coalitional manipulation on networks abstract we study allocation rules that are robust to coalitional manipulation by transferring merging or splitting individual characteristics among coalition partners e g merging or splitting claims in bankruptcy problems coalition formation is restricted by an exogenous network a non directed graph so that only connected subsets of agents can form a coalition we offer a full characterization of non manipulable rules without any assumption on the network structure this result yields a variety of useful corollaries for specific networks such as complete network trees and networks without a bridge and corollaries for specialized models dealing with bankruptcy surplus sharing cost sharing income redistribution social choice with transferable utility etc

sharing the proceeds from a hierarchical venture we consider the problem of distributing the proceeds generated from a joint venture in which the participating agents are hierarchically organized we introduce and characterize a family of allocation rules where revenue bubbles up in the hierarchy the family is flexible enough to accommodate a no transfer rule where no revenue bubbles up and a full transfer rule where all the revenues bubble up to the top of the hierarchy intermediate rules within the family are reminiscent of popular incentive mechanisms for social mobilization our benchmark model refers to the case of linear hierarchies but we also extend the analysis to the case in which hierarchies may convey a general tree structure and include joint ownerships

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

multi issue allocation situations abstract this paper introduces a new class of transferable utility games called multi issue allocation games these games arise from various allocation situations and are based on the concepts underlying the bankruptcy model as introduced by o neill math social sci 2 1982 345 in this model a perfectly divisible good estate has to be divided amongst a given set of agents each of whom has some claim on the estate contrary to the standard bankruptcy model the current model deals with situations in which the agents claims are multi dimensional where the dimensions correspond to various issues it is shown that the class of multi issue allocation games coincides with the class of non negative exact games the run to the bank rule is introduced as a solution for multi issue allocation situations and turns out to be shapley value of the corresponding game finally this run to the bank rule is characterised by means of a consistency property in the spirit of o neill

cyclical and causal relations between real wages and employment in the eu this paper analyses and compares the joint behaviour of real wages and employment over the business cycle in the european union eu economies using both annual and quarterly data since 1960 further investigation of the cointegrating properties and the existence of causal effects in the real wage employment relation is undertaken by employing appropriate var models the evidence suggests weak procyclical or acyclic behaviour of real wages relative to cyclical employment in the quarterly data and stronger procyclicality in the annual data thus confirming the dunlop tarshis result for the majority of the eu economies with a few exceptions no cointegrating relations were detected while the granger causality tests suggest either weak or lack of unidirectional causality finally the sensitivity analysis showed that the filtering method has not much influence on the results but the choice of deflator may overturn them in certain cases

non manipulable division rules in claim problems and generalizations abstract when resources are divided among agents the characteristics of the agents are taken into consideration a simple example is the bankruptcy problem where the liquidation value of a bankrupt firm is divided among the creditors based on their claims we characterize division rules under which no group of agents can increase the total amount they receive by transferring their characteristics within the group by allowing agents characteristics to be multi dimensional and choosing the meaning of variables appropriately our model can subsume a number of existing and new allocation problems such as cost sharing social choice with transferable utilities income redistribution bankruptcy with multiple types of assets probability updating and probability aggregation a number of existing and new results in specific problems are obtained as corollaries

capital flows and real exchange rate fluctuations following spain s entry into the european community abstract spain s 1986 entry into the european community was followed by a dismantling of restrictions on international capital flows initial trade deficits and real exchange rate appreciation were followed by trade surpluses and real exchange rate depreciation this paper analyzes spain s financial liberalization using a dynamic general equilibrium model with a traded and nontraded good where a capital poor country opens itself to its capital rich neighbors a carefully calibrated model has trouble accounting for the large changes in relative prices observed given the small changes in quantities variants of the model with frictions in factor mobility between sectors fare better

the impossibility of a progressive tax structure abstract when households are identical in all respects other than income a non decreasing average tax rate is both necessary and sufficient for post tax incomes to be always at least as equal as pre tax incomes this paper investigates whether this well known result can be extended to households with different needs a tax structure which never increases inequality in the lorenz sense is shown to be unable to discriminate between household types if in addition the tax structure never reduces the relative income of the poorest member of the neediest group of households then the same proportional tax must be applied to all households and redistribution is impossible either within or between groups of households with differing needs a similar conclusion is reached using conventional equivalence scale arguments and also applies when the parameters of the tax schedules are determined endogenously we discuss the significance of this impossibility result and its implications for tax design

