rules stability and growth abstract this paper examines two systems of fiscal redistribution in the context of a growing economy subject to unexpected shocks rules and discretion under the former system the tax system is in place and is known to households contemplating investment decisions under the second redistribution is decided upon only after the investment decisions have been made i find that rules always lead to faster capital accumulation and growth but political support for them is only likely to occur in a stable economy income inequality adversely affects the likelihood of adopting rules especially so in an unstable economy

investment and uncertainty with time to build evidence from entry into u s copper mining abstract the standard real options model predicts that increased uncertainty discourages investment when projects are large and take time to build however that prediction can be reversed we investigate the investment uncertainty relationship empirically using historical data on opening dates of new u s copper mines large irreversible projects with substantial construction lags both the timing of the decision to go forward and the price thresholds that trigger that decision are assessed in particular we build upon a reduced form analysis to construct a structural model of entry we find that in this market greater uncertainty encourages investment and lowers the price thresholds for many mines

the behavior of prices and inflation an empirical analysis of disaggregat price data this paper analyzes the effects of inflation on the dispersion of prices as well as other aspects of price behavior using disaggregated data on prices of foodstuffs in israel during 1978 84 we find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation we show that even in times of high inflation price quotations are not trivially short and price changes are not synchronized across firms these facts taken together confirm that there is some staggering in the setting of prices we find that the distribution of real prices is far from being uniform as many menu cost based models assume or conclude in fact as inflation increases to very high levels this distribution is not even symmetric when the annual inflation rate reaches 130 percent there are equal chances of finding real prices above or below the market average but upward deviations in the real price are further away from zero than downward ones furthermore as the annu

real investment decisions under adjustment costs and asymmetric information abstract we study the cost of adjustment model of investment when there is asymmetry of information between owners the principal and managers the agent information asymmetry distorts the relationship between investment and the cost of capital for all agent types and a regime of inaction appears over a certain cost range in an observationally different way than when fixed adjustment costs or irreversibilities cause a similar phenomenon uncertainty in the form of an increase in the spread of agents types tends to reduce investment despite symmetric adjustment cost and perfect competition the model gives a new interpretation of tobin s q under asymmetric information explaining some results of the mergers and acquisition literature

what drives the capital flows into brics economies understanding what drives the capital flows has important policy implications for countries in managing the direction and magnitude of such flows this paper empirically investigates the main drivers of capital flows into the fast growing brics countries in the backdrop of their growing inward capital flows employing a fully balanced panel for the period 1995 2015 we focus on among others the hitherto commonly untested variables sovereign credit ratings economic freedom and ease of doing business ranking of these countries in searching for the relevant interaction and causality among the drivers of capital flows we employ the panel granger causality test to arrive at the policy implications the results suggest that market size is a significant driver of capital flows in addition to infrastructure economic freedom in the host countries ease of doing business ranking and sovereign credit ratings are the main drivers in the long run growth of capital flows

population growth and economic growth long run evidence from latin america unit root tests the johansen maximal likelihood methodology and granger causality tests in the context of a one step error correction model are used to examine the long run relation between population and per capita gdp in seven latin american countries over most of the 20th century the results suggest that no long run relation has existed and hence population growth neither causes per capita gdp growth nor is caused by it

market power and inflation market power exercised by firms has become central to macroeconomics recent theoretical work highlights the importance of the relation between market power and inflation we examine this relation for individual firms in eleven u s industries our econometric framework exploits restrictions from dynamic theory and information from financial markets to generate quantitative evidence on the responsiveness of market power to inflation we find that inflation usually has a positive effect on market power this relation is heterogeneous across the eleven industries and statistically significant positive relations are concentrated in industries with little market power

macroeconomic volatility and welfare in developing countries an introduction macroeconomic volatility both a source and a reflection of underdevelopment is a fundamental concern for developing countries their high aggregate instability results from a combination of large external shocks volatile macroeconomic policies microeconomic rigidities and weak institutions volatility entails a direct welfare cost for risk averse individuals as well as an indirect one through its adverse effect on income growth and development this article provides a brief overview of the recent literature on macroeconomic volatility in developing countries highlighting its causes consequences and possible remedies it then introduces the contributions of a recent conference on the subject sponsored by the world bank and pompeu fabra university barcelona

the role of economic theory in modelling the long run this argues for a closer link between the modelling of the long run relations in applied economics and the intertemporal equilibrium notion from economic theory this abstract was borrowed from another version of this item

what is happening to the impact of financial deepening on economic growth i introduction among the strongest elements of the modern economists canon is that financial sector development has a significant impact on economic growth a generation ago economists like goldsmith 1969 1 and mckinnon 1973 began to draw attention to the benefits of financial structure development and financial liberalization by the early 1990s mckinnon 1991 12 could write with confidence that now however there is widespread agreement that flows of saving and investment should be voluntary and significantly decentralized in an open capital market at close to equilibrium interest rates since the 1990s a burgeoning empirical literature has illustrated the importance of financial sector development for economic growth despite the growing consensus however we find that the link between finance and growth in cross country panel data has weakened considerably over time at the very time that financial sector liberalization spread around the world the influence of financial sector development on economic growth has diminished the seminal empirical work that established the growth finance link is king and levine 1993 which extended the cross country framework introduced in barro 1991 by adding financial variables such as the ratios of liquid liabilities or claims on the private sector to gross domestic product gdp to the standard growth regression they found a robust positive and statistically significant relationship between initial financial conditions and subsequent growth in real per capita incomes for a cross section of about 80 countries in the subsequent decade numerous empirical studies expanded upon this using both cross country and panel data sets for the post 1960 period 2 in this paper we reexamine the core cross country panel result and find that the impact of financial deepening on growth is not as strong with more recent data as it appeared in the original panel studies with data for the period from 1960 to 1989 we consider various explanations for this clear shift first we suggest that financial deepening has a positive effect on growth if not done to excess rapid and excessive deepening as manifested in a credit boom can be problematic even in the most developed markets because it can both weaken the banking system and bring inflationary pressures we test this hypothesis by looking at the finance growth nexus among countries that have or have not experienced financial sector crises we find that once crisis episodes are removed the finance growth relationship remains intact its weakening over time thus seems to be a result of an increased incidence of crises in later years our second and related hypothesis is that the widespread liberalization of financial markets that occurred in the late 1980s and early 1990s made financial deepening less effective this is reminiscent of robert lucas s 1975 critique of econometric policy evaluation advanced three decades ago policies that have promoted and or forced increases in financial depth over the past two decades may have altered the basic structural relationship between finance and growth this could occur if the observed benefits of financial deepening led many countries to liberalize before the associated legal and regulatory institutions were sufficiently well developed as a consequence the impact of financial deepening on growth would become smaller our evidence does not indicate that recent liberalizations are responsible for the breakdown of the finance growth link however there may be an indirect link as premature financial development can lead to financial crises that have real effects third we examine the role of global equity markets that have grown in importance and prominence in the years over which the finance growth relationship disappeared however we do not find any evidence to suggest that equity market growth has substituted for the role of credit markets and banks in particular

