taming macroeconomic instability monetary and macro prudential policy interactions in an agent based model abstract we develop an agent based model to study the macroeconomic impact of alternative macro prudential regulations and their possible interactions with different monetary policy rules the aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability simulation results show that a triple mandate taylor rule focused on output gap inflation and credit growth and a basel iii prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations moreover we consider the different levers of basel iii and their combinations we find that minimum capital requirements and counter cyclical capital buffers allow to achieve results close to the basel iii first best with a much more simplified regulatory framework finally the components of basel iii are non additive the inclusion of an additional lever does not always improve the performance of the macro prudential regulation

theories of bank behavior under capital regulation abstract this paper reviews academic studies of bank capital regulation in an effort to evaluate the intellectual foundation for the imposition of the basel i and basel ii systems of risk based capital requirements the theoretical literature yields general agreement about the immediate effects of capital requirements on bank lending and loan rates and the longer term impacts on bank ratios of equity to total or risk adjusted assets this literature produces highly mixed predictions however regarding the effects of capital regulation on asset risk and overall safety and soundness for the banking system as a whole thus the intellectual foundation for the present capital regulation regime is not particularly strong the mixed conclusions in the academic literature on banking certainly do not provide unqualified support for moving to an even more stringent and costly system of capital requirements these widely ambiguous results do suggest however that assessing the implications of capital regulation for balance sheet risk and monitoring effort in diverse banking systems is an important agenda for future theoretical research in the banking area

new microfoundations for the aggregate matching function empirical studies of the aggregate labor market matching function have favored a cobb douglas functional form for which there are no microfoundations in the existing literature i present a new model for the matching process based on a telephone line poisson queuing process which unlike other microeconomic approaches can be integrated directly into standard theoretical search models this implies a ces matching function approximately cobb douglas when search costs are approximately linear the model allows empirical estimates of matching function parameters to be interpreted in terms of the costs and benefits of search

existence of steady state equilibria in matching models with search frictions we prove existence of steady state equilibrium in a class of matching models with search frictions

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

search theoretic models of the labor market a survey we survey the literature on search theoretic models of the labor market we show how this approach addresses many issues including the following why do workers sometimes choose to remain unemployed what determines the lengths of employment and unemployment spells how can there simultaneously exist unemployed workers and unfilled vacancies what determines aggregate unemployment and vacancies how can homogeneous workers earn different wages what are the tradeoffs firms face from different wages how do wages and turnover interact what determines efficient turnover we discuss various modeling choices concerning wage determination and the meeting process including recent models of directed search

competing for order flow in otc markets we develop a model of a two sided asset market in which trades are intermediated by dealers and are bilateral dealers compete to attract order flow by posting the terms at which they execute trades which can include prices quantities and execution times and investors direct their orders toward dealers that offer the most attractive terms of trade equilibrium outcomes have the following properties first investors face a trade off between trading costs and speeds of execution second the asset market is endogenously segmented in the sense that investors with different asset valuations and different asset holdings will trade at different speeds and different costs for example under a leontief technology to match investors and dealers per unit trading costs decrease with the size of the trade in accordance with the evidence from the market for corporate bonds third dealers implicit bargaining powers are endogenous and typically vary across sub markets finally we obtain a rich set of comparative statics both analytically by studying a limiting economy where trading frictions are small and numerically for instance we find that the relationship between trading costs and dealers bargaining power can be hump shaped

inflation and welfare in retail markets prior production and imperfectly directed search this paper considers the effect of monetary policy and inflation on retail markets goods are dated and produced prior to being retailed buyers direct their search on price and general quality buyers match specific tastes are private information sellers set the same price for all buyers some of whom do not value the good highly enough to buy it the market economy is typically inefficient as a social planner would have the good consumed under free entry of sellers the friedman rule is optimal policy when the upper bound on the number of participating sellers binds moderate levels of inflation can be welfare improving