an axiomatic approach to systemic risk systemic risk refers to the risk of collapse of an entire complex system as a result of the actions taken by the individual component entities or agents that comprise the system systemic risk is an issue of great concern in modern financial markets as well as more broadly in the management of complex business and engineering systems we propose an axiomatic framework for the measurement and management of systemic risk based on the simultaneous analysis of outcomes across agents in the system and over scenarios of nature our framework defines a broad class of systemic risk measures that accomodate a rich set of regulatory preferences this general class of systemic risk measures captures many specific measures of systemic risk that have recently been proposed as special cases and highlights their implicit assumptions moreover the systemic risk measures that satisfy our conditions yield decentralized decompositions i e the systemic risk can be decomposed into risk due to individual agents furtherm

finance and business cycles the credit driven household demand channel what is the role of the financial sector in explaining business cycles this question is as old as the field of macroeconomics and an extensive body of research conducted since the global financial crisis of 2008 has offered new answers the specific idea put forward in this article is that expansions in credit supply operating primarily through household demand have been an important driver of business cycles we call this the credit driven household demand channel while this channel helps explain the recent global recession it also describes economic cycles in many countries over the past 40 years

monitoring vulnerability and impact diffusion in financial networks abstract in this paper we propose novel risk related network measurements to identify the roles that financial institutions play as potential targets or sources of contagion we derive theoretical properties and provide a clear systemic risk interpretation for the proposed measures devised upon the notion of communicability in networks we introduce the impact susceptibility index which indicates whether market participants are locally or remotely vulnerable we show how this index can be used as a financial stability monitoring tool and apply it to analyze the brazilian financial market we find that non banking institutions are potentially remotely vulnerable in certain periods while banking institutions are not susceptible to indirect impacts to address the perspective of market participants as sources of contagion we propose the impact diffusion influence index which captures the potential influence of financial institutions on propagating impacts in the network we unveil the presence of a portion of small medium banking institutions that is consistently more influential than large banks in potentially diffusing impacts throughout the network regarding financial system stability regulators should identify the entities that play these two roles as they can render the system more risky

backtesting marginal expected shortfall and related systemic risk measures this paper proposes an original approach for backtesting systemic risk measures this backtesting approach makes it possible to assess the systemic risk measure forecasts used to identify the finan

progressive taxation and the equal sacrifice principle abstract a classical problem in public finance is when does equal sacrifice imply progressive taxation suppose that a tax schedule imposes equal sacrifice on all taxpayers in loss of utility and that this property is preserved under re indexing of the schedule then the utility function must exhibit constant relative risk aversion i e it must be logarithmic or a power function if equal sacrifice relative to such a utility function holds for all taxable incomes and if tax rates do not exceed 100 percent then the degree of relative risk aversion must be at least unity and the tax must be nonregressive

last bank standing what do i gain if you fail banks are highly leveraged institutions potentially attracted to speculative lending even without deposit insurance a counterbalancing incentive to lend prudently is the risk of loss of charter value which depends on future rents we show in a dynamic model that current concentration does not reduce speculative lending and may in fact increase it in contrast a policy of temporary increases in market concentration after a bank failure by promoting a takeover of failed banks by a solvent institution is very effective by making speculative lending decisions strategic substitutes it grants bankers an incentive to remain solvent subsequent entry policy fine tunes the trade off between the social costs of reduced competition and the gain in stability

energy and resource allocation a dynamic model of the dutch disease it is well known that a domestic resource discovery gives rise to wealth effects that cause a squeeze of the tradeable good sector of an open economy the decline of the manufacturing sector following an energy discovery has been termed the dutch disease and has been investigated in many recent studies our model extends the principally static analyses to date by allowing for 1 short run capital specificity and long run capital mobility 2 international capital flows and 3 far sighted intertemporal optimizing behaviour by households and firms the model is solved by numerical simulation

