according to this power theory the state tries to increase its economic competitiveness ensure security of material needs and promote its broad foreign policy objectives economic policy is for the most part subordinate to and best explained by state priorities and prerogatives robert tucker klaus knorr robert gilpin and others have also adopted this framework

sectoral shocks and aggregate fluctuations abstract this paper presents a multisector dynamic general equilibrium model of business cycles with a distinctive feature aggregate fluctuations are driven by independent sectoral shocks the model hypothesizes that trade among sectors provides a strong synchronization mechanism for these shocks due to the limited but locally intense interaction that is characteristic of such input trade flows limited interaction characterized by a sparse intermediate input use matrix reduces substitution possibilities among intermediate inputs which strengthens comovement in sectoral value added and leads to a postponement of the law of large numbers in the variance of aggregate value added the chief virtue of this model is that reliance on implausible aggregate shocks is not necessary to capture the qualitative features of macroeconomic fluctuations building on horvath 1998 review of economic dynamics 1 781 808 which establishes the theoretical foundation for the relevance of limited interaction in the context of a stylized multisector model this paper specifies a more general multisector model calibrated to the us 2 digit standard industrial code economy simulations prove the model is able to match empirical reality as closely as standard one sector business cycle models without relying on aggregate shocks

much ado about ideas the cognitive factor in economic policy this article examines recent works that investigate how ideas acquire influence over economic policy choice the revival of interest in the material power of ideas stems from discontent with the inability of rational interest based models to explain particular policy outcomes except by resorting to auxiliary assumptions the works under review primarily apply ideas approaches as supplementary analytical devices to clarify the dynamics of policy choices these studies succeed in illuminating the interpenetration of interests and ideas in order to plumb the problematic variability of interest formation and the degree of public influence over economic policy parameters the bolder thesis that ideas have a force of their own independent of all interests is however misconceived and unproved

endogenous production networks we develop a tractable model of endogenous production networks each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs different combinations of inputs generate prespecified levels of productivity and various distortions may affect costs and prices we establish the existence and uniqueness of an equilibrium and provide comparative static results on how prices and endogenous technology input choices and thus the production network respond to changes in parameters these results show that improvements in technology or reductions in distortions spread throughout the economy via input output linkages and reduce all prices and under reasonable restrictions on the menu of production technologies also lead to a denser production network using a dynamic version of the model we establish that the endogenous evolution of the production network could be a powerful force towards sustained economic growth at the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount that is if there are n products the arrival of one more new product increases the combinations of inputs that each existing product can use from 2n 1 to 2n thus enabling significantly more pronounced cost reductions from choice of input combinations these cost reductions then spread to other industries via lower input prices and incentivize them to also adopt additional inputs

lessons from the past capital markets during the 19th century and the interwar period on friday 13 august 1982 finance minster jesus silva herzog of mexico made a series of visits to the international monetary fund the federal reserve and the u s treasury his message to each was the same mexico could no longer continue to service its debt thus began a dramatic weekend of negotiations that marked the end of the preceding decade s buoyant expansion of developing country debt and the start of a still continuing response to the sudden collapse

central banks and financial stability rediscovering the lender of last resort practice in a finance economy the purpose of our paper is to assess whether central banks have adopted new practices of lending in last resort during the 2007 09 financial crisis we compare the current period with the classical period both featured by a finance economy with developed financial markets and unregulated institutions beyond the differences determined by the monetary regime and concerning the central bank rate policy we find similarities such as the enlargements of the set of counterparties and eligible collateral assets since the credit system is based on financial markets and innovations central banks have a wider involvement that goes beyond a narrow conception of the lender of last resort that prevailed under a regulated banking system we conclude that the historical roots of financial stabilisation by central banks in a finance economy have just been rediscovered and that the functions of lender of last resort and market maker of last resort may be analytically integrated copyright oxford university press

