the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

inventory investment and asymmetric adjustment some evidence for the uk abstract there is now a plethora of non linear time series models of output over the business cycle and considerable empirical evidence that there are key non linear poorly understood mechanisms at work though they account for a small part of the total flow of national income inventories play a disproportionately large role in fluctuations in output it would seem natural to try to determine what role inventories play in the non linear behaviour of the business cycle the first question is are there economic models of firm behaviour suggesting that the movement of inventories over the business cycle is non linear the second issue is whether we can detect such non linearity in the data in this paper we use data on the aggregate behaviour of uk manufacturing but disaggregated according to the stage of fabrication we find that the asymmetric adjustment of inventories varies with the stage of fabrication

efficiency and equilibria in complementary teams abstract this paper considers a team or partnership where the partners effort levels enter as strict complements in the production function the existence of a linear budget balancing sharing mechanism is demonstrated which implements the team s efficient outcome as a nash equilibrium this result is in contrast to a result derived in holmstrom 1982

evidence on nonlinear error correction in money demand the case of taiwan this paper proposes a nonlinear error correction model based upon smooth transition regression methodology the model is specified such that the short run adjustment toward long run equilibrium is nonlinear and that the error correction is a smooth function of long run deviation empirical results obtained from estimating m2 money demand in taiwan support the hypothesis of a nonlinear error correction process and provide better interpretation of change in the demand for money

financing constraints and reordering rules abstract constraints on external finance modify a simple inventory investment decision optimal policy is no action when cash holdings are less than threshold levels the control boundaries which are functions of the current level of inventories on the control boundaries additional cash is used for inventory replenishment when inventory holdings are below the level which would be held in the absence of financing constraints and for dividend payment when inventory holdings are equal to or exceed this level a fixed boundary at all inventory levels is used as an approximation to the fully optimal control allowing computation of the behaviour of aggregate inventory and cash holdings for a population of financially constrained firms there is a pronounced and extended dynamic response from inventory investment following aggregate disturbances to cash holdings to prices and to the standard error of the diffusion process for cash holdings this contrasts with the unconstrained case where such shocks have no effect on either inventory holdings or inventory investment

computational economics and economic theory substitutes or complements abstract this essay examines the idea and potential of a computational approach to theory discusses methodological issues raised by such computational methods and outlines the problems associated with the dissemination of computational methods and the exposition of computational results we argue that the study of a theory need not be confined to proving theorems that current and future computer technologies create new possibilities for theoretical analysis and that by resolving these issues we will create an intellectual atmosphere in which computational methods can make substantial contributions to economic analysis

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

non linear target adjustment in corporate liquidity management an endogenous thresholds approach we provide new empirical evidence on nonlinear liquidity management in dutch firms our results reveal that liquidity adjustment from below the target is significantly faster than from above we find no evidence for bands of inaction around the target

firm value illiquidity risk and liquidity insurance abstract our interest here concerns liquidity supply to firms we first examine the relation between firm value and access to liquidity supply and then we investigate the existence conditions and efficiency properties of financial contracts with a liquidity covenant in a continuous time infinite horizon stochastic model of a repeated firm investors relationship where the key problem is the mutual commitment between the two parties to model this problem we consider liquidity supply as a stochastic regulator mechanism that prevents the firm s ability to pay from falling below a predefined threshold here the market fixed coupon and we then apply recent developments in dynamic programming techniques for regulated processes to obtain a close form solution for the firm s value our main finding is that efficient i e actuarially fair and renegotiation proof contracts emerge in the absence of perfect commitment as the firm and the investor can exert mutual threat of termination

north south lending and endogenous domestic capital market inefficiencies abstract we develop an open economy model of intertemporal trade under asymmetric information capital market imperfections are endogenous and depend on a country s stage of economic development relative to the perfect information benchmark north south capital flows are dampened and possibly reversed and world interest rates are lower whereas riskless rates are equalized across borders the domestic loan rate is higher in poorer countries the model can be applied to a number of policy issues including the debt overhang problem the indexation of foreign public debts and the effect of income distribution on growth

do adjustment costs explain investment cash flow insensitivity abstract in this paper i explain two puzzles that have been observed in firm level data first firms that display a high sensitivity of investment to cash flow commonly believed to be an indicator of liquidity constraints usually have large unutilized lines of credit which presumably could be used to overcome the shortage of funds second firms that are perceived to be extremely liquidity constrained actually show very little sensitivity of investment to cash flow i show how a dynamic model of firm investment with liquidity constraints and non convex costs of adjustment of capital can explain these facts these two features together imply that firms need to have a certain threshold level of financial resources before they can afford to increase investment once they cross this threshold firms investment will be positively correlated with their financial resources until they reach their desired level of capital stock however even if investment is sensitive to cash flow firms may borrow below their credit limit to guard against future bankruptcy or binding liquidity constraints