priority rules and other asymmetric rationing methods in a rationing problem each agent demands a quantity of a certain commodity and the available resources fall short of total demand a rationing method solves this problem at every level of resources and individual demands we impose three axioms consistency with respect to variations of the set of agents upper composition and lower composition with respect to variations of the available resources in the model where the commodity comes in indivisible units the three axioms characterize the family of priority rules where individual demands are met lexicographically according to an exogeneous ordering of the agents in the more familiar model where the commodity is divisible these three axioms plus scale invariance independence of the measurement unit characterize a rich family of methods it contains exactly three symmetric methods giving equal shares to equal demands these are the familiar proportional uniform gains and uniform losses methods the asymmetric methods in the family partition the agents into priority classes within each class they use either the proportional method or a weighted version of the uniform gains or uniform losses methods

risk in a large claims insurance market with bipartite graph structure we model the influence of sharing large exogeneous losses to the reinsurance market by a bipartite graph using pareto tailed claims and multivariate regular variation we obtain asymptotic results for the value at risk and the conditional tail expectation we show that the dependence on the network structure plays a fundamental role in their asymptotic behaviour as is well known in a nonnetwork setting if the pareto exponent is larger than 1 then for the individual agent reinsurance company diversification is beneficial whereas when it is less than 1 concentration on a few objects is the better strategy an additional aspect of this paper is the amount of uninsured losses that are covered by society in our setting of networks of agents diversification is never detrimental to the amount of uninsured losses if the pareto tailed claims have finite mean diversification is never detrimental to society or individual agents by contrast if the pareto tailed claims have infinite mean a conflicting s

exchange rate based inflation stabilization the initial real effects of credible plans abstract this paper studies the initial effects of exchange rate based stabilization programs within a dynamic general equilibrium model of a small open economy in which inflation acts as a tax on intermediate transactions and capital accumulation is subject to convex adjustment costs and gestation lags the model replicates the typical pattern of slow inflation convergence sustained real exchange rate appreciation trade balance deterioration and expansion in domestic spending followed by a deflationary slowdown without resorting to sticky prices imperfect credibility or adaptive expectations calibrated versions of the model are compared with the initial effects of the argentine convertibility plan of april 1991

how does credit supply expansion affect the real economy the productive capacity and household demand channels credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand in this study we develop a test to determine if the household demand channel is present and we implement the test using both a natural experiment in the united states in the 1980s and an international panel of 56 countries over the last several decades consistent with the importance of the household demand channel we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods with limited effects on tradable sector employment such credit expansions amplify the business cycle and lead to more severe recessions

axiomatic characterizations of the cea solution for rationing problems abstract situations abound in the real world where aggregate demand for a commodity exceeds aggregate supply when such situations of excess demand occur what is required is some kind of rationing the literature on rationing problems has an interesting origin in the babylonian talmud the purpose of this paper is to characterize axiomatically and analyze the constrained equal award solution for rationing problems

hierarchical outcomes and collusion neutrality on networks abstract we investigate tu game solutions that are neutral to collusive agreements among players a collusive agreement binds collusion members to act as a single player and is feasible when they are connected on a network collusion neutrality requires that no feasible collusive agreement can change the total payoff of collusion members we show that on the domain of network games there is a solution satisfying collusion neutrality efficiency and null player property if and only if the network is a tree considering a tree network we show that affine combinations of hierarchical outcomes demange 2004 van den brink 2012 are the only solutions satisfying the three axioms together with linearity as corollaries we establish characterizations of the average tree solution equally weighted average of hierarchical outcomes one established earlier in the literature and the others new

fair allocation of disputed properties we model problems of allocating disputed properties as generalized exchange economies in which agents have preferences and claims over multiple goods and the social endowment of each good may not be sufficient to satisfy all individual claims in this context we investigate procedural and end state principles of fairness their implications and relations to do so we explore procedural allocation rules represented by a composition of a rights assignment mechanism to assign each profile of claims individual property rights over the endowment and walrasian or other individually rational exchange rule using variants of fairness based on no envy as end state principles we provide axiomatic characterizations of the three focal egalitarian mechanisms known in the literature on rationing problems as constrained equal awards constrained equal losses and proportional mechanisms our results are connected to focal contributions in political philosophy and also provide rationale for market based environ mental policy instruments such as cap and trade schemes and personal carbon trading and moral foundation for the three proposals to allocate ghg emission rights known as the equal per capita sharing the polluter pays principle and the equal burden sharing the victims pay principle