supply chain disruptions evidence from the great east japan earthquake this paper quanti es the spillover eect of local exogenous shocks such as earthquakes to other rms through supply chain networks combining micro data on a large scale inter rm transaction network and geographic information on rm location we examine the rm level impact of supply chain disruptions occurring in the aftermath of the great east japan earthquake in 2011 when we focus on exiting rms in aected areas as the originating rms of spillovers we nd that sales growth of linked rms outside the area exhibits negative and signi cant eects for both upstream and downstream rms furthermore the signi cantly negative eects on downstream rms are shown not only for directly linked rms but also indirectly connected rms with degrees of separation 2 3 4 and 5

natural disasters damage to banks and firm investment this article investigates the effect of banks lending capacity on firms investment to identify exogenous shocks to loan supply we utilize the natural experiment provided by japan s great hanshin awaji earthquake in 1995 using a unique data set that allows us to identify firms and banks in the earthquake affected areas we find that the investment ratio of firms located outside the earthquake affected areas but having a main bank inside the areas was significantly smaller than that of firms located outside the areas and having a main bank outside the areas our findings suggest that loan supply shocks affect firm investment abstract from author

threshold behavior and aggregate fluctuation this paper concerns a propagation mechanism in an economy where many individuals follow a threshold rule and interact with a positive feedback we derive an asymptotic distribution of the propagation size when the number of the agents tends to infinity the propagation distribution exhibits a slower convergence to a deterministic value than it would if the agents followed a smooth adjustment policy this gives rise to significant aggregate fluctuations in a finite lumpy adjusting economy even when the agents are hit by small independent shocks

the great diversification and its undoing we investigate the hypothesis that macroeconomic fluctuations are primitively the results of many microeconomic shocks we define fundamental volatility as the volatility that would arise from an economy made entirely of idiosyncratic sectoral or firm level shocks fundamental volatility accounts for the swings in macroeconomic volatility in the major world economies in the past half century it accounts for the great moderation and its undoing the initial great moderation is due to a decreasing share of manufacturing between 1975 and 1985 the recent rise of macroeconomic volatility is chiefly due to the growth of the financial sector jel e23 e32 e44 this article explores the hypothesis that changes in the microeconomic composition of the economy during the postwar period can account for the great moderation and its unraveling both in the united states and in the other major world economies we call fundamental volatility the volatility that would be derived only from microeconomic shocks if aggregate shocks come in large part from microeconomic shocks augmented by amplification mechanisms then aggregate volatility should track fundamental volatility to operationalize this idea the key quantity we consider which constitutes one departure from other studies is the following definition of fundamental volatility

growth waves systemic openness and protectionism there is a distinctively repetitive quality about trade policy problems domestic economic growth slows producers seek protection against foreign competitors and national decision makers raise barriers to trade while at the same time criticizing their counterparts in other governments for engaging in similar practices because trade is one of the more important topics in international and comparative political economy and because this scenario has played itself out more than a few times it is not surprising that a number of theorists have sought to model the underlying processes thought to produce movements toward and away from protectionism by now a variety of different types of approaches ranging from the cognitive to the systemic have been tried systemic structure ideas and ideology surplus capacity business cycles and shifts in elite orientation and domestic coalitions in response to external crises have been emphasized as principal theoretical foci our position is that the different levels of analysis and alternative foci all have merit and utility what they lack is an appreciation for the underlying systemic processes that link together these various facets of the political economy we seek to develop a theoretical argument that explicates these underlying processes the argument centers on recurring growth waves characterized in alternating pattern by the ascent of system leaders and the subsequent successful attempt of technological followers to catch up with the leaders the downturns of the growth waves produce conditions favoring protectionism but we contend the form and the intensity of protectionism that are likely to be produced will depend on which of the two types of growth waves is in progress ascent waves are characterized by the emergence of new technological leaders and a consequent increase in the gap between the leaders and the technological followers during the periods of structural transition and intense