search price setting and inflation a model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search price dynamics and entry on the part of consumers and firms respectively equilibrium price strategies are s s these bounds increase continuously with consumer search costs and so does price dispersion indeed the whole equilibrium varies smoothly from the competitive bertrand to the monopolistic diamond 1971 end of the spectrum the latter s paradoxical result is explained as a limiting case where frictions on firms side of the market price adjustment costs but not on buyers search costs tend to zero a positive relationship between smooth and perfectly anticipated inflation and price dispersion or uncertainty is established

economic freedom and growth decomposing the effects most studies of the relation between economic freedom andgrowth of gdp have found a positive relation one problem inthis area is the choice of economic freedom measure a singlemeasure does not reflect the complex economic environment anda highly aggregated index makes it difficult to draw policyconclusions in this paper we investigate what specific typesof economic freedom measures that are important for growth the robustness of the results is carefully analysed since thepotential problem with multicollinearity is one of thenegative effects of decomposing an index the results showthat economic freedom does matter for growth this does notmean that increasing economic freedom defined in generalterms is good for economic growth since some of thecategories in the index are insignificant and some of thesignificant variables have negative effects

evaluating replacement project of nuclear power plants under uncertainty this paper investigates the valuation of a replacement project of nuclear power plants under the deregulated electricity market the replacement project consists of two components the decision to decommission an existing plant and the decision to construct a new plant in the replacement project the decommissioning decision should be made considering not only the profitability of the existing plant but also the profitability and costs of the construction of the new plant real options theory is used to determine the optimal timing of the decommissioning and construction in order to examine the effect of decommissioning time and decision making one we consider a time lag for these decision making times we show the dependence of the replacement project value on uncertainty and time lag

financial liberalization financial sector development and growth evidence from malaysia abstract the objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of malaysia using time series data from 1960 to 2001 we conduct cointegration and causality tests to assess the finance growth link by taking the real interest rate and financial repression into account the empirical evidence suggests that financial liberalization through removing the repressionist policies has a favorable effect in stimulating financial sector development financial depth and economic development are positively related but contrary to the conventional findings our results support robinson s view that output growth leads to higher financial depth in the long run

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

inflation and the informativeness of prices this paper studies the welfare effects of the relative price variability arising from inflation if customers and suppliers form long term relationships prices have an informational role a potential customer uses current prices as signals of future prices inflation reduces the informativeness of current prices causing customers to make costly mistakes about which relationships to enter in addition the reduced informativeness of prices makes demand less price elastic thereby increasing markups both effects can be quantitatively significant at moderate inflation rates

a note on competitive investment under uncertainty uncertainty over future output prices or input costs can affect investment by a riskneutral firm in two opposing ways first it can increase the value of the marginal unit of capital which leads to more investment this only requires that the stream of future profits generated by the marginal unit be a convex function of the stochastic variable by jensen s inequality the expected present value of that stream is increased this result was demonstrated by richard hartman 1972 and later extended by andrew abel 1983 and others in their models constant returns to scale and the substitutability of capital with other factors ensure that the marginal profitability of capital is convex in output price and input costs even with fixed proportions however this convexity can result from the ability of the firm to vary output so that the marginal unit of capital need not be utilized at times when the output price is low or input costs are high if investment is irreversible and can be postponed a second effect of uncertainty is to create an opportunity cost of investing now rather than waiting for new information to arrive before committing resources this increases the full cost of investing in a marginal unit of capital which reduces investment 2 hence the net effect of uncertainty on irreversible investment depends on the size of this opportunity cost relative to the increase in the value of the marginal unit of capital the sign of the net effect is significant because of its possible policy implications pindyck 1988 and giuseppe bertola 1989 developed models in which a firm faces a downward sloping demand curve and found the net effect to be negative ricardo caballero 1991 has recently studied investment by an individual firm facing a stochastically shifting demand curve he shows that as returns to scale become constant and the elasticity of demand faced by the firm rises this opportunity cost of investing now rather than waiting approaches zero thus in the limit of constant returns and an infinitely elastic demand curve an increase in uncertainty tends to raise rather than decrease current investment even if that investment is irreversible it is important to stress that caballero s limiting result treats the firm in isolation and describes the effect of a meanpreserving increase in price uncertainty and not an increase in industry wide demand uncertainty this note shows that in a competitive market the key interactions between irreversibility and uncertainty occur at the industry level and can only be understood by making price and industry output endogenous 3 doing so restores the positive opportunity cost associated with irreversible investment in addition caballero s result is based on a model with convex adjustment costs an innovative aspect of the model is that these costs can be asymmetric thereby allowing for partial or complete irreversibility complete irreversibility corresponds to a cost of massachusetts institute of technology cambridge ma 02139 this work was supported by the national science foundation under grant no ses 8618502 and by mit s center for energy policy research my thanks to julio rotemberg and especially ricardo caballero for very helpful comments and discussions 1then the marginal profit of capital at each time t in the future is max o pt ct where ct is variable cost thus a unit of capital represents a set of all options on future production which are worth more the greater the variance of pt or ct 2for a detailed discussion of this point and a survey of the recent literature on irreversibility and its implications for investment and market evolution see pindyck 1991 3studies that make price endogenous include steven lippman and richard rumelt 1985 avinash dixit 1989 1991 and john leahy 1990