financial fragility in small open economies firm balance sheets and the sectoral structure episodes of large capital inflows in small open economies are often associated with a shift of resources from the tradable to the non tradable sector and sometimes lead to balance of payments crises this article builds a two sector dynamic model to study the evolution of the sectoral structure and its impact on financial fragility the model embeds a static mechanism of balance of payments crisis which produces multiple equilibria within a single time period when the non tradable sector is large enough compared to the tradable sector the article studies the dynamics induced by an increase in financial openness it shows that the relative size of the non tradable sector overshoots which makes the economy more likely to be financially fragile during the transitory dynamics using an extended version of the model the article conducts a quantitative analysis and shows that this mechanism accounts well for several episodes of large capital inflows that led to financial crises

inflation differentials between spain and the emu a dsge perspective this paper estimates a dynamic stochastic general equilibrium model of a currency union with nominal rigidities to explain the sources of inflation differentials between the economic monetary union emu and one of its member countries spain the paper finds that productivity shocks account for 85 of the variability of the inflation differential demand shocks explain a large fraction of output growth volatility but not variability in inflation differentials in addition the estimated model finds evidence that inflation dynamics are different across countries in the nontradable sector only finally the balassa samuelson effect does not appear to be an important driver of the inflation differential during the emu period

dualism and macroeconomic volatility this paper develops a simple macroeconomic model that shows that combining capital market imperfections together with unequal access to investment opportunities across individuals can generate endogenous and permanent euctuations in aggregate gdp investment and interest rates reducing inequality of access may be a necessary condition for macroeconomic stabilization moreover countercyclical escal policies have a role to play in our model savings are underutilized in slumps because of the limited debt capacity of potential investors therefore the government should issue public debt during recessions in order to absorb those idle savings and enance investment subsidies or tax cuts for investors the most important single fact about saving and investment activities is that in our industrial society they are generally done by different people and for different reasons for years there might tend to be too little investment leading to deeation losses excess capacity and unemployment for other years there might tend to be too much investment leading to periods of chronic ineation unless prudent and proper public policies in the escal and monetary eelds are followed paul a samuelson economics 8th edition 1970 pp 196 198

estimating bilateral exposures in the german interbank market is there a danger of contagion abstract credit risk associated with interbank lending may lead to domino effects where the failure of one bank results in the failure of other banks not directly affected by the initial shock recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages we use balance sheet information to estimate a matrix of bilateral credit relationships for the german banking system and test whether the breakdown of a single bank can lead to contagion we find that in the absence of a safety net there is considerable scope for contagion that could affect a large proportion of the banking system the financial safety net in this case institutional guarantees for saving banks and cooperative banks considerably reduces but does not eliminate the danger of contagion even so the failure of a single bank could lead to the breakdown of up to 15 of the banking system in terms of assets

an experimental study of the investment implications of bankruptcy laws in bankruptcy laws proportionality is the universal norm when allocating the liquidation value of a bankrupt firm among creditors the theoretical literature on bankruptcy proposes two prominent alternatives to proportionality the equal awards and the equal losses principles we use an experiment to analyze and compare actual creditor behavior under these three principles more specifically we test the following hypotheses replacing proportionality with equal losses increases total investment while replacing proportionality with equal awards decreases total investment under all three principles individual investment choices decrease in response to an increase in the probability of bankruptcy or an increase in risk aversion total investment difference between proportionality and either of the other two principles is independent of the probability of bankruptcy as long as both induce an interior equilibrium the results of the nonparametric tests and random effects tobit regression analyses we conduct on our experimental data offer support for all hypotheses

decentralized clearing in financial networks we consider a situation in which agents have mutual claims on each other summarized in a liability matrix agents assets might be insufficient to satisfy their liabilities leading to defaults in case of default bankruptcy rules are used to specify the way agents are going to be rationed a clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisfies limited liability and priority of creditors since clearing payment matrices and the corresponding values of equity are not uniquely determined we provide bounds on the possible levels equity can take unlike the existing literature which studies centralized clearing procedures we introduce a large class of decentralized clearing processes we show the convergence of any such process in finitely many iterations to the least clearing payment matrix when the unit of account is sufficiently small all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing proce