is the 2007 u s sub prime financial crisis so different an international historical comparison the first major financial crisis of the twentyfirst century involves esoteric instruments unaware regulators and skittish investors it also follows a well trodden path laid down by centuries of financial folly is the special prob lem of sub prime mortgages really different our examination of the longer historical record which is part of a larger effort on cur rency and debt crises finds stunning qualitative and quantitative parallels across a number of standard financial crisis indicators to name a few the run up in us equity and housing prices that graciela l kaminsky and reinhart 1999 find to be the best leading indicators of crisis in countries experiencing large capital inflows closely tracks the average of the previous 18 post world war ii banking crises in industrial countries so too does the inverted v shape of real growth in the years prior to the crisis despite widespread concern about the effects on national debt of the tax cuts of the early 2000s the run up in us public debt is actually some what below the average of other crisis episodes in contrast the pattern of us current account deficits is markedly worse at this juncture the book is still open on how the current dislocations in the united states will play out the precedent found in the aftermath of other episodes suggests that the strains can be quite severe depending especially on the initial degree of trauma to the financial system and to some extent the policy response the average drop in real per capita output growth is over 2 percent and it typically takes two years to return to trend for the five most catastrophic cases which include episodes in finland japan

the demand for international regimes international regimes can be understood as results of rational behavior by the actors principally states that create them regimes are demanded in part because they facilitate the making of agreements by providing information and reducing transactions costs in world politics increased interdependence among issues greater issue density will lead to increased demand for regimes insofar as regimes succeed in providing high quality information through such processes as the construction of generally accepted norms or the development of transgovernmental relations they create demand for their own continuance even if the structural conditions such as hegemony under which they were first supplied change analysis of the demand for international regimes thus helps us to understand lags between structural change and regime change as well as to assess the significance of transgovernmental policy networks several assertions of structural theory seem problematic in light of this analysis hegemony may not be a necessary condition for stable international regimes past patterns of institutionalized cooperation may be able to compensate to some extent for increasing fragmentation of power

crisis and responses the federal reserve in the early stages of the financial crisis in summer 2007 u s and global financial markets found themselves facing a potential financial crisis and the u s federal reserve found itself in a difficult situation it was becoming clear that banks and other financial institutions would ultimately lose tens or even hundreds of billions of dollars from their exposure to subprime mortgage market loans bank lending is closely tied to bank capital or net worth specifically bank regulators require that loans not exceed a certain multiple of capital thus the federal reserve faced the danger of a sharp contraction in credit and bank lending in a way that threatened a deep recession or worse when this kind of event happens the job of the central bank is to assure that financial institutions have the necessary funds to conduct their daily business that they have the liquidity they need to make timely payments and transfers modern financial institutions need to replenish their funding every day in the united states alone literally trillions of dollars are transferred between banks each day to support the 50 trillion credit outstanding in the economy as a whole commercial banks require funds to initiate the mortgages auto loans and credit card debt they then sell into financial markets while investment banks finance much of their activity with daily borrowing in the early stages of the crisis the situation often arose in which a wellcapitalized bank was forced to make sudden large loans based on previously committed lines of credit in this circumstance central bank actions can ease

central banking in the credit turmoil an assessment of federal reserve practice abstract central banking is understood in terms of the fiscal features of monetary credit and interest on reserves policies monetary policy expanding reserves by buying treasuries transfers all revenue from money creation directly to the fiscal authorities credit policy selling treasuries to fund loans or acquire non treasury securities is debt financed fiscal policy interest on reserves frees monetary policy to fund credit policy independently of interest rate policy an ambiguous boundary of responsibilities between the fed and the fiscal authorities contributed to economic collapse in fall 2008 accord principles are proposed to clarify fed credit policy powers and secure its independence on monetary and interest rate policy the fed needs more surplus capital from the fiscal authorities to be fully flexible against both inflation and deflation at the zero interest bound

market and public liquidity as the record of federal reserve interventions over the past year from december 2007 to december 2008 makes abundantly clear a foremost concern of monetary authorities in responding to the financial crisis has been to avoid a repeat of the great depression and especially a repeat of the monetary contraction that milton friedman and anna schwartz 1963 have claimed as the major cause of the 1930s depression the fed has shown tremendous resourcefulness and inventiveness in its liquidity injections considerably widening the collateral eligible under the discount window and the term auction facility and setting up new programs targeted at primary dealers the commercial paper market and money market funds at the same time it has stepped in to offer guarantees on assets held by some financial institutions e g citigroup to avoid their bankruptcy see david enrich et al 2008 this unprecedented intervention has had the intended effect of averting a major systemic financial meltdown and it has kept some critical financial institutions afloat yet until now banks have mostly responded by cutting new lending and hoarding liquidity so that the ultimate goal of forestalling a credit crunch has not been achieved for the most part banks also are still holding most of the toxic assets that monetary policy liquidity and financial crises