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

firm behaviour under the threat of liquidation abstract we study the optimal behaviour of a firm whose cash flow is determined by a diffusion process facing liquidation if internal cash balances fall below some threshold there is a conflict between the desire to pay dividends to satisfy shareholders and the need to retain cash as a barrier against possible liquidation stochastic optimal control characterises the value function and gives optimal decision rules for the firm the firm has a precautionary motive for retaining earnings the internal cost of funds and local risk aversion are both decreasing functions of cash held and in natural extensions to our model output and investment are both increasing functions of cash balances

opaque bank assets and optimal equity capital abstract banks assets are opaque and therefore we model their true accounting asset values as partially observed variables we derive a stochastic control model to optimize banks dividend and recapitalization policies in this situation and calibrate that to a sample of u s banks by the calibrated model the noise in reported accounting asset values hides about one third of the true asset return volatility and raises the banks market equity value by 7 8 particularly those banks with a high level of loan loss provisions nonperforming assets and real estate loans and with a low volatility of reported total assets have noisy accounting asset values because of the substantial shock on the true asset values the banks assets were more opaque during the recent financial crisis

efficient and nearly efficient partnerships this paper shows in two ways that the degree to which free riding diminishes the performance of deterministic partnerships may be less than has been generally thought first a necessary and sufficient condition is provided for a partnership to sustain full efficiency it implies that many non trivial partnerships sustain efficiency such as generic ones with finite action spaces and neoclassical ones with leontief technologies second approximate efficiency is shown to be achievable in a large class of partnerships including ones with smooth and monotonic production and disutility functions approximate efficiency is achieved by mixed strategy equilibria one partner takes with small probability an inefficient action the degree to which efficiency is approximated is restricted only by the amount of liability the partners can bear nonetheless their equilibrium payments are not arbitrarily large

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

does asymmetry of international shocks matter for the u s business cycle this article proposes and investigates the asymmetry hypothesis which predicts that an international asymmetric shock tends to have a stronger and longer effect on the u s business cycle than a symmetric shock the hypothesis finds empirical support in the impulse responses of u s output and inflation to symmetric and asymmetric shocks those responses are estimated in a four variable structural vector autoregression the hypothesis also finds support in stylized facts the longest u s expansions have tended to occur when the rest of the world was growing below potential jel e3 e5 e4 i introduction economic expansions in the united states since world war ii have tended to end with the same pattern as the economy approaches capacity wage and price inflation begins to rise the federal reserve then tightens monetary policy to dampen inflationary pressures thereby pushing the economy into a recession 1 the expansion that ended in march 2001 however appeared to deviate from this pattern it was associated with little inflationary build up and consequently the federal reserve did not begin a string of uninterrupted tightening until late june 1999 when consumer price index cpi inflation was running only slightly above the 2 rate by comparison consumer prices were rising at 6 2 at the end of the 1960s boom and over 5 at the end of the 1980s boom clearly the monetary tightening of 1999 was enacted more in reaction to the threat of inflation in light of the tight labor market than to actual high inflation what made the 1990s expansion different a number of explanations have been offered for the longevity of the latest expansion that the credit markets have played an important role in sustaining the current expansion 2 that greater fiscal discipline and enhanced central bank credibility have helped tame inflation expectations and sustain the boom that the rise in the services component of gross domestic product gdp relative to manufacturing and more efficient inventory management have contributed to rendering the economy less susceptible to cyclical swings that the increase in productivity growth caused by digital technology has helped meet increases in demand and labor shortages without driving up inflation or that globalization per se has helped prolong the expansion this article considers another factor that is likely to have helped increase the longevity of the 1990s expansion we call this factor the asymmetry hypothesis the hypothesis maintains that in a flexible exchange rate regime an asymmetric that is country specific shock will have a stronger and longer effect on output than will a shock that also hits the rest of the world the hypothesis makes two assumptions that the united states is sufficiently integrated with the rest of the world or globalized and that the federal reserve is forward looking and at least partly effective in combating inflation and recessions under those assumptions an expansion caused by a symmetric positive shock is accompanied by stronger inflationary pressures than an expansion caused by an equal sized asymmetric shock prompting quicker and stronger monetary tightening consequently an expansion caused by a symmetric shock ends earlier than one caused by an asymmetric shock symmetrically a contraction caused by a symmetric negative shock is potentially more devastating for the economy than one caused by an equal sized asymmetric shock prompting quicker and stronger monetary easing thus a contraction caused by a symmetric shock ends earlier than a contraction caused by an asymmetric shock this article builds a two country open economy model to illustrate why the hypothesis makes sense in an age of globalization and a forward looking monetary regime it then estimates a structural vector autoregression svar system using both long run and short run restrictions to investigate whether the hypothesis can stand the scrutiny of empirical study