mortgage debt consumption and illiquid housing markets in the great recession using a model with housing search endogenous credit constraints and mortgage default this paper accounts for the housing crash from 2006 to 2011 and its implications for aggregate and cross sectional consumption during the great recession left tail shocks to labor market uncertainty and tighter down payment requirements emerge as the key drivers an endogenous decline in housing liquidity amplifies the recession by increasing foreclosures contracting credit and depressing consumption balance sheets act as a transmission mechanism from housing to consumption that depends on gross portfolio positions and the leverage distribution low interest rate policies accelerate the recovery in housing and consumption

turnover externalities with marketplace trading this article considers equilibrium decentralized trade when there is a marketplace where buyers and sellers meet costlessly since buyers have idiosyncratic match payoffs for each seller s good some buyers rather than trade with the current stock of sellers wait for new sellers to enter the marketplace to obtain a good they like a turnover externality exists where all traders are better off with higher entry rates of new traders furthermore this turnover externality supports multiple pareto rankable equilibria this provides new insights into similar results obtained in the random matching literature

marketplaces and matching this paper models equilibrium trading patterns when marketplaces exist and goods are differentiated when first visiting the market a buyer samples a stock of goods if fortunate the buyer matches with and purchases one of these goods and then exits the market if an initial match does not exist the buyer can now only match with the flow of new goods for sale the previous stock has been sampled and rejected in a steady state the current stock of unmatched traders on one side of the market is trying to match with the flow of new traders on the other side it is shown that this market behaviour describes matching patterns between unemployed job seekers and vacancies in uk job centres

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

economic methodology in a nutshell he literature on economic methodology is concerned mainly with questions of theory confirmation or disconfirmation or empirical theory choice the central question is usually how one can tell whether a particular bit of economics is good science economists would like methodologists to provide the algorithm for doing good economic science and they want the algorithm to vindicate their own practice and to reveal the foolishness of those who do economics differently for example milton friedman 1953 tells economists that good theories are those that provide correct and useful predictions while paul samuelson 1947 1963 tells economists to formulate theories with operational concepts that are ideally logically equivalent to their descriptive consequences in my view not only are these and most other specific views on theory appraisal mistaken but the concern with problems of empirical appraisal is exaggerated for there are also interesting methodological questions to consider both normative and descriptive concerning the structure strategy goals and heuristics of various economic theories for example few writers on economic methodology recognize that the activities of formulating economic models and investigating their implications are a sort of conceptual exploration instead most mistakenly regard these activities as offering empirical hypotheses and assess them in terms of some philosophical model of confirmation or falsification as a tendentious survey of standard methodological literature this essay will however share its preoccupation with the empirical appraisal of theory microeconomic theory in particular i shall in particular discuss four approaches to praising or damning microeconomic theory that have dominated methodological discussions

bertrand equilibrium with capacity constraints and restricted mobility this paper considers price competition among firms when there are capacity constraints and buyers have limited ability to visit firms a natural method of allocating buyers among firms arises in the equilibrium of the buyers search game sufficient conditions are given under which the buyers equilibrium varies continuously with the prices charged by firms capacity constraints are used to guarantee that this ensures existence of mixed strategy equilibria for the pricing game played by sellers we show that natural pure strategy equilibria arise when the game is made large in appropriate ways since bertrand s criticism of cournot it has been known that models where sellers compete with prices may have undesirable properties when the commodities traded are homogenous in the simplest models with constant marginal costs price may be driven down to the competitive level even when there are only two firms more problematic if sellers are subject to capacity constraints nash in prices equilibrium may not exist at all these problems all arise because of a discontinuity in firms profit functions that arises when the prices of two or more firms are equal there have been many attempts to resolve this problem the simplest is to constrain sellers prices to be equal and to force them to compete in quantities this is the basis of most of the literature on monopolistic competi

why are similar workers paid differently the role of social networks abstract we provide a matching model where identical workers are embedded in ex ante identical social networks job arrival rate is endogenous and wages are bargained we study the evolution of networks over time and characterize the equilibrium distribution of unemployment rates across networks within our framework wage dispersion arises endogenously as the consequence of the dynamics of networks firms strategies and wage bargaining we show that networks induce new search externalities which shape the dynamics of the labor market our endogenous framework allows us to quantify these effects