quantitative implications of a debt deflation theory of sudden stops and asset prices abstract this paper shows that the quantitative predictions of an equilibrium asset pricing model with financial frictions are consistent with key features of the sudden stop phenomenon foreign traders incur costs in trading assets with domestic agents and a collateral constraint limits external debt to a fraction of the market value of domestic equity holdings when this constraint does not bind standard productivity shocks cause typical real business cycle effects when it binds the same shocks cause strikingly different effects depending on the leverage ratio and asset market liquidity with high leverage and a liquid market the shocks force fire sales of assets and fisher s debt deflation mechanism amplifies the responses of asset prices consumption and the current account precautionary saving makes these sudden stops infrequent in the long run

the finnish great depression from russia with love during the period 1991 93 finland experienced the deepest economic downturn in an industrialized country since the 1930s we argue that the collapse of the finnish trade with the soviet union in and of itself resulted in a large contraction of the economy and a costly restructuring of the manufacturing sector similar to the transition suffered by countries in eastern europe finland and these transition countries show almost identical u shaped dynamics of output in the early 1990s yet as a western democracy with fully developed capital markets and well functioning legal and political institutions finland faced none of the large institutional adjustments experienced in the formerly centrally planned economies thus by studying the finnish experience we can isolate the adjustment costs due solely to the collapse of trade from the other burdens of adjustment borne by transition economies we develop and calibrate a multisector dynamic general equilibrium model of the finnish economy and show that the collapse of soviet finnish trade can indeed go a long way in explaining finland s great depression

monotonic redistribution of non negative allocations a case for proportional taxation revisited we reconsider casajus forthcoming characterization of uniformly proportional taxation by three properties of redistribution efficiency symmetry and monotonicity when restricted to non negative income these properties imply proportional taxation in a weaker sense the tax rate may vary with total income but only in an economically reasonable way

the dutch disease a disease after all many third world oil producers are encountering serious problems in building up a diversified export base while west european oil and gas producers netherlands united kingdom are suffering a decline in their traded goods manufacturing sector induced by real wage pressures it is becoming increasingly clear that high but temporary oil revenues may be somewhat ora mixed blessing the quip of the economist notwithstanding the mechanism behind this unbalance is clear enough part of the oil revenues is spent on non traded goods which leads to a real appreciation i e a rise in the relative price of non traded goods in terms of traded goods this in turn draws resources out of the non oil traded sector into the non traded goods producing sector corden and neary 1982 van wijnbergen 1980 one may say that this is an efficient response to the increase in income from oil production the united kingdom mexico egypt simply should move into oil derived industries and non traded goods and forget about their manufacturing sector until oil reserves are exhausted however many developing countries are hesitant to take this advice after all the post world war ii success stories in economic development involve without exception countries that promoted their traded goods sector aggressively moreover it is a well established stylised fact that technological progress is faster in the traded non sheltered sectors of an economy than in the non traded sector balassa 1964 is an early reference considering the hypothesis that technological progress rather than taking place exogenously with the passage of time is a function of accumulated experience the concern of countries like egypt mexico or indonesia is much easier to understand since solow 1957 and denison 1962 it is known that capital accumulation explain only a small part of economic growth if most of economic growth is caused by learning by doing induced technologica

game theoretic analysis of a bankruptcy problem from the talmud abstract for three different bankruptcy problems the 2000 year old babylonian talmud prescribes solutions that equal precisely the nucleoli of the corresponding coalitional games a rationale for these solutions that is independent of game theory is given in terms of the talmudic principle of equal division of the contested amount this rationale leads to a unique solution for all bankruptcy problems which always coincides with the nucleolus two other rationales for the same rule are suggested in terms of other talmudic principles needless to say the rule in question is not proportional division

currency crashes in emerging markets an empirical treatment we use a panel of annual data for over 100 developing countries from 1971 through 1992 to characterize currency crashes we define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation we examine the composition of the debt as well as its level and a variety of other macroeconomic factors external and foreign crashes tend to occur when output growth is low the growth of domestic credit is high and the level of foreign interest rates are high a low ratio of fdi to debt is consistently associated with a high likelihood of a crash

no profitable decompositions in quasi linear allocation problems abstract we study the problem of allocating a bundle of perfectly divisible private goods from an axiomatic point of view in situations where compensations can be made through monetary transfers the key property we impose on the allocation rule requires that no agent should be able to gain by decomposing the problem into sequences of subproblems combined with additional standard properties it leads to a characterization of the rule that shares the total surplus equally hence a traditional welfarist rule emerges as the unique consequence of our axioms phrased in a natural economic environment

asymmetric parametric division rules we describe and characterize the family of asymmetric parametric division rules for the adjudication of conflicting claims on a divisible homogeneous good as part of the characterization we present two novel axioms which restrict how a division rule indirectly allocates between different versions of the same claimant we also show that such division rules can alternately be represented as the maximization of an additively separable social welfare function

new evidence on real wage employment correlations from u s manufacturing data abstract the stylized fact of positive real wage employment correlation first noted by dunlop 1938 tarshis 1939 and keynes 1939 is re examined using alternative price deflators and detrending procedures we find little evidence that real wages are uniformly procyclical in either aggregate or disaggregated u s manufacturing

distributive justice in taxation abstract a classical criterion for apportioning taxes is that all should sacrifice equally in loss of utility suppose that a method of apportioning taxes is continuous and has the following four properties i the way that taxpayers split a given tax total depends only on their own taxable incomes ii an increase in the tax total implies that everyone pays more iii every incremental increase in tax is apportioned according to taxpayers current after tax incomes iv the ordering of taxpayers by pre tax income and after tax income is the same then there exists a utility function relative to which all sacrifice equally

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

sudden stops and output drops in recent financial crises and in recent theoretical studies of them abrupt declines in capital inflows or sudden stops have been linked with large drops in output do sudden stops cause output drops no according to a standard equilibrium model in which sudden stops are generated by an abrupt tightening of a country s collateral constraint on foreign borrowing in this model in fact sudden stops lead to output increases not decreases an examination of the quantitative effects of a well known sudden stop in mexico in the mid 1990s confirms that a drop in output accompanying a sudden stop cannot be accounted for by the sudden stop alone to generate an output drop during a financial crisis as other studies have done the model must include other economic frictions which have negative effects on output large enough to overwhelm the positive effect of the sudden stop this abstract was borrowed from another version of this item

an axiomatization of the proportional rule in financial networks the most important rule to determine payments in real life bankruptcy problems is the proportional rule many such bankruptcy problems are characterized by network aspects and the values of the ag

forward looking solvency contagion abstract solvency contagion risk is a key channel through which systemic risk can come about we introduce a model that accounts not only for losses transmitted after banks default but also for losses due to the fact that creditors revalue their exposures when probabilities of default of their counterparties change we apply the model to run a series of simplified stress tests of the uk banking system from 2008 to 2016 based on two datasets of real interbank exposures between the seven major uk banks we show that risks due to solvency contagion decrease markedly from the peak of the crisis to the point of becoming negligible we also characterise the distributions of both vulnerabilities and systemic importances of individual banks thereby tracking the evolution of risk concentration

differentially monotonic redistribution of income we suggest a differential version of monotonicity for redistribution rules whenever the differential of two persons income weakly increases then the differential of their post redistribution rewards also weakly increases together with efficiency and non negativity differential monotonicity characterizes redistribution via taxation at a fixed rate and equal distribution of the total tax revenue

systemic risk mitigation in financial networks abstract we propose a multi period clearing framework where the level of systemic risk is mitigated through the provision of liquidity assistance the interbank liability network evolves stochastically over time and assets of defaulted banks are sold to qualified banks within the network through a first price sealed bid auction we find that policies targeting systemically important banks are more effective in core periphery network structures whereas those maximizing the total liquidity in the system are preferred in random network configurations we assess sensitivity of systemic risk to variations in interbank liabilities as well as to their correlation structure

networks and systemic risk in the financial system the complex web of exposures and interlinkages across the financial system highlights the relevance of network analysis in understanding systemic risk and guiding the design of financial regulation this paper discusses how network models and those based on epidemiological approaches in particular offer a compelling description of the structure of real world financial systems and shed light on different contagion mechanisms seen during the global financial crisis we also review how these insights may inform macroprudential risk assessment and policy in the areas of stress testing the financial system and the regulation of systemically important institutions the role of non bank financial intermediation and social networks in shaping financial system risk is also briefly considered

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

trade and capital flows a financial frictions perspective the classical heckscher ohlin mundell paradigm states that trade and capital mobility are substitutes in the sense that trade integration reduces the incentives for capital to ow to capital scarce countries in this paper we show that in a world with heterogeneous nancial development the classic conclusion does not hold in particular in less nancially developed economies south trade and capital mobility are complements within a dynamic framework the complementarity carries over to nancial capital ows this interaction implies that deepening trade integration in south raises net capital in ows or reduces net capital out ows it also implies that at the global level protectionism may back re if the goal is to rebalance capital ows when these are already heading from south to north our perspective also has

towards a new early warning system of financial crises abstract this paper develops a new early warning system ews model based on a multinomial logit model for predicting financial crises it is shown that commonly used ews approaches which use binomial discrete dependent variable models are subject to what we call a post crisis bias this bias arises when no distinction is made between tranquil periods when economic fundamentals are largely sound and sustainable and crisis post crisis periods when economic variables go through an adjustment process before reaching a more sustainable level or growth path we show that applying a multinomial logit model which allows distinguishing between more than two states is a valid way of solving this problem and constitutes a substantial improvement in the ability to forecast financial crises the empirical results reveal that for a set of 20 open emerging markets for the period 1993 2001 the model would have correctly predicted a large majority of crises in emerging markets

financial networks and contagion we study cascades of failures in a network of interdependent financial organizations how discontinuous changes in asset values e g defaults and shutdowns trigger further failures and how this depends on network structure integration greater dependence on counterparties and diversification more counterparties per organization have different nonmonotonic effects on the extent of cascades diversification connects the network initially permitting cascades to travel but as it increases further organizations are better insured against one another s failures integration also faces trade offs increased dependence on other organizations versus less sensitivity to own investments finally we illustrate the model with data on european debt cross holdings jel d85 f15 f34 f36 f65 g15 g32 g33 g38 globalization brings with it increased financial interdependencies among many kinds of organizations governments central banks investment banks firms etc that hold each other s shares debts and other obligations such interdependencies can lead to cascading defaults and failures which are often avoided through massive bailouts of institutions deemed too big to fail recent examples include the us government s interventions in aig fannie mae freddie mac and general motors and the european commission s interventions in greece and spain although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries they emphasize the need to study the risks created by a network of interdependencies understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent in this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies organizations values depend on each other e g through cross holdings of shares debt or other liabilities if an

financial networks contagion commitment and private sector bailouts i develop a model of financial networks in which linkages not only spread contagion but also induce private sector bailouts where liquid banks bail out illiquid banks because of the threat of contagion introducing this bailout possibility i show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible however in some cases e g when liquidity is concentrated among a small group of banks the whole network may collapse i also characterize the optimal network size and apply the results to joint liability arrangements and payment systems linkages among agents in financial markets are a concern because of the risk of financial contagion that is the risk that a small shock to one agent will spread to other agents in a domino effect whether we should worry about these linkages is an open question the main goal of this paper is to show that a network in which agents are closely interlinked may be optimal both because of and despite the potential for contagion another goal is to characterize optimal networks that is whether and how agents should be linked to one another the basic intuition is as follows linkages present the threat of contagion to prevent collapse of the whole network agents who are lucky ex post may be willing to bail out those who are not in this way agents obtain the benefits of mutual insurance even though they cannot precommit to making payments

on the investment implications of bankruptcy laws axiomatic analysis of bankruptcy problems reveals three major principles i proportionality pro ii equal awards ea and iii equal losses el however most real life bankruptcy procedures implement only the proportionality principle we construct a noncooperative investment game to explore whether the explanation lies in the alternative implications of these principles on investment behavior our results are as follows i el always induces higher total investment than pro which in turn induces higher total investment than ea ii pro always induces higher egalitarian social welfare than both ea and el in interior equilibria iii pro induces higher utilitarian social welfare than el in interior equilibria but its relation to ea depends on the parameter values however a numerical analysis shows that on a large part of the parameter space pro induces higher utilitarian social welfare than ea

to fully net or not to net adverse effects of partial multilateral netting we show that partial versus full multilateral netting of interbank liabilities increases bank shortfall and reduces clearing asset price and aggregate bank surplus we also show that partial multilateral netting can be worse than no netting at all

systemic risk in financial systems we consider default by firms that are part of a single clearing mechanism the obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity we first show via a fixed point argument that there always exists a clearing payment vector that clears the obligations of the members of the clearing system under mild regularity conditions this clearing vector is unique next we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms finally we produce qualitative comparative statics for financial systems these comparative statics imply that in contrast to single firm results even unsystematic nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms

animal spirits technology shocks and the business cycle the last few years have witnessed a revival of business cycle models in which beliefs of agents have played a leading role in explaining economic fluctuations 1 most of these models involve strong economy wide increasing returns to scale in order for sunspot equilibria to exist in a recent paper however basu and fernald 1996 present evidence that returns to scale are far from evenly distributed across the u s economy in particular they report that scale economies are present mainly in the domain of durable goods production in the nondurable goods sector of the u s economy evidence of increasing returns to scale cannot be found