human capital formation and business cycle persistence abstract in this paper we examine the role of the formation of human capital in propagating shocks over the business cycle we show that a two sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post war us data a key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital

too much investment a problem of asymmetric information this paper shows that under plausible assumptions the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level raising the rate of interest above the free market level will restore optimality this conflicts with generally held views and is contrasted with the stiglitz weiss model it is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance however under the stiglitz weiss assumptions used to derive an underinvestment result equity is shown to be the equilibrium method of finance

the shadow costs of repos and bank liability structure making use of a structural model that allows for optimal liquidity management we study the role that repos play in a bank s financing structure in our model the bank s assets consist of illiquid loans and liquid reserves and are financed by a combination of repos long term debt deposits and equity repos are a cheap source of funding but they are subject to an exogenous rollover risk we show that the use of repos inflicts two types of indirect shadow costs on the bank s shareholders first it induces the bank to maintain higher liquid reserves in order to alleviate the additional default risk second it adds to the cost of long term debt financing these shadow costs limit the bank s appetite for cheap but unstable repo funding this effect is however weakened under poor returns on risky assets access to deposit funding and the depositor preference rule we also analyze the impact of a liquidity coverage ratio payout restrictions and a leverage ratio on the bank s financing choices and show that all these tools are able to curb the bank s reliance on repos

the effects of external financing costs on investment timing and sizing decisions abstract we develop a dynamic model in which a firm exercises an option to expand production on either a small or large scale with cash reserves and costly external funds an intermediate level of cash reserves which is insufficient for the large scale investment but sufficient for the small scale investment provides an incentive for the firm to invest early in the small scale project these results fill the gap between two types of results i empirical findings of a u shaped relation between the investment volume and internal funds and ii empirical predictions of a u shaped relation between the investment timing and internal funds in addition our results have real world implications for investment in alternative projects

has the rise in globalization reduced u s inflation in the 1990s juann h hung this article investigates whether increased globalization of the u s economy has helped hold down inflation in the 1990s based on several measures we find that globalization has increased further we find that import prices exert a greater impact on prices of products in industries faced with greater import penetration high foreign excess capacity accounts for much of the recent decline in u s inflation our results suggest that the decline in inflation is explained by the interaction of increased globalization and high excess foreign capacity globalization by itself does not lead to less inflation just greater sensitivity to foreign economic conditions jel e3 i introduction has the rise in globalization helped reduce u s inflation in the 1990s two hypotheses have been proposed for how the rise in globalization may have held down inflation the first is the so called competing goods effect hypothesis which contends that greater competition from foreign producers has limited the ability of domestic producers to raise prices the second hypothesis maintains that excess capacity abroad has helped u s manufactures meet the robust domestic demand in the united states without straining domestic resources and pushing up inflationary pressures this article first lays out a general framework that integrates these two hypotheses and then investigates each of them empirically we find evidence in support of both hypotheses to examine the competing goods effect hypothesis we estimate panel data regressions to find whether import prices have indeed exerted a greater impact on product prices in industries that are faced with greater import penetration the results are affirmative we study the second more general hypothesis by making two inquiries first has the rise in globalization coincided with the breakdown of the traditional phillips curve s ability to predict inflation that began in the early 1990s that is has the united states become considerably more open in the 1990s than in previous years when the phillips curve tracked inflation with reasonable accuracy second has foreign capacity utilization played an important role along with traditional explanatory variables in predicting inflation our empirical evidence suggests that the answers to both inquires are also positive most striking is the finding that by including foreign capacity utilization in the estimation of a phillips curve equation almost all of the missing inflation the difference between actual inflation and predicted inflation based on the traditional phillips curve since 1994 disappears our findings suggest that the interaction of slack foreign economic conditions and greater openness to trade may have helped tame the u s inflation in the 1990s but globalization alone has not permanently reduced the threat of recession or inflation indeed greater globalization may even help increase inflation when the u s and foreign economic expansions are synchronized no single researcher has looked at all of the questions posed in this article but each question has been investigated separately before krugman 1994 1995 and irwin 1996 have looked at whether the united states has become more globalized over the past decade they find that trade with the rest of the world is not a significant or rapidly growing influence on the u s economy the question of whether prices of foreign goods influence domestic prices through the competing goods effect has been investigated by swagel 1997 he finds a statistically significant but small impact in 10 of the 19 industries in his sample similarly slaughter and swagel 1997 find that increased globalization has had only a modest impact on wages in industrialized economies finally orr 1994 and tootel 1998 find very little or no impact of foreign capacity utilization on domestic inflation

nonlinear response of firm investment to q abstract abel and eberly 1994 study optimal investment behavior in the presence of flow fixed costs proportional costs and convex costs a clear prediction is that investment will alternate between regimes of insensitivity and responsiveness to q separated by unknown threshold levels of q at the firm level we find evidence for different regimes of sensitivity to q but not for a regime of zero sensitivity our finding that investment has a nonlinear relationship to q is important because it implies an elasticity of aggregate investment to q and fundamentals that is high and variable over time

financial capacity and output fluctuations in an economy with multi period financial relationships this paper motivates a financial propagation mechanism in the context of an intertemporal production economy with asymmetric information and with borrowers and lenders who enter multi period financial relationships a key feature is that aggregate output and borrowers financial capacity the maximum overhang of past debt they may feasibly carry are determined jointly much in the spirit of gurley and shaw 1955 expectations of future economic conditions govern financial capacity which in turn may constrain current production especially in bad times a small but persistent shift in aggregate conditions may have a large impact on financial capacity making the framework capable of motivating large endogenous fluctuations in financial constraints understanding how small disturbances can induce large output fluctuations is an on going quest in macroeconomics this paper develops a simple framework in which shifts in aggregate economic fundamentals are amplified through their impact on financial conditions a distinguishing feature is that output and borrowers financial capacity the maximum overhang of past debt they may feasibly carry are determined jointly much in the spirit of gurley and shaw 1955 expectations of future economic conditions govern financial capacity and financial capacity may constrain current production especially in bad times a number of recent papers have resurrected the view that financial factors may play a part in propagating business fluctuations the underlying theories exploit the idea that with asymmetric information between borrowers and lenders agency costs may drive the price of uncollateralized external funds above the price of internal funds in this kind of setting a borrower s financial position is a key determinant of the terms of credit she faces in the aggregate swings in borrower balance sheets over the cycle amplify fluctuations in investment and output essentially by inducing counter cyclical movements in the required premium for external finance this simple mechanism is broadly consistent with informal descriptions of how financial and real variables interacted in the great depression bernanke 1983 and in the postwar business cycles eckstein and sinai 1986 in addition numerous recent panel data studies beginning with fazzari hubbard and peterson 1988 support the notion of a financial investment accelerator mechanism

the paradox of liquidity the more liquid a firm s assets the greater their value in a short notice liquidation it is generally thought that a firm should find it easier to raise external finance against more liquid assets this paper focuses on the dark side of liquidity greater asset liquidity reduces the firm s ability to commit to a specific course of action as a result greater asset liquidity can in some circumstances reduce the firm s capacity to raise external finance firms with excessively liquid assets are in the best position to finance illiquid projects this leads us to a theory of financial intermediation and disintermediation based on the liquidity of assets

bank capital interbank contagion and bailout policy abstract this paper develops a theoretical framework in which asset linkages in a syndicated loan agreement can infect a healthy bank when its partner bank fails we investigate how capital constraints affect the choice of the healthy bank to takeover or liquidate the exposure held jointly with the failing bank and how the bank s ex ante optimal capital holding and possibility of contagion are affected by anticipation of bail out policy capital requirements and the joint exposure we identify a range of factors that strengthen or weaken the possibility of contagion and bailout recapitalization with common stock rather than preferred equity injection dilutes existing shareholder interests and gives the bank a greater incentive to hold capital to cope with potential contagion increasing the minimum regulatory capital does not necessarily reduce contagion while the requirement of holding conservation capital buffer could increase the bank s resilience to avoid contagion