on matters methodological in economics books reviewed in this article lawrence a boland 1989 the methodology of economic model building methodology after samuelson j c glass and w johnson 1989 economics progression stagnation or degeneration arjo klamer donald n mccloskey and robert m solow eds 1989 the consequences of economic rhetoric brian j loasby 1989 the mind and method of the economist a critical appraisal of major economists in the 20th century john pheby 1988 methodology and economics a critical introduction

bank capital requirements business cycle fluctuations and the basel accords a synthesis abstract in order to survey the mechanisms through which the introduction of basel ii bank capital requirements is likely to accentuate the procyclical tendencies of banking this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the basel accords we conclude that the theoretical models that revisit the bank capital channel under the new accord generally support the basel ii procyclicality hypothesis and that the magnitude of the procyclical effects essentially depends on i the composition of banks asset portfolios ii the approach adopted by banks to compute their minimum capital requirements iii the nature of the rating system used by banks iv the view adopted concerning how credit risk evolves through time v the capital buffers over the regulatory minimum held by the banking institutions vi the improvements in credit risk management and vii the supervisor and market intervention under basel ii the recent events and instability in financial markets all over the world have led the procyclicality issue to enter the agendas of several political international fora and some measures to mitigate procyclicality are being put forward the bank capital channel literature should now play an important role in evaluating their effectiveness

winter is possibly not coming mitigating financial instability in an agent based model with interbank market abstract we develop a macroeconomic agent based model to study how financial instability can emerge from the co evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy the model is populated by heterogenous firms consumers and banks that locally interact in different markets in particular banks provide credit to firms according to a basel ii or iii macro prudential frameworks and manage their liquidity in the interbank market the central bank performs monetary policy according to different types of taylor rules we find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies banking crises and the emergence of deep downturns this requires the timely intervention of the central bank as a liquidity lender of last resort moreover we find that the joint adoption of a three mandate taylor rule tackling credit growth and the basel iii macro prudential framework is the best policy mix to stabilize financial and real economic dynamics however as the liquidity coverage ratio spurs financial instability by increasing the pro cyclicality of banks liquid reserves a new counter cyclical liquidity buffer should be added to basel iii to improve its performance further finally we find that the central bank can also dampen financial instability by employing a new unconventional monetary policy tool involving active management of the interest rate corridor in the interbank market

ideology markets and money contemporary economic theory is considered in terms of the science ideology distinction marx s critique of hegel is then used to derive a demarcation criterion that sharply separates scientific knowledge from ideology this critique interprets hegelian methodology as fundamentally ideological because it understands reality in terms of

firm to firm labor flows and the aggregate matching function a network based test using employer employee matched records the assumption of aggregate matching functions in labor markets is tested using a network configuration model for directed multigraphs we use employer employee matched records of the universe of employees and firms in finland and find that aggregate matching functions even at the level of submarkets cannot explain the vast majority of the observed patterns of labor flows between firms our findings suggest the need for theoretical frameworks that take into account the structure of labor market frictions

a leverage ratio rule for capital adequacy abstract this paper studies the economic foundations for maximum leverage ratio capital adequacy rules the paper makes three contributions to the literature first we show how to determine the maximum leverage ratio such that the probability of insolvency is less than some predetermined quantity two we show that a leverage ratio rule controls for the same risks as does a value at risk var capital adequacy rule third we argue that leverage ratio rules are better than var rules because they are more intuitive and easier to compare across firms

holdups and efficiency with search frictions a natural holdup problem arises in a market with search frictions firms have to make a range of investments before finding their employees and larger investments translate into higher wages in particular when wages are determined by ex post bargaining the equilibrium is always inefficient recognizing that capital intensive production relations have to pay higher wages firms reduce their investments this can only be prevented by removing all the bargaining power from the workers but this in turn depresses wages below their social product and creates excessive entry of firms in contrast to this benchmark we show that efficiency is achieved when firms post wages and workers can direct their search toward more attractive offers this efficiency result generalizes to an environment with imperfect information where workers only observe a few of the equilibrium wage offers we show that the underlying reason for efficiency is not wage posting per se but the ability of workers to direct their search toward more capital intensive jobs