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

the impact of surges in net private capital inflows on manufacturing investment and unemployment abstract we use local projection methods to examine the dynamic response of surges in net private capital inflows on the output and employment shares of manufacturing the investment output ratio and the unemployment rate high income countries are studied separately from emerging economies both from asia and latin america our sample covers the years from 1970 to 2010 we find that surges in high income countries do not magnify the trend toward deindustrialization however the persistent decline in the investment to gdp ratio and the rise in the overall unemployment rate suggest that surges may negatively affect longer run growth prospects and employment opportunities in these countries in middle income asian countries surges tend to induce deindustrialization in both output and employment in the medium run but they do not lower the investment to gdp ratio in middle income latin america surges speed up deindustrialization lower investment and raise economy wide unemployment

failure and rescue in an interbank network this paper is concerned with systemic risk in an interbank market modelled as a directed graph of interbank obligations this builds on the modelling paradigm of eisenberg and noe eisenberg l noe th 2001 systemic risk in financial systems management sci 472 236 249 by introducing costs of default if loans have to be called in by a failing bank this immediately introduces novel and realistic effects we find that in general many different clearing vectors can arise among which there is a greatest clearing vector arrived at by letting banks fail in succession until only solvent banks remain such a collapse should be prevented if at all possible we then study situations in which consortia of banks may have the means and incentives to rescue failing banks this again departs from the conclusions of the earlier work of eisenberg and noe where in the absence of default losses there would be no incentive for solvent banks to rescue failing banks we conclude with some remarks about how a rescue consortium might be constructed this paper was accepted by wei xiong finance

in search of a stylised fact do real wages exhibit a consistent pattern of cyclical variability the paper surveys the studies on the cyclical behaviour of real wages published from the twenties onwards the traditional simple neoclassical model of the labour market suggests that real wages tend to move countercyclically however from a theoretical viewpoint there are few reasons to expect this behaviour once the simple model is extended to account for imperfect competition uncertainty lagged responses or contracting between firms and workers empirical studies give different answers to the problem the contributions reviewed in the paper are arranged roughly in a chronological order the interwar period the postwar pre econometric studies the econometric work using aggregate data the evidence produced on the basis of longitudinal data the analyses of the shock responsiveness of real wages and finally the most recent papers attempting a reconciliation of the somewhat conflicting evidence derived from aggregate and panel data

interbank contagion at work evidence from a natural experiment this article tests financial contagion due to interbank linkages for identification we exploit an idiosyncratic sudden shock caused by a large bank failure in conjunction with detailed data on interbank exposures first we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals second the magnitude of contagion is higher for banks with weaker fundamentals third interbank linkages among surviving banks further propagate the shock finally we find results suggesting that there are real economic effects these results suggest that interbank linkages act as an important channel of contagion and hold important policy implications jel g01 g21 g28 e58 since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity this has resulted in a significant decline of trading in the interbank money markets jean claude trichet president of the european central bank december 2008

monetary policy in a financial crisis what are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis under what conditions will a cut stimulate output and employment and raise welfare under what conditions will a cut have the opposite effects we answer these questions in a general class of open economy models where a financial crisis is modeled as a time when collateral constraints are suddenly binding we find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy then a cut in the interest rate is most likely to result in a welfare reducing fall in output and employment when these frictions are absent a cut in the interest rate improves asset positions and promotes a welfare increasing economic expansion

foreign currency debt and the global financial architecture abstract this paper discusses some problems posed by foreign currency debt for emerging economies in the context of the ongoing debate on the reform of the global financial architecture we present a model in which the currency composition of corporate debt is endogenous and discuss the optimality of measures aimed at coping with the risks posed by foreign currency debt while removing these risks is not necessarily efficient in the presence of moral hazard some forms of public intervention such as a tax on foreign currency debt or international bailouts may be optimal