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

the link between inflation and output variability in canada one of the costs of high levels of inflation may be misperceptions of relative prices and excessive volatility in sectoral output this paper therefore examines the relationship between the level of inflation and sectoral output growth variability in canada from 1961 1 to 1995 4 despite the substantial variation in inflation over this period the authors find little evidence of an impact of the level of inflation on variability of sectoral output growth their results indicate that the oil price and the real exchange rate are significantly correlated with the variability of output growth across sectors

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

on high inflation and the allocation of resources abstract this paper formalizes some of the disruptive effects of inflation on the organization of markets rapid inflation induces buyers to speed up purchases which thus inhibits the selection of more adequate trading partners through search this blurs distinctions across firms of different productivities and leads to resource misallocations as inflation causes efficient and inefficient firms to be less distinguishable the incentives to engage in cost reduction are dampened and lower growth results the model could provide a rationale for the large number of bankruptcies and large turnover rates following successful inflation stabilization programs like those of israel bolivia and argentina

non linearity between finance and growth abstract we present a simple model which establishes a non linear and possibly non monotonic relationship between financial development and economic growth applying a threshold regression model to king and levine s q j econ 109 1993 83 data set we find evidence consistent with the theoretical model

partisan and incumbency effects of 1970s congressional redistricting the authors review earlier tests and purpose several new tests of two rival hypotheses concerning the drawing of lines for congressional districts 1 districting is partisan in nature and favors the candidates including incumbents of one party over those of the other and 2 districting is bipartisan in nature and will equally favor incumbents of both parties

same financial development yet different economic growth why we re study the relationship between financial development and real gdp per capita growth in 48 countries what we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable if not negative effect on growth we examine whether or not these impacts are a product of various financial and economic conditional variables our conditional variables consist of financial liberalization two sets of country development dummies crises in banking and currency dummies the creditor protection index as well as the anti director and corruption indices our results clearly show that the conditional variables of financial liberalization high income level and good shareholder protection mitigate the negative impacts of banking development on growth in contrast the conditional variables of middle income level regional latin american sub saharan african and east asian dummies banking and currency crises good creditor protection and higher corruption strengthen the negative impacts of banking development on growth next the conditional variables of middle income level latin american sub saharan african and east asian dummies strengthen the positive impacts of stock market development on growth whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth last we find that the relationship between growth and bank development is better described as a weak inverse ushape this inverse u shape becomes stronger when additional stock market variables are squared thus financial development and growth may in fact be in a nonlinear form

search sticky prices and inflation this paper examines equilibrium in a deflationary environment in a market with free entry where consumers search and firms set prices on individual units of the commodity prices attached to newly produced goods are continuously adjusted prices attached to previously produced goods can only be changed at a cost deflation cuts into the market power created by the need to search for the good thus consumers welfare is inverse u shaped in deflation

another look at the linear q model an empirical analysis of aggregate business capital spending with maintenance expenditures the paper revisits the empirical investment literature which has established that aggregate business fixed investment is not found to be related linearly to marginal or average tobin s q the theoretical background is extended here by developing a supply side model where the depreciation rate of private capital is determined endogenously the firm can either invest in new capital which adds directly to the existing capital stock at the presence of convex adjustment costs or extend the durability of installed capital through maintenance expenditure which affects its depreciation rate the model shows that tobin s q is then a positively related sufficient statistic for both components of aggregate capital expenditures this central implication is tested empirically using aggregate time series survey data from canada on new investment and maintenance expenditures covering the period 1956 93 the estimated relationships produce significant and plausible parameter estimates for the structural parameters of the q model le texte examine la litterature empirique sur l investissement qui a etabli que le niveau d investissement agrege des entreprises en capital fixe n est pas relie de facon lineaire au coefficient moyen ou marginal q de tobin on enrichit l arriere plan theorique en developpant un modele d offre dans lequel le taux de depreciation du capital prive est determine de facon endogene l entreprise peut soit investir dans du capital nouveau ce qui ajoute directement au stock de capital existant soit allonger la vie du capital en place par des depenses de maintenance qui modifient le taux de depreciation le modele montre que le coefficient q de tobin est alors positivement relie aux deux composantes des depenses agregees en capital cette implication importante est mise au test empiriquement en utilisant les series chronologiques en provenance des enquetes de statistiques canada sur les nouveaux investissements et les depenses de maintenance pour la periode 1956 93 les relations estimees produisent des parametres plausibles et significatifs pour les parametres structurels du modele q

investment in new activities and the welfare cost of uncertainty abstract recent literature has shown that trade distortions are associated with first order costs stemming from the induced drop in the formation of new activities we demonstrate that uncertainty may induce similar welfare costs and that these costs apply also to a closed economy this argument is illustrated in romer s model of a dependent economy where foreign direct investment is needed to enable the importation of capital goods and intermediate products used in domestic production we show that knightian uncertainty inhibits the formation of new activities leading to first order losses whereas risk aversion alone leads to second order losses

real wages profit margins and inflation in turkish manufacturing under post liberalization this article reports investigations into the behaviour of gross profit margins mark ups in turkish manufacturing industries for the post 1980 liberalization period in relation to price inflation trade liberalization openness and real wage costs panel data econometrics over 29 subsectors of turkish manufacturing are used over the period 1980 1996 results suggest that profit margins are positively and significantly related both to price inflation and real wage costs however openness is found to have very little impact on profit margins

the direction of causality between financial development and economic growth abstract this paper employs the geweke decomposition test on pooled data of 109 developing and industrial countries from 1960 to 1994 to examine the direction of causality between financial development and economic growth the paper finds that 1 financial development generally leads to economic growth 2 the granger causality from financial development to economic growth and the granger causality from economic growth to financial development coexist 3 financial deepening contributes more to the causal relationships in the developing countries than in the industrial countries 4 the longer the sampling interval the larger the effect of financial development on economic growth 5 financial deepening propels economic growth through both a more rapid capital accumulation and productivity growth with the latter channel being the strongest

the effect of uncertainty on investment timing in a real options model abstract this paper examines the effect of uncertainty on investment timing in a canonical real options model we show that the critical value of a project that triggers the exercise of the investment option exhibits a u shaped pattern against the volatility of the project this is due to the two countervailing risk and return factors in effect we further show that such a u shaped pattern is inherited by the expected time to exercise the investment option thus for relatively safe projects greater uncertainty shortens the expected exercise time and thus enhances investment this is in sharp contrast to the negative investment uncertainty relationship commonly found in the extant literature finally we show that the positive investment uncertainty relationship is more likely for high growth projects than for low growth projects

endogenous growth and intermediation in an archipelago economy a general equilibrium model based on the parable of an economy of many islands shows the market imperfections in the intermediation activity affect economic growth and possibly prevent take off into sustained growth the inhabitants of different islands accumulate heterogeneous assets and transportation type intermediation allows for better allocation of the productive resources the development process is accompanied by a reduction in intermediation costs which induces firms to adopt more efficient techniques and sustains economic growth a laissez faire economy suffers from two distortions the existence of market imperfections and a thick market externality

investment in risky r d programs in the face of climate uncertainty we analyze how the socially optimal technology rd and that uncertainty in damages interacts with uncertainty in the returns to rd and r d that reduces the emissions to output ratio and argue that this is a good representation of r d into fossil fuel technologies for r d programs into non carbon technologies optimal investment is higher in riskier programs our empirical model indicates that the optimal investment in a risky program is about 3 1 2 times larger than in a program with certain returns for r d programs aimed at reducing emissions in fossil fuel based technologies our results show that qualitatively investment is higher in less risky programs under most uncertain damage scenarios our empirical model shows however that the risk profile of fossil fuel based r d programs generally has little quantitative impact on optimal investment the exception is that when the probability of a catastrophe inducing full abatement is very high investment is about twice as high in risky programs compared to programs with certain returns

the consequences of price instability on search markets toward understanding the effects of inflation real price variability depreciates the information about future prices contained in current ones repeat purchase customers have then less incentive to acquire price information the fact that consumers are less well informed allows firms to increase their markups and permits inefficient producers to increase their sales production gets reallocated toward higher cost firms given the well documented correlation between inflation and relative price variability these results help explain some of the costs of inflation copyright 1994 by american economic association

price dispersion inflation and welfare we examine the implications of inflation for both price dispersion and welfare in a monetary search economy in our economy if the degree of buyers incomplete information about prices is fixed both price dispersion and real prices are increasing in inflation as the inflation rate approaches the friedman rule both price dispersion and welfare losses vanish if households choose the number of prices to observe then the optimal inflation rate may exceed the friedman rule as inflation induces search and up to a point raises welfare by eroding market power

zeros and lumps in investment empirical evidence on irreversibilities and nonconvexities the objective of this paper is to investigate if and how capital adjustment departs from the smooth pattern implied by standard model based on convex adjustment costs using norwegian micro data we start by documenting the intermittent and lumpy nature of investment rates we then present two pieces of econometric evidence on these issues first we estimate a discrete hazard model to determine the probability of having an episode of high investment conditional on the length of the interval from the last high investment episode second we estimate a switching regression model that allows for the response of the investment rate to fundamentals to differ across regimes in both cases we investigate the aggregate implications of our results

a quantitative reassessment of the finance growth nexus evidence from a multivariate var abstract the long run relationship between financial development and economic growth is examined in a multivariate vector autoregression var framework using 10 sample countries difficulties surrounding the cross country regressions and bivariate time series studies are outlined the long run financial development and output relationships are identified in a cointegrating framework through tests of over identifying restrictions we find bi directional causality between financial development and economic growth in all the sample countries conclusions that stand distinct from those in the existing empirical literature we attribute our findings to i analysis of a higher dimensional system ii a new method of identifying the long run economic relationships and iii a new approach to long run causality testing

monetary instability the predictability of prices and the allocation of investment an empirical investigation using u k panel data it is often argued that monetary instability reduces the informational content of market signals and thereby hinders the efficient allocation of investment in this paper we use a signal extraction framework to give empirical content to this idea in particular we show why this framework predicts that as monetary uncertainty decreases the cross sectional distribution of investment widens we then explore this hypothesis using panel data information for uk companies over twenty years our data generally support the view that monetary instability may affect investment allocation through its effect on the predictability of prices this abstract was borrowed from another version of this item

the effect of financial development on convergence theory and evidence we introduce imperfect creditor protection in a multicountry schumpeterian growth model the theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier and that all other countries will have a strictly lower long run growth rate we present evidence supporting these and other implications in the form of a cross country growth regression with a significant and sizable negative coefficient on initial per capita gdp relative to the united states interacted with financial intermediation in addition we find that other variables representing schooling geography health policy politics and institutions do not affect the significance of the interaction between financial intermediation and initial per capita gdp and do not show any independent effect on convergence in the regressions our findings are robust to removal of outliers and to alternative conditioning sets estimation procedures and measures of financial development

thresholds of financial development in the euro area we analyse the dynamics of financial development and economic growth in the euro area as these countries went through considerably higher levels of financial development using a balanced panel data of 38 years from 1980 to 2018 we offer new evidence on the finance growth nexus we show the presence of non linearity as there is an inverted u shaped relationship between finance and growth in the long run estimating the thresholds in the finance growth nexus we notice a threshold effect at 74 86 of gdp for domestic credit 51 of gdp for stock turnover ratio and 65 of gdp for stock market capitalisation we notice that exceeding the threshold causes deceleration in economic growth as too much finance results in crowding out effect for productive economic activities the panel granger causality test results show that financial development should be associated with optimal growth performance these findings in the euro area provide some useful policy implications to the emerging and developing economies in designing their financial development strategies

buffer stocks and precautionary savings with loss aversion abstract this paper reexamines buffer stocks and precautionary savings in the presence of loss aversion we assume that agents are disappointment averse as in gul econometrica 59 1991 667 686 we show that the concavity of the marginal utility continues to determine precautionary saving but its effect is of a second order magnitude proportional to the square of the coefficient of variation compared to the first order effect proportional to the coefficient of variation induced by loss aversion we show that a stabilization fund that is rather small when agents are maximizing the conventional expected utility turns out to be rather large with loss aversion

the role of search costs in determining the relationship between inflation and profit margins previous empirical studies have found a negative relationship between inflation and industry profit margins recent theoretical findings however suggest that buyer search costs can significantly impact this relationship we use an actual measure of search cost that varies across wholesale industries to estimate the impact of these costs on the relationship between inflation and markups using firm level data from 57 industries we show that margins increase during inflation if search costs become sufficiently high our findings reconcile the theoretical and empirical literatures on this topic

real options delay vs pre emption do industrial characteristics matter this paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory using panel data from the confederation of british industry cbi industrial trends survey we report ols estimates of the impact of uncertainty on investment where the regressors are augmented by cross sectional averages of the dependent variable and of the individual specific regressors as recently suggested by pesaran pesaran m h 2006 estimation and inference in large heterogeneous panels with a multifactor error structure econometrica 74 967 1012 the cross industry pattern of results is checked for consistency with the pattern predicted by real options theory using a specially constructed data set of industrial characteristics we find that irreversibility is able to predict the pattern detected but only when combined with a measure of the information advantage of delay there is also evidence for expansion options effects industries with high r d and advertising intensities tend to have positive uncertainty effects

industry wide versus firm specific uncertainty and investment british company panel data evidence this paper presents evidence on the prediction that the impacts of firm specific and industry wide uncertainty on investment will be different results show that these work in opposing directions and that the effect of industry specific uncertainty is stronger in concentrated industries

the impact of inflation on budgetary discipline abstract this paper views the budgetary process as a limited contingencies contract between the treasury and the ministers allowing a minister to ask for budget revisions upon costly verification by the treasury the minister may obtain extra funds for significant state verification costs and for low volatility the contract is non contingent for volatility significant enough the contract becomes state contingent it reduces the initial allocation and reduces the threshold associated with budgetary revisions in volatile economics the projected revenue understates the realized budget and the average budget error is positive the model s predictions are confirmed using data from latin america

the effects of advertising on resale price maintenance this research combines the market power and market competition perspectives on advertising under the framework of a generalized theoretical model in minimum resale price maintenance rpm in order to investigate the effects of advertising on rpm using the real options approach the effects of advertising on retail price will impact the value of rpm further influence the incentive of manufacturers to impose rpm through brand penetration and promotional pricing effects advertising is likely to influence rpm under the condition of retail price competition when the brand penetration effect is dominant advertising will discourage manufacturers from imposing rpm advertising will encourage manufacturers to impose rpm when the promotional pricing effect is dominant rpm not only substitutes advertising but also complements advertising

financial development and economic growth evidence from panel unit root and cointegration tests abstract in this paper we investigate the long run relationship between financial depth and economic growth trying to utilize the data in the most efficient manner via panel unit root tests and panel cointegration analysis in addition we use threshold cointegration tests and dynamic panel data estimation for a panel based vector error correction model the long run relationship is estimated using fully modified ols for 10 developing countries the empirical results provide clear support for the hypothesis that there is a single equilibrium relation between financial depth growth and ancillary variables and that the only cointegrating relation implies unidirectional causality from financial depth to growth

thresholds in the finance growth nexus a cross country analysis thresholds of inflation government size trade openness and per capita income for the finance growth nexus are investigated using five year averages of standard variables for 84 countries from 1965 to 2004 the results suggest that i high inflation crowds out positive effects of financial depth on long run growth ii small government sizes hurt the finance growth nexus in low income countries while large government sizes hurt high income countries iii low levels of trade openness are sufficient for finance growth nexus in high income countries but low income countries need higher levels of trade openness for similar magnitudes of the finance growth nexus and iv catch up effects through the finance growth nexus are higher for moderate per capita income levels

undefeated equilibria of the shi trejos wright model under adverse selection abstract decentralized markets where assets are useful as media of exchange are also usually subject to private information to analyze the liquidity and prices of such assets i adapt the shi 1995 trejos and wright 1995 model with lucas trees under adverse selection while most studies focus on either a pooling or separating equilibrium i apply the undefeated equilibrium refinement by mailath et al 1993 to make the selection based on fundamentals under pooling the high quality asset holder accepts a pooled price and under separating signals quality through asset retention applying the refinement results in a regime switch from no information pooling to information revelation separating following a negative shock to the quality or quantity of lemons this change leads to a discontinuous fall in aggregate welfare

volatility and growth credit constraints and the composition of investment abstract how does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth this paper addresses this question within a model where firms engage in two types of investment a short term one and a long term one which contributes more to productivity growth because it takes longer to complete long term investment has a relatively less cyclical return but it also has a higher liquidity risk the first effect ensures that the share of long term investment to total investment is countercyclical when financial markets are perfect the second implies that this share may turn procyclical when firms face tight credit constraints a novel propagation mechanism thus emerges through its effect on the cyclical composition of investment tighter credit can lead to both higher volatility and lower mean growth evidence from a panel of countries provides support for the model s key predictions

optimal capital structure and investment with real options and endogenous debt costs we examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs higher capacity ceteris paribus increases operating leverage and default probability but lowers ex post adjustment costs and generates larger tax shields a key insight is that financial leverage and capacity are substitutes in the debt market equilibrium we develop novel predictions about the effects of capital adjustment costs operating costs and uncertainty on optimal financial leverage and capacity that may potentially help explain ambiguous empirical results in the literature regarding the determinants of capital structure and investment received march 17 2016 editorial decision july 8 2017 by editor itay goldstein

irreversible investment real options and competition evidence from real estate development abstract we examine the extent to which uncertainty delays investment and the effect of competition on this relationship using a sample of 1214 condominium developments in vancouver canada built from 1979 1998 we find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments empirically a one standard deviation increase in the return volatility reduces the probability of investment by 13 percent equivalent to a 9 percent decline in real prices increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development these results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion

monetary and real shocks productive capacity and exchange rate regimes where producers may diversify internationally international diversification is shown to inuuce a positive correlation between the volatility of productivity shocks and investment in the presence of a phillips curve the expected gnp is lower under a floating exchange rate regime than under a fixed exchange rate regime this result applies both for real and monetary shocks attempts to reduce foreign direct investment by capital controls will tend to reduce welfare without affecting our results regarding the ranking of exchange rate regimes implies that in the presence of market power uncertainty tends to reduce investment in the first part of the paper i demonstrate the international diversi fication of production modifies this result foreign direct investment tends to offset the impact of market power on the concavity of the profit function by weakening the relative price effect associated with output changes and by increasing the flexibility of adjusting the variable input hence international diversification of production is shown to induce a positive correlation between the volatility of productivity shocks and investment the second part of the paper utilizes the framework presented in section i to re examine the welfare ranking of exchange rate regimes in the presence of capital mobility as is well appreciated a one dimensional answer regarding the merits of a fixed exchange rate regime will not do justice to the host of issues relevant for making the choice between exchange rate regimes the second part of the paper focuses on one aspect of the debate the linkages between volatility domestic and foreign direct investment and productive capacity a frequent argument in favour of exchange rate stability relates to the potential cost of exchange rate volatility which may work to increase the cost of international trade and to reduce its volume yet efforts to detect the adverse effects of exchange rate volatility on trade volumes in the last two decades have not delivered clear cut results in fact the experience of international trade among the united states canada europe and japan suggests that there is no natural

the determinants of the cost efficiency of electric generating plants a stochastic frontier approach this article provides a detailed analysis of generation plant operating cost efficiency over the period 1988 1997 i estimate a stochastic frontier cost function together with a model of plant inefficiencies to measure the operating efficiencies of individual plants and identify factors that are associated with variations in plant efficiencies i find evidence that plant efficiencies are associated with capacity utilization of the plant the number of plants under utility management and ownership form i also find that regulatory restructuring activity in certain states is associated with improvements in plant operating performance the purpose of this article is to provide a detailed analysis of the operating cost efficiencies of electricity generating plants over the period 1988 1997 i estimate the operating efficiencies of fossil fueled steam generating plants and examine factors that influence plant operating performance i use the estimation procedure of battese and coelli 1995 to simultaneously estimate a stochastic frontier cost function and a function relating plant efficiency levels to plant specific factors and other explanatory variables a comprehensive data set allows me to investigate the influence of capacity utilization ownership form and utility experience on plant efficiency levels since significant regulatory change in the electricity industry had begun during this time period i also investigate the impact of state level regulatory change on plant operating efficiency a number of authors have analyzed the efficiencies of electricity generating plants relative to a best practice frontier including kopp and smith 1980 schmidt and lovell 1979 stevenson 1980 cote 1989 reifschneider and stevenson 1991 hammond 1992 pollitt 1995 and fire grosskopf and logan 1983 1985 these studies find considerable evidence of inefficiency in electricity generation during the 1960s and 1970s the present study provides more recent information regarding generating plant efficiencies during a period of significant regulatory and structural change studies investigating the determinants of power plant departures from the frontier have focused primarily on the effects of ownership mode pollitt 1995 provides a comprehensive review of these studies reifschneider and stevenson 1991 examine the impact on cost efficiency of a number of variables including the capacity utilization of the firm s generating facilities more recently knittel 2001 examines the impact of incentive regulation on plant efficiency levels steiner

product innovation and the decision to invest in fixed capital assets evidence from an sme survey in six european union member states abstract this work explores the relationship between product innovation and the decision to invest in fixed capital assets among a sample of smes in six european union countries located in both peripheral and more central areas we find that the presence of product innovation reduces the probability to invest a firm s size exerts a direct inverted u shape effect on the probability to invest and an indirect effect through the linear effect of size on the probability to innovate the gap in the probability to invest between innovative and non innovative firms increases with size

price dispersion and inflation new facts and theoretical implications abstract in workhorse macroeconomic models price dispersion is a central determinant of welfare the cost of business cycles optimal inflation and the tradeoff between inflation and output stability while price dispersion increases with inflation in the models this relationship is negative in the data due to sales prices the comovement of price dispersion and inflation for regular prices is positive a model with sales can quantitatively match the comovement in the data whereas a range of similar models without sales cannot even for regular prices these findings have important implications for welfare calculations optimal inflation and the effects of monetary shocks

inflation and efficiency in a search economy we present a model in which purely monetary inflation systematically affects efficiency welfare and relative prices the model focuses on the microeconomics of trade in search markets under inflation inflation by increasing the cost of holding money undermines the market s ability to sustain long term customer relationships because those relationships generate the most efficient transactions patterns overall welfare unambiguously declines

time varying impact of uncertainty shocks on the us housing market abstract this paper investigates the impact of uncertainty shocks on the housing market of the united states using the time varying parameter factor augmented vector autoregression tvp favar we use a comprehensive quarterly time series dataset on real economic activity price and financial variables besides housing market variables covering the period 1963 q1 to 2014 q3 in addition to housing prices we also consider variables related to home sales permits and starts in general the results of the cumulative response of housing variables to a one standard deviation positive uncertainty shock at the one four eight and twelve quarter horizon tends to change over time both in terms of sign and magnitude with the uncertainty shock primarily negatively affecting the housing variables in particular prices permits and starts in longer runs i e two and three years ahead horizons

government expenditure and economic growth evidence from g7 countries this paper examines wagner s law of public expenditure which emphasizes economic growth as the fundamental determinant of public sector growth using time series data drawn from the g7 industrialized countries over the sample period 1960 1993 it presents evidence on both the short and long run effects of growth in national income on government expenditure by resorting to recent developments in the theory of cointegrated processes an attempt is also made in this study to examine if wagner s law holds between certain key components of government expenditure and income

cost uncertainty and the rate of investment abstract this paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework former works which have studied this issue like hartman 1972 and abel 1983 1984 1985 have come to the conclusion that this effect is positive since increased price uncertainty raises expected profitability but these studies assume a fixed discount rate which is equivalent to assuming that consumers are risk neutral this paper shows that if consumers are risk averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased

gerrymandering and the voting rights act of 1982 a public choice analysis of turnover in the u s house of representatives the present paper uses various data sets and statistical techniques to examine the outcome of gerrymandering under the voting rights act of 1982 on turnover rates in the u s house of representatives as well as the competitiveness in party primaries for house seats evidence presented here suggests that political redistricting at the federal level namely for u s house seats has tended to favor incumbents in both the party primaries and general elections in fact some results suggest that turnover rates for 1988 are between 8 9 and 10 3 percentage points lower within states that engaged in such redistricting efforts our findings generally support the main tenets of the public choice view of legislator behavior

discrete equilibrium price dispersion an explicit solution of an equilibrium model with price setting firms and searching customers makes possible a number of comparativestatics predictions about how cost differences among firms search costs of customers and taxes will affect the mean and variance of the distribution of market prices another implication of the model is that a firm s demand depends on the difference between its price and the average price in the market

price dispersion price flexibility and repeated purchasing this paper presents a search model in which consumers repeatedly purchase a commodity the repetition of purchases leads to the formation of implicit contracts with sellers which generate a kink in the demand curve facing each seller these kinks can generate equilibrium price dispersion under conditions where single purchase search models predict no price dispersion despite the kinks prices are at least partially flexible in that some and possibly all sellers change their prices in response to changes in production costs or demand dispersion de prix flexibilite des prix et achats repetes ce memoire presente un modele de recherche dans lequel les consommateurs font des achats repete s d un bien la repetition de l achat entraine la formation de contrats implicites avec les vendeurs ceci cree un pli dans la cedule de demande a laquelle chaque vendeur fait face ces plis peuvent engendrer une dispersion des prix d equilibre alors que le meme modele ne predirait aucune dispersion de prix en l absence d achats repet s malgre les plis les prix sont au moins partiellement flexibles puisque certains vendeurs tous peut re peuvent changer leurs prix en reponse a des changements dans les cofuts de production ou dans la demande

is the relationship between financial development and economic growth monotonic evidence from a sample of middle income countries summary we revisit the relationship between financial development and economic growth in a panel of 52 middle income countries over the 1980 2008 period using pooled mean group estimations in a dynamic heterogeneous panel setting we show that there is an inverted u shaped relationship between finance and growth in the long run in the short run the relationship is insignificant this suggests that too much finance can exert a negative influence on growth in middle income countries the finding of a non monotonic effect of financial development on growth is confirmed by estimating a threshold model

search costs sticky prices and markups this article investigates how search costs price stickiness and product durability influence the impact of inflation on firm markups we provide evidence that each of these three factors plays an independent role in influencing the responsiveness of markups to inflation although we find that the direct effect of inflation on markups is negative offsetting positive influences of inflation on markups arise in industries that produce durable experience goods with flexible prices thus our results indicate that markups of industries producing nondurable search goods with sticky prices tend to experience unambiguously negative impacts from inflation

inflation thresholds and the finance growth nexus abstract the robustness of the cross sectional relationship between the size of a country s financial sector and its rate of economic growth is by now well established in this article we examine whether the strength of this relationship varies with the inflation rate using five year averages of standard measures of financial development inflation and growth for 84 countries from 1960 to 1995 a series of rolling panel regressions show that there is an inflation threshold for the finance growth relationship that lies between 13 and 25 percent when inflation exceeds the threshold finance ceases to increase economic growth we also find that the level of financial depth varies inversely with inflation in low inflation environments and that disinflation is associated with a positive effect of financial depth on growth

price dispersion and inflation evidence from israel the paper considers the question whether observed price differentials reflect perceived differences in quality service agreements or location or whether information imperfections can explain this phenomenon it sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion the hypothesis is tested using monthly price data for 13 uniquely defined goods sold in israel between 1971 and 1984 price dispersion is shown to be positively related to the rate of market price inflation since inflation is an unlikely proxy for changes in perceived characteristics the findings support price dispersion theories based on optimally imperfect decision making

firms investment decisions in response to demand and price uncertainty we investigate the effect of demand and price uncertainty on firms planned and realized investment from a panel of manufacturing firms uncertainty measures are derived from firms own expectations about demand and prices and firm s sales we find that demand uncertainty at the time of planning depresses planned and subsequent realized investment firms do not revise their plans due to demand uncertainty at the time of spending suggesting that reducing demand uncertainty will only have lagged effects on investment we do not find any effect of price uncertainty our results are consistent with the behaviour of monopolistic firms with irreversible capital

on the sign of the investment uncertainty relationship understanding the effects of uncertainty over any decision variable has fascinated economists for a long time risk aversion and incomplete markets are likely to make the investment uncertainty relationship negative e g roger craine 1989 joseph zeira 1989 what happens in the absence of risk aversion and incomplete markets is however ambiguous richard hartman 1972 and andrew b abel 1983 1984 1985 found that in the presence of symmetric convex costs of adjustment mean preserving increases in price uncertainty raise investment of a competitive firm as long as the profit function is convex in prices on the other hand the recent literature on irreversible investment e g robert s pindyck 1988 giuseppe bertola 1988 has shown that increases in uncertainty lower investment all these results have been derived under either risk neutrality or complete markets intuition suggests that the explanation for such a difference lies with the asymmetric nature of adjustment costs in the irreversible investment case as compared with the symmetry of the adjustment cost mechanisms proposed by abel and hartman although this intuition is confirmed in this paper asymmetric adjustment costs are shown not to be sufficient to explain why the results differ in fact a more hidden but at least as important difference between these two literatures is that the former assumes perfect competition and constant returns to scale whereas the latter assumes either imperfect competition or decreasing returns to scale or both 2 the purpose of this paper is to highlight the role of the decreasing marginal return to capital assumption due to either imperfect competition or decreasing returns to scale or both in determining the effects of adjustment cost asymmetries on the sign of the response of investment to changes in uncertainty under risk neutrality for this the paper develops a simple model with a cost of adjustment mechanism general enough to consider both symmetric convexity and irreversibility as special cases one of the most important findings is the lack of robustness of the negative relationship between investment and uncertainty under asymmetric adjustment costs3 to changes in the degree of competition in fact when firms are nearly competitive the conclusion of hartman and of abel holds no matter how asymmetric adjustment costs are studying adjustment cost mechanisms has a central role in understanding the dynamics of investment and its business cycle implications but conclusive results about the sign of the instantaneous relationship between uncertainty and investment should not be department of economics columbia university new york ny 10027 i am grateful to giuseppe bertola prajit dutta glen hubbard anil kashyap richard lyons and the referees for their useful comments 1the financial literature on investment has considered risk aversion through a premium in the discount rate determined by the capm capital asset pricing model intertemporal capm or consumption capm however often this discount rate is left unchanged when studying the response of investment to uncertainty changes e g pindyck 1988 pp 974 5 thereby omitting the effect of changes in uncertainty on investment due to risk aversion and incomplete markets 2in the typical version of the irreversible investment problem there is no cost of upward adjustments thus imperfect competition and or decreasing returns to scale are required to bound the size of the firm 3in this paper asymmetric adjustment cost refers to the case in which it is more expensive to adjust downward than upward certainly the opposite case is a trivial extension of the case studied in this paper

adjustment costs uncertainty and the theory of investment the case of non renewable natural resources abstract this paper examines the effects of mineral price and extraction cost uncertainty on the investment program of a competitive resource extracting industry that faces convex costs of adjustment the results show that depletion of mineral reserves will slow down if the marginal adjustment cost function is concave or linear whereas the effect will be ambiguous if the function is convex

interaction between economic and financial development this paper presents a model of financial and economic development which assumes the consumption of real resources by the financial sector financial development occurs endogenously as the economy reaches a critical threshold of economic development compared to financial autarky financial intermediaries allocate savings net of their costs of operation to more productive investments whenever the technology financed by intermediaries is more capital intensive than that operated in financial autarky the growth effect of financial development is ambiguous as a result financial development may be unsustainable however when financial development is sustainable the credit market becomes more competitive and more efficient over time and this could eventually contribute to economic growth nonetheless given monopolistic competition in the financial sector the level of entry into the credit market is generally inefficient for instance with diminishing returns to specialisation entrants might be too few at the early stages of economic development and too many later on

structural constraints on partisan bias under the efficient gerrymander partisan bias occurs when the translation of the popular vote into legislative seats differs between competing parties this paper contains a theoretical and empirical analysis of the consequences of an efficient gerrymander for the partisan bias of an electoral system under partisan apportionment bias is shown to depend on some structural features of the electoral environment namely the size of the voting population and the number of single member districts within a political jurisdiction a statistical analysis reveals the predicted relationships in data on congressional elections across states in the 1950 1984 period this paper highlights the importance of some measurable features of the electoral environment for determining bias and provides an indirect test of partisan gerrymandering in congressional apportionment processes

inflation and efficiency in search markets this paper examines how inflation affects efficiency and output in monopolistically competitive search markets it formalizes the conventional wisdom linking higher inflation price dispersion and increased resources devoted to search it also brings to light the induced exit of arms which reduces rent dissipation but the most important effect of inflation is how it alters the distribution of real transactions prices whether this reduces or promotes efficiency and output is shown to depend critically on preferences and market structure and especially on whether search costs are large or small relative to consumer surplus

investments of uncertain cost abstract this paper examines irreversible investment decisions when projects take time to complete and are subject to two types of cost uncertainty the first is technical uncertainty i e uncertainty over the physical difficulty of completing a project which is only resolved as the investment proceeds the second is input cost uncertainty i e uncertainty over the prices of construction inputs or over government regulations affecting construction costs which is external to the firm these two types of uncertainty have very different effects on the investment decision a simple investment rule is derived that maximizes firm value and is used to analyze the decision to start or continue building a nuclear power plant during the 1980s

does one size fit all a reexamination of the finance and growth relationship abstract recent research has found a strong positive effect of a country s financial development on economic growth we propose that this relationship may vary according to the level of financial development divided in three regions in the low region countries with very low levels of financial development additional improvements in financial markets have an uncertain effect on growth in the intermediate region financial development has a large positive effect on growth finally in the high region the effect is positive but smaller we examine a panel of 74 countries using generalized method of moments gmm dynamic panel techniques and find support for the different regions

aggregate uncertainty investment and asymmetric adjustment in the uk manufacturing sector theory suggests that the level of uncertainty facing firms should affect both the rate of adjustment to and the steady state level of investment although there is ambiguity about the sign of the effect a non linear model of investment behaviour incorporating time varying adjustment speeds with threshold effects is estimated for the uk manufacturing sector the most general non linear specification is found to be most congruent with the data uncertainty has a large and significant effect on both levels and rates of adjustment

search with learning from prices does increased inflationary uncertainty lead to higher markups aggregate cost uncertainty arising from real shocks or unanticipated inflation reduces the informativeness of prices by scrambling relative and aggregate variations but when agents can acquire additional information such increased noise may in fact lead them to become better informed and price competition will intensify we examine these issues in a model of search with learning where consumers search optimally from an unknown price distribution while firms price optimally given consumers search rules we show that the decisive factor in whether inflation variability increases or reduces the incentive to search and thereby market efficiency is the size of informational costs

volatility and investment interpreting evidence from developing countries we uncover a significant negative correlation between various volatility measures and private investment in developing countries even when adding the standard control variables no such correlation is uncovered when the investment measure is the sum of private and public investment spending indeed public investment spending is positively correlated with some ineasures of volatility these findings suggest that the detrimental impact of volatility on investment may be easier to detect using disaggregated data we provide several possible interpretations for our findings nonlinearities in preferences or budget constraints can cause volatility to have first order negative effects on private investment