cheap talk coordination and entry we show how costless nonbinding nonverifiable communication cheap talk can achieve partial coordination among potential entrants into a natural monopoly industry where the payoffs are qualitatively like the battle of the sexes the analysis would apply equally in other economic situations with such payoffs for example bargaining under complete information or choosing compatibility standards while cheap talk helps achieve asymmetric coordination in a symmetric mixed strategy equilibrium it cannot achieve complete coordination if the game involves even a small amount of conflict

why has house price dispersion gone up we calibrate a dynamic general equilibrium island model to investigate the 30 year increase in the level of house prices and their dispersion across u s metropolitan areas the model is based on two main assumptions households o w in and out metropolitan areas in response to local productivity shocks and the housing supply cannot adjust instantly because of technological and regulatory constraints the calibration reveals that the observed tightening of housing supply regulation cannot quantitatively account for the rise in the level and dispersion of house prices in equilibrium workers o w out of tightly regulated towards less regulated metropolitan areas undoing most of the price impact of local supply restrictions in contrast the observed increase in wage dispersion across metropolitan areas does create the observed increase in the level and dispersion of house prices workers o w towards exceptionally productive metropolitan areas and drive house prices up the calibration also suggests that the welfare eects of housing supply regulation are large when wages become more dispersed

frictional unemployment on labor flow networks abstract we develop an alternative theory to the aggregate matching function in which workers search for jobs through a network of firms the labor flow network the lack of an edge between two companies indicates the impossibility of labor flows between them due to high frictions in equilibrium firms hiring behavior correlates through the network generating highly disaggregated local unemployment hence aggregation depends on the topology of the network in non trivial ways this theory provides new micro foundations for the beveridge curve wage dispersion and the employer size premium we apply our model to employer employee matched records and find that network topologies with pareto distributed connections cause disproportionately large changes on aggregate unemployment under high labor supply elasticity

trading frictions and house price dynamics we model liquidity in housing markets the model provides a simple characterization for the joint process of prices sales and inventory we compare the implications of the model to certain properties of housing markets the model can generate the large price changes and the positive correlation between prices and sales that we see in the data unlike the data prices are negatively autocorrelated and high inventory predicts price appreciation we investigate several amendments to the model informational frictions show promise

segmented housing search we study housing markets with multiple segments searched by heterogeneous clienteles in the san francisco bay area search activity and inventory covary negatively across cities but positively across market segments within cities a quantitative search model shows how the endogenous flow of broad searchers to high inventory segments within their search ranges induces a positive relationship between inventory and search activity across segments with a large common clientele the prevalence of broad searchers shapes the response of housing markets to localized supply and demand shocks broad searchers help spread shocks across many segments and reduce their effect on local market activity

pricing and matching with frictions suppose that n buyers each want one unit and m sellers each have one or more units of a good sellers post prices and then buyers choose sellers in symmetric equilibrium similar sellers all post one price and buyers randomize hence more or fewer buyers may arrive than a seller can accommodate we call this frictions we solve for prices and the endogenous matching function for finite n and m and consider the limit as n and m grow the matching function displays decreasing returns but converges to constant returns we argue that the standard matching function in the literature is misspecified and discuss implications for the beveridge curve

directed search with multi vacancy firms abstract i construct a directed search model in which firms decide whether to enter a market and how many positions to create within this framework the number of firms and the size of each firm are determined endogenously wages play an allocative role in the matching process and the frictions inherent in this process derive from the equilibrium behavior of workers and firms i characterize the unique equilibrium comparative statics generate testable implications for cross sectional variation in matching efficiency as well as the dynamic behavior of vacancies and unemployment moreover allowing for ex ante heterogeneity across firms the model can easily and naturally generate the observed relationship between firm size wages profitability and hiring