the macroeconomic consequences of disasters abstract natural disasters have a statistically observable adverse impact on the macro economy in the short run and costlier events lead to more pronounced slowdowns in production yet interestingly developing countries and smaller economies face much larger output declines following a disaster of similar relative magnitude than do developed countries or bigger economies a close study of the determinants of these adverse macroeconomic output costs reveals several interesting patterns countries with a higher literacy rate better institutions higher per capita income higher degree of openness to trade and higher levels of government spending are better able to withstand the initial disaster shock and prevent further spillovers into the macro economy these all suggest an increased ability to mobilize resources for reconstruction financial conditions also seem to be of importance countries with more foreign exchange reserves and higher levels of domestic credit but with less open capital accounts appear more robust and better able to endure natural disasters with less adverse spillover into domestic production

the credit crisis conjectures about causes and remedies what caused the financial crisis that is sweeping across the world what keeps asset prices and lending depressed what can be done to remedy matters while it is too early to arrive at definite answers to these questions it is certainly time to offer informed conjectures and these are the focus of this paper this abstract was borrowed from another version of this item

micro shocks and aggregate risk the paper presents a micro shock explanation of aggregate risk shocks are independent over agents and equilibria are always unique it is shown that any amount of aggregate risk can be generated by games in which shocks to players are independent explicit examples are given some of which elaborate on examples in the literature implications are drawn for factor analytic methods of extracting aggregate shocks

the macroeconomic impact of microeconomic shocks beyond hulten s theorem we provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced form non parametric elasticities for efficient economies we also show how structural parameters are mapped to these reduced form elasticities in this sense we extend the foundational theorem of hulten 1978 beyond first order terms key features ignored by first order approximations that play a crucial role are structural elasticities of substitution network linkages structural returns to scale and the extent of factor reallocation higher order terms magnify negative shocks and attenuate positive shocks resulting in an output distribution that is asymmetric fat tailed and has a lower mean even when shocks are symmetric and thin tailed in our calibration output losses due to business cycle fluctuations are an order of magnitude larger than the cost calculated by lucas 1987 second order terms also show how shocks to critical sectors can have large macroeconomic impacts tripling the estimated impact of the 1970s oil price shocks

monetary policy in a systemic crisis summary this paper examines the monetary policy followed during the current financial crisis from the perspective of the theory of the lender of last resort it is argued that standard monetary policy measures would have failed because the channels through which monetary policy is implemented depend upon the well functioning of the interbank market as the crisis developed liquidity vanished and the interbank market collapsed central banks had to inject much more liquidity at low interest rates than predicted by standard monetary policy models at the same time as the interbank market did not allow for the redistribution of liquidity among ban ks central banks had to design new channels for liquidity injection

the international economy as a constraint on u s macroeconomic policymaking international economic factors increasingly influence american trade and exchange policy and interdependence also circumscribes the autonomous choice of domestic policies but the growing concern of organization for economic cooperation and development oecd policymakers over the potential for macroeconomic policy coordination to enhance national as well as world welfare implies that international economic relations present opportunities rather than constraints under some circumstances this suggests that understanding domestic economic policy choice within its international context involves not only how policy choices are made within the bounds of international constraints but also when countries might cooperate to modify the constraints themselves this research looks to four important historical cases for information on these questions the first three are the series of cumulating crises in the international monetary system during the 1960s and early 1970s the fourth is the energy supply shock of 1973 and the recession that followed the article describes the process of policy selection in each of these cases contrasting domestic versus international premises for policy choice the economics literature has emphasized the magnitude of domestic welfare gains available from coordinated national economic policies although the cases considered here do not contradict the importance of payoffs they underline the corresponding role of political economic and strategic uncertainty in conditioning elites policy choices