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

dividends and leverage how to optimally exploit a non renewable investment in this paper we model the situation where a non renewable investment is given for instance a resource reservoir and show how to optimally trade off between dividends and leverage in order to maximize a performance indicator for shareholders up to the bankruptcy time we then study the way market risk the volatility of the market price of the resource impacts the optimal policies and the default risk of the company the moments when the policies are rebalanced are analyzed and we give a measure of the agency costs which appear between the shareholders and the debt holders

simulation based stress tests of banks regulatory capital adequacy abstract banks holding of reasonable capital buffers in excess of minimum requirements could alleviate the procyclicality problem potentially exacerbated by the rating sensitive capital charges of basel ii determining the sufficient buffer size is an important risk management task for banks which the basel committee suggests should be approached via stress testing we present here a simulation based approach to stress testing of regulatory capital adequacy where rating transitions are conditioned on business cycle phase and which takes into account business cycle dynamics our approach is an extension of a typical credit portfolio analysis in that we simulate actual bank capital and minimum capital requirements simultaneously actual bank capital absent mark to market accounting is driven by bank income and default losses whereas capital requirements within basel ii are driven by rating transitions the joint dynamics of these determine the necessary capital buffers given a confidence level for regulatory capital adequacy chosen by bank management we provide a tentative calibration of this confidence level to data on actual bank capital ratios which enables a ceteris paribus extrapolation of bank capital under the current regime to bank capital under basel ii

a computational approach to liquidity constrained firms over an infinite horizon abstract this paper examines the behavior of liquidity constrained firms in a time series it illustrates that cash shortage expectations induce a firm to hold liquid assets which reveal a nonlinear relationship with the degree of financing constraints this paper also argues that financial constraints could create serial correlation in a firm s internal funds even if exogenous shocks last for a single period of time

the dynamic effects of firm level borrowing constraints in this paper i develop a detailed dynamic model of firm behavior in order to see whether financial constraints and endogenous exit are important propagation mechanisms to do this i construct an economy where firms face financial constraints fixed costs and persistent idiosyncratic shocks using numerical methods i analyzehowa large collection of these firmsresponds to aggregate productivity shocks a common result is that financial constraints tend to dampen the economy s initial response to aggregate productivity shocks but equity accumulation and exit dynamics amplify the longer term response the relative sizes of these two effects however are sensitive to firms environments

efficiency and equilibria in complementary teams a comment abstract we argue that visile s 1994 claim that the moral hazard in the teams problem depends on the assumption that the inputs are perfect substitutes is incorrect discontinuities in the marginal product curves not complementarity of the inputs allows the moral hazard problem to be avoided in vislie s perfect complements example

investment cash flow sensitivities are useful a comment on kaplan and zingales arecent paper in this journal by kaplan and zingales reexamines a subset of erms from work of fazzari hubbard and petersen and criticizes the usefulness of investment cash eow sensitivities for detecting enancing constraints we show that the kaplan and zingales theoretical model fails to capture the approach employed in the literature and thus does not provide an effective critique moreover we describe why their empirical classiecation system is eawed in identifying both whether erms are constrained and the relative degree of constraints across erm groups we conclude that their results do not support their conclusions about the usefulness of investment cash eow sensitivities in a recent paper in this journal kaplan and zingales 1997 hereinafter kz argue that investment cash eow sensitivities do not provide useful evidence about the presence of enancing constraints because kz use a subset of the same erms and the same regressions as fazzari hubbard and petersen 1988 hereinafter fhp and claim page 176 that fhp can legitimately be considered the parent of all papers in this literature it is appropriate that we respond based on a simple theoretical model kz reach the provocative conclusion page 211 that the investment cash eow sensitivity criterion as a measure of enancial constraints is not well grounded in theory in section i we show that the kz model does not capture the theoretical approach employed in fhp and many subsequent studies most of the kz paper attempts to show that empirical investment cash eow sensitivities do not increase monotonically with the degree of enancing constraints within the 49 low dividend erms from the fhp sample in section ii we explain why the kz classiecation of the degree of constraints is eawed in identifying both whether or not erms are constrained absolute constraints as well as the relative degree of constraints across erms as a result we argue in section iii that there is no expected ex ante pattern for the

unintended consequences of the market risk requirement in banking regulation abstract we analyze a bank that operates under the basel credit and market risk requirements and that maximizes its value through recapitalizations dividends and liquid asset investments according to our model the market risk requirement may postpone recapitalization and this way increase the bank s default probability we show that this is indeed the case if the expected return and volatility of the liquid asset portfolio are high i e then the market risk requirement raises the default probability of the bank in this sense the market risk requirement is inefficient

financial liberalization and banking crises in emerging economies abstract financial liberalization often leads to financial crises this link has usually been attributed to poorly designed banking systems an explanation that is largely static in this paper we develop a dynamic explanation by modelling the evolution of a newly liberalized bank s opportunities and incentives to take on risk over time the model reveals that even if a banking system is well designed in the sense of having good long run properties many countries will enjoy an initial period of rapid low risk growth and then enter a period with an elevated risk of banking crisis this transition emerges because of the way in which the degree of foreign competition the marginal product of capital and the bank s own net worth simultaneously evolve

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society