why basel ii may need a leverage ratio restriction abstract we analyze regulatory capital requirements where the amount of required capital depends on the level of risk reported by the banks it is shown that if the supervisors have a limited ability to identify or to sanction dishonest banks an additional risk independent leverage ratio restriction may be necessary to induce truthful risk reporting the leverage ratio helps to offset the banks potential capital savings of understating their risks by i reducing banks put option value of limited liability ex ante and by ii increasing the banks net worth which in turn enhances the supervisors ability to sanction banks ex post

ranking unemployment duration and wages it explores the implication of one central assumption when firms receive multiple acceptable applications they hire the worker who has been unemployed for the least amount of time this assumption ranking is contrasted with the assumption of random hiring no ranking by embodying this assumption in a model of the labour market with job creation destruction and matching the joint behaviour of unemployment the distribution of unemployment durations and wages are characterized the implication that the re employment prospects of employed workers were they to become unemployed are better than those of the currently unemployed appears to have been an important feature of european unemployment experience in the 1980 s this paper examines the effects of the composition of unemployment on wage determination it explores one central assumption when firms receive multiple acceptable applications they hire the worker who has been unemployed for the least amount of time we refer to this assumption as ranking and contrast it throughout to the assumption of random hiring or no ranking by embodying this assumption in a model of the labour market with job creation destruction and matching we characterize the joint behaviour of unemployment the distribution of unemployment durations and wages ranking has a number of important implications first in addition to the obvious result that the exit rate from unemployment is a decreasing function of duration we show that the effect of duration is stronger the higher the rate of unemployment second with the wage depending on the distributions of prospective unemployment durations the presence of long term unemployed per se has little effect on wages third looking at the relation between the wage and the aggregate level of unemployment and comparing ranking to the case of no ranking the wage moves less with the level of unemployment but more with the change in unemployment put simply ranking and no ranking models show exactly the same aggregate unemployment slightly different long run responses of wages to unemployment and sharply different wage dynamics the paper is organized as follows section i characterizes the matching process and derives a matching function based on an urn ball process with vacancies as urns and applications by unemployed workers as balls thus the distribution of applications per vacancy depends on aggregate unemployment and vacancies vacancies with at least one acceptable application are filled when a vacancy receives more than one acceptable application firms use a rule to choose among applicants thus the rule determines who is hired but does not affect the number of hires section ii uses this matching function in a model of the labour market with continual job creation and destruction and characterizes the equilibrium values of unemployment vacancies and hires

endogenous business cycles with frictional labour markets we present a neoclassical model of capital accumulation with frictional labour markets under standard parameter values the equilibrium of the model is indeterminate and consequently displays expectations driven business cycles so called endogenous business cycles we study the properties of such cycles and find that the model predicts the high autocorrelation in output growth and the hump shaped impulse response of output found in us data important features that existing endogenous real business cycle models fail to explain the indeterminacy of the equilibrium stems from job search externalities and does not rely on increasing returns to scale as in most models

stable marriages and search frictions stable matchings are the primary solution concept for two sided matching markets with nontransferable utility we investigate the strategic foundations of stability in a decentralized matching market towards this end we embed the standard marriage markets in a search model with random meetings we study the limit of steady state equilibria as exogenous frictions vanish the main result is that convergence of equilibrium matchings to stable matchings is guaranteed if and only if there is a unique stable matching in the underlying marriage market whenever there are multiple stable matchings sequences of equilibrium matchings converging to unstable inefficient matchings can be constructed thus vanishing frictions do not guarantee the stability and efficiency of decentralized marriage markets

matching with phantoms searching for partners involves informational persistence that reduces future traders matching probability in this article traders who are no longer available but who left tracks on the market are called phantoms we examine a dynamic matching market in which phantoms are a by product of search activity no coordination frictions are assumed and non phantom traders may lose time trying to match with phantoms the resulting aggregate matching technology features increasing returns to scale in the short run but has constant returns to scale in the long run we embed a generalized version of this matching function in the canonical continuous time equilibrium search unemployment model long run constant returns to scale imply there is a unique steady state whereas short run increasing returns generate excess volatility in the short run and endogenous fluctuations based on self fulfilling prophecies