tenure issues in higher education the system of tenure that dominates american higher education has long been a source of controversy the institution of tenure has been attacked for entrenching a lazy professoriate more interested in attending faraway conferences and producing unreadable research than in teaching or developing practical insights while on the other hand it has long been defended as an absolute necessity for the defense of open intellectual inquiry the tenure controversy has been sharpened in recent years by several events the end of mandatory retirement which was abolished by federal law effective january 1 1994 has heightened concerns about the productivity and commitment of professors who received tenure long ago and who no longer have the same incentives to invest in long term reputation there is also ongoing concern over the steadily rising cost of higher education which raises the question of what students as well as the taxpayers who support public institutions of higher education are getting for their money 1 the idea that tenure is a wasteful institution for universities runs up against the puzzling fact that the commitment to tenure is one that academic institutions impose on themselves although the american association of university professors aaup provides a powerful lobby in favor of tenure generally colleges and universities most notably private ones are under no legal requirement to observe tenure constraints although as administrators we certainly feel the weight of those constraints our view is that a tenure system in fact provides important benefits to society and to colleges and universities we argue here that the role of tenure is

microeconomic origins of macroeconomic tail risks we document that even though the normal distribution provides a good approximation to gdp fluctuations it severely underpredicts macroeconomic tail risks that is the frequency of large economic downturns using a multi sector general equilibrium model we show that the interplay of idiosyncratic microeconomic shocks and sectoral heterogeneity results in systematic departures in the likelihood of large economic downturns relative to what is implied by the normal distribution notably we also show that such departures can happen while gdp is approximately normally distributed away from the tails highlighting the qualitatively different behavior of large economic downturns from small or moderate fluctuations we further demonstrate the special role that input output linkages play in generating tail comovements whereby large recessions involve not only significant gdp contractions but also large simultaneous declines across a wide range of sectors

from micro to macro via production networks amodern economy is an intricately linked web of specialized production units each relying on the flow of inputs from their suppliers to produce their own output which in turn is routed towards other downstream units in this essay i argue that the structure of this production network is key in determining whether and how microeconomic shocks affecting only a particular firm or technology along the chain propagate throughout the economy and shape aggregate outcomes therefore understanding the structure of this production network can better inform both academics on the origins of aggregate fluctuations and policy makers on how to prepare for and recover from adverse shocks that disrupt these production chains two recent events have brought to the forefront the importance of interconnections between firms and sectors in aggregate economic performance consider first the 2011 earthquake in japan while the triple tragedy of the earthquake the ensuing tsunami and the near nuclear meltdown at fukushima surely resulted in a significant destruction of human and physical capital its effects would have been largely restricted to the affected areas were it not for the disruption of national

financial instability reserves and central bank swap lines in the panic of 2008 in this paper we connect the events of the last twelve months the panic of 2008 as it has been called to the demand for international reserves in previous work we have shown that international reserve demand can be rationalized by a central bank s desire to backstop the broad money supply to avert the possibility of an internal external double drain a bank run combined with capital flight thus simply looking at trade or short term debt as motivations for reserve holdings is insufficient one must also consider the size of the banking system m2 here we show that a country s reserve holdings just before the current crisis relative to their predicted holdings based on these financial motives can significantly predict exchange rate movements of both emerging and advanced countries in 2008 countries with large war chests did not depreciate and some appreciated meanwhile those who held insufficient reserves based on our metric were likely to depreciate current account balances and short term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account our model s typically high predicted reserve levels provide important context for the unprecedented u s dollar swap lines recently provided to many countries by the federal reserve this abstract was borrowed from another version of this item

sectoral versus aggregate shocks a structural factor analysis of industrial production using factor methods we decompose industrial production ip into components arising from aggregate and sector specific shocks an approximate factor model finds that nearly all of ip variability is associated with common factors we then use a multisector growth model to adjust for the effects of input output linkages in the factor analysis thus a structural factor analysis indicates that the great moderation was characterized by a fall in the importance of aggregate shocks while the volatility of sectoral shocks was essentially unchanged consequently the role of idiosyncratic shocks increased considerably after the mid 1980s explaining half of the quarterly variation in ip

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances