hierarchical organization and incentives abstract we study decentralization in public decision making as the possibility for local authorities to sign incentive contracts with local agents in a context of asymmetric information we first review some theoretical arguments put forward for the optimality of decentralized structures we then present a model of organization of incentive policy in the eu context where national authorities have better information on their agents but less bargaining power than central authorities at the community level we show the complementarities between both levels of regulation

incomplete contracts and privatization the paper offers a selective survey on the incomplete contracts approach to privatization furthermore a simple model of privatization to an owner manager is developed in which different allocations of ownership rights lead to different allocations of inside information about the firm which in turn affect allocative and productive efficiency in this model privatization is a commitment device of the government to credibly reward the manager for a successful cost reduction and to harden his budget constraint

the quantitative importance of news shocks in estimated dsge models we estimate a dynamic stochastic general equilibrium dsge model with several frictions and both unanticipated and news shocks using quarterly u s data from 1954 to 2004 and bayesian methods we find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output consumption and investment growth interest rate and the relative price of investment the unanticipated shock to the marginal efficiency of investment is the dominant shock accounting for over 45 of the variance in output growth news shocks account for less than 15 of the variance in output growth within the set of news shocks nontechnology sources of news dominate technology news with wage markup news shocks accounting for about 60 of the variance share of both hours and inflation we find that in the estimated dsge model i the presence of endogenous countercyclical price and wage markups due to nominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions and ii while there is little change in the estimated contributions of technology news when we restrict wealth effects on labor supply the contributions of nontechnology news shocks are relatively more sensitive

pricing and hedging of derivatives in contagious markets it is well documented that stock markets are contagious a negative shock to one market increases the probability of adverse shocks to other markets we model this contagion effect by including mutually exciting jump processes in the dynamics of the indexes log returns on top of this we add a stochastic volatility component to the dynamics it is important to take the contagion effect into account if derivatives written on a basket of assets are to be priced or hedged due to the affine model specification the joint characteristic function of the log returns is known analytically and for two specifications we detail how the model can be calibrated efficiently to option prices in total we calibrate over an extended period of time the specifications to options data on four us stock indexes and show how the models achieve satisfactory pricing errors we study the effect of contagion on multi asset derivatives prices and show how for certain derivatives the impact is heavy moreover we derive hedge ratios for european put and call options and perform a numerical experiment which illustrates the impact of contagious jumps on option prices and hedge ratios mutually exciting processes have been analyzed for multivariate intensity modeling for the purpose of credit derivatives pricing but have not been used for pricing hedging options on equity indexes

volatility effects of news shocks in new keynesian models with optimal monetary policy abstract this paper studies the volatility implications of anticipated cost push shocks i e news shocks in a hybrid new keynesian model both under optimal unrestricted and discretionary monetary policy in both regimes the volatility of the output gap and the central bank s loss are increasing with the anticipation horizon under sufficiently flexible inflation targeting by contrast under nearly strict inflation targeting an anticipated cost push shock leads to a smaller central bank s loss than an unanticipated shock of the same size if additionally the phillips curve is sufficiently backward looking

communication in federal politics universalism policy uniformity and the optimal allocation of fiscal authority the paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy relevant information depending on the type of policy under consideration communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible this generates inefficient federal policy choices that are often endogenously characterized by overspending universalism and uniformity building on these findings i develop a theory of fiscal de centralization which revisits the work of oates in a world of incomplete information and strategic communication empirical results from a cross section of us municipalities are consistent with the predicted pattern of spending

incentives for separation and incentives for public good provision in this paper i examine how the incentives of regions to unite and to separate are related to the incentives to provide public goods separation allows for greater influence over the nature of political decision making while unification allows regions to exploit economies of scale in the provision of public goods from a social welfare perspective there are excessive incentives for separation and for the provision of public goods when incentives for public good provision are not taken into account however these incentives can be misinterpreted as incentives for separation

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

central governance or subsidiarity a property rights approach to federalism abstract we consider a model where one region in a federation can realize a public project after undertaking value increasing investments while negotiations on the federal level ensure that an efficient project size is implemented in equilibrium non contractibility of investments causes the overall outcome to differ across regimes if the region bears the entire implementation costs of its policies underinvestment prevails and subsidiarity centralized governance is superior when spillovers are weak strong conversely if linear cost sharing arrangements are feasible decentralized authority often admits a socially optimal outcome while centralized authority with majority or unanimity rule does not

modeling financial contagion using mutually exciting jump processes we propose a model to capture the dynamics of asset returns with periods of crises that are characterized by contagion in the model a jump in one region of the world increases the intensity of jumps both in the same region self excitation as well as in other regions cross excitation generating episodes of highly clustered jumps across world markets that mimic the observed features of the data we develop and implement moment based estimation and testing procedures for this model the estimates provide evidence of self excitation both in the us and the other world markets and of asymmetric cross excitation with the us market typically having more influence on the jump intensity of other markets than the reverse we propose filtered values of the jump intensities as a measure of market stress and examine their out of sample forecasting abilities

on the dynamic implications of news shocks abstract this paper assesses the time series properties of rational expectations models with news shocks we show that news shocks allows to substantially improve the dynamic behavior of such models in generating higher persistence we also warn the use of svar models to uncover news shocks

can news be a major source of aggregate fluctuations a bayesian dsge approach we examine whether the news shocks as explored in beaudry and portier 2004 can be a major source of aggregate fluctuations for this purpose we extend a dynamic stochastic general equilibrium model a la christiano eichenbaum and evans 2005 by allowing news shocks on the total factor productivity and estimate the model using bayesian methods estimation results on the japanese and u s economies show that 1 the news shocks play an important role in business cycles 2 a news shock with a longer forecast horizon has larger effects on nominal variables and 3 the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks

financial contagion and asset pricing abstract asset market interconnectedness can give rise to significant contagion risks during periods of financial crises that extend beyond the risks associated with changes in volatilities and correlations these channels include the transmission of shocks operating through changes in the higher order comoments of asset returns including changes in coskewness arising from changes in the interaction between volatility and average returns across asset markets these additional contagion channels have nontrivial implications for the pricing of options through changes in the payoff probability structure and more generally in the management of financial risks the effects of incorrectly pricing risk has proved to be significant during many financial crises including the subprime crisis from mid 2007 to mid 2008 the great recession beginning 2008 and the european debt crisis from 2010 using an exchange options model the effects of changes in the comoments of asset returns across asset markets are investigated with special emphasis given to understanding the effects on hedging risk during financial crises the results reveal that by not correctly pricing the risks arising from higher order moments during financial crises there is significant mispricing of options while hedged portfolios during noncrisis periods become exposed to price movements in times of crises

federal fiscal constitutions risk sharing and redistribution the paper studies the political and economic determinants of regional public transfers specifically it focuses on how such transfers are shaped by alternative fiscal constitutions where a constitution is an allocation of fiscal instruments across different levels of governments plus a procedure for the collective choice of these instruments realistic restrictions on fiscal instruments introduce a tradeoff between risk sharing and redistribution different constitutions produce very different results in particular a federal social insurance scheme chosen by voting provides overinsurance whereas an intergovernmental transfer scheme chosen by bargaining provides underinsurance

the spirit of capitalism and expectation driven business cycles abstract while news shocks are believed to be instrumental in explaining business cycles many existing models fail to predict a boom in consumption investment employment output and asset prices in response to good news about future productivity a model with the intrinsic desire for wealth is shown to generate the aforementioned responses a news driven boom is explained predominantly by an expansion of labor supply and is characterized by the falling real wage the simulated model not only captures well conventional business cycle statistics but also reproduces countercyclical real returns and hump shaped responses of hours and output to an unexpected technology shock

identification and estimation in non fundamental structural varma models the basic assumption of a structural vector autoregressive moving average svarma model is that it is driven by a white noise whose components are uncorrelated or independent and can be interpreted as economic shocks called structural shocks when the errors are gaussian independence is equivalent to non correlation and these models face two identification issues the first identification problem is static and is due to the fact that there is an infinite number of linear transformations of a given random vector making its components uncorrelated the second identification problem is dynamic and is a consequence of the fact that even if a svarma admits a non invertible moving average ma matrix polynomial it may feature the same second order dynamic properties as a varma process in which the ma matrix polynomials are invertible the fundamental representation the aim of this paper is to explain that these difficulties are mainly due to the gaussian assumption and that both identification challenges are solved in a non gaussian framework if the structural shocks are assumed to be instantaneously and serially independent we develop new parametric and semi parametric estimation methods that accommodate non fundamentalness in the moving average dynamics the functioning and performances of these methods are illustrated by applications conducted on both simulated and real data

news driven business cycles insights and challenges there is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations the news view of business cycles offers a formalization of this perspective in this paper we discuss mechanisms by which changes in agents information due to the arrival of news can cause business cycle fluctuations driven by expectational change and we review the empirical evidence aimed at evaluating their relevance in particular we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations while at the same time we emphasize the many challenges that must be addressed before a proper assessment of the role of news in business cycles can be established jel d83 d84 e13 e32 o33

booms and busts in economic activity a behavioral explanation booms and busts in economic activity are a regular occurrence they lead to a strong empirical regularity i e that output gaps and output growth are non normally distributed mainstream macroeconomic models explain this phenomenon by invoking exogenous shocks that are non normally distributed this is not a very satisfactory explanation as it shifts our ignorance one step further i propose an explanation based on a behavioral macroeconomic model in which agents are assumed to have limited cognitive abilities and thus develop different beliefs this model produces waves of optimism and pessimism in an endogenous way animal spirits and provides for a better endogenous explanation of the observed non normality in output movements i also analyze the implications for monetary policy

does asset ownership always motivate managers outside options and the property rights theory of the firm this paper studies the grossman hart moore ghm property rights approach to the theory of the firm under alternating offers bargaining when managers can pursue other occupations while negotiating over the division of the gains from cooperation the ghm results obtain if taking the best alternative job terminates bargaining outcomes are very different sometimes an agent with an important investment decision should not own the assets he works with sometimes independent assets should be owned together sometimes strictly complementary assets should be owned separately

decentralization externalities and efficiency in the competitive model externalities lead to inefficiencies and inefficiencies increase with the size of externalities however as argued by coase these problems may be mitigated in a decentralized system through voluntary coordination we show how coordination is limited by the combination of two factors respect for individual autonomy and the existence of private information together they imply that efficient outcomes can only be achieved through coordination when external effects are relatively large moreover there are instances in which coordination cannot yield any improvement at all despite common knowledge that social gains from agreement exist this occurs when external effects are relatively small and this may help to explain why coordination is so seldom observed in practice when improvements are possible we describe how simple subsidies can be used to implement second best solutions and explain why standard solutions such as pigovian taxes cannot be used possible extensions to issues arising in the structure of research joint ventures assumptions in the endogenous growth literature and the location of environmental hazards are also described

externalities vs internalities a model of political integration abstract decentralized government leads to inter regional externalities whereas an integrated jurisdiction solves the externality problem centralized government entails other costs in particular a neglect for minority interests the paper models formally the trade off between these two forces in determining the optimum as well as the equilibrium design of jurisdictions both the relative size of regions and the distribution of tastes are shown to be important parameters of the problem

no news in business cycles this paper uses a structural large dimensional factor model to evaluate the role of news shocks shocks with a delayed eect on productivity in generating the business cycle

accountability and decentralisation in government an incomplete contracts model this paper approaches the question of the appropriate level of decentralisation of power in government as a problem in the allocation of control rights under incomplete contracts the model of the paper compares allocations of power to local central and regional government as alternative means of motivating governments to act in the interests of citizens centralisation allows benefits from policy coordination but has costs in terms of diminished accountability which can be precisely defined as the reduced probability that the welfare of a given region can determine the re election of the government the model is extended to allow for conflicts of interest within regions and externalities between central and local governments in a federation it is also applied to determining levels of fiscal transfer between localities and to circumstances where governments may act as leviathans appropriating resources for their own use

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

inflation targeting rules history dependent or forward looking abstract this note discusses the inflation targeting strategy if price setting gives rise to a hybrid phillips curve the strategy is inverted relative to private sector pricing behavior if private sector price setting is backward looking policy should be forward looking and vice versa

on the de stabilizing effects of news shocks this paper analyzes the impacts of news shocks on macroeconomic volatility whereas anticipation amplifies volatility in any purely forward looking model such as the baseline new keynesian model the results are ambiguous when including a backward looking component in addition to these theoretical findings we use the estimated model of smets and wouters 2003 to provide numerical evidence that news shocks increase the volatility of key macroeconomic variables in the euro area when compared to unanticipated shocks

a simple dynamic decentralized leadership model with private savings and local borrowing regulation abstract this paper considers a simple dynamic decentralized leadership model with local borrowing and regional productivity enhancing investment in this model the central government is benevolent but cannot commit to ex post intergovernmental transfer policies while local governments act strategically after accounting for the ex post motives of the central government we then investigate inefficiency in the subgame perfect equilibrium we analyze the effect of central control on local borrowing and show that central control is of no benefit because ex ante local taxation works to offset it we find the model yields different policy implications that central control is effective when extended to the case of residential mobility

optimal monetary policy in a new keynesian model with animal spirits and financial markets this article presents a macro finance interaction model that integrates a nkm with bounded rationality and an agent based financial market model we derive four interactive channels between the two sectors where two channels are strictly microfounded we analyze the impact of the different channels on economic stability and derive optimal conventional and unconventional monetary policy rules we find that coefficients of optimal taylor rules do not significantly change if financial market stabilization becomes part of the central bank s objective function additionally we show that rule based backward looking monetary policy creates huge instabilities if expectations are boundedly rational our model is externally validated by showing that it generates fat tailed output growth rates

information revelation and strategic delay in a model of investment we model investment as an n player game with a pure informational externality each player s payoff depends only on his own action and the state of nature however because a player s action reveals his private information players wait to see what other players will do equilibrium is inefficient because delay is costly and information is imperfectly revealed we characterize the unique symmetric perfect bayesian equilibrium and study the robustness of delay which turns out to be sensitive to the reaction speed and the number of players we establish the following results i when the period length is very short the game ends very quickly and there is a form of herding or informational cascade which results in a collapse of investment ii as the period length increases the possibility of herding disappears iii as the number of players increases the rate of investment and the information flow are eventually independent of the number of players adding more players simply increases the number who delay iv in the limit the time profile of investment is extreme a period of low investment followed either by an investment surge or a collapse

news shocks or parametric indeterminacy an observational equivalence result in linear rational expectations models abstract this paper studies identification in linear rational expectations models with news shocks we show that news driven models and indeterminate equilibrium economies with i i d fundamentals are observationally equivalent this finding calls for carefully designing empirical investigations of news shocks in estimated dsge models

the architecture of federations constitutions bargaining and moral hazard abstract the paper studies a federal system where a a region provides non contractible inputs into the social benefits from a public policy project with spillovers to other regions and b where political bargaining between different levels of government may ensure efficient decision making ex post allowing intergovernmental grants to be designed optimally we ask whether project authority should rest with the region or with the central government centralization is shown to dominate when governments are benevolent with regionally biased governments both centralization and decentralization yield inefficiencies and the second best institution depends on parameter values if political bargaining is prohibited when bargaining is feasible however the first best can often be achieved under decentralization but not under centralization at the root of this dichotomy is the alignment of decision making over essential inputs and project size under decentralized governance and their misalignment under centralization

interregional redistribution and mobility in federations a positive approach the paper studies the effects and the determinants of interregional redistribution in a model of residential and political choice we find that paradoxical consequences of inter jurisdictional transfers arise if people are mobile while self sufficient regions are nec essarily identical with respect to policies and average incomes in our model interregional redistribution always leads to the divergence of regional policies and per capita incomes thus interregional redistribution prevents interregional equality at the same time however transfers may allow for more interpersonal equality among the inhabitants of each region the voting population may therefore in a decision over the fiscal constitution deliberately implement such a transfer scheme to foster regional divergence empirical evidence from panel data from oecd countries and candian provinces is consistent with the theory