trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

monetary union with voluntary participation a monetary union is modelled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy within a fully dynamic context we show that such an arrangement may dominate a regime with independent national currencies two new results are delivered by the voluntary participation assumption first the optimal plan is shown to respond to a country s temptation to leave the union by tilting both current and future policy in its favour this yields a non linear rule according to which each country weight in policy decisions is time varying and depends on its incentive to abandon the union second we show that there might be conditions such that a break up of the union as has occurred in some historical episodes is efficient the paper thus provides a first formal analysis of the incentives behind the formation sustainability and disruption of a monetary union

risk and potential insurance in europe abstract this paper argues that risk is related to long run volatility of income and therefore stabilization policies should target permanent fluctuations we show that such fluctuations can in principle be insured away by a multinational fiscal federation which smooths income cross sectionally and has no ex ante permanent redistribution effects we propose a measure of risk and a measure of potential insurable risk we estimate these measures for the european countries and compare results with the us results show that potential insurable income risk in europe is about 45 most countries will benefit from an average income tax of 10 but gains differ widely across countries

currency areas and voluntary transfers this paper discusses the relationship between the formation of a currency area and the use of voluntary fiscal transfers between countries we show that there is a trade off between the benefits of flexible exchange rates and the additional risk sharing benefits of voluntary transfers that can be sustained in a currency area we show that whether a currency area is beneficial or not will depend on the magnitude of economic parameter values in particular we show that in a simple two country model and for a plausible set of economic parameter values a currency area is optimal

liquidity constrained markets versus debt constrained markets this paper compares two different models in a common environment the first model has liquidity constraints in that consumers save a single asset that they cannot sell short the second model has debt constraints in that consumers cannot borrow so much that they would want to default but is otherwise a standard complete markets model both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates in a stochastic environment the two models have quite different dynamic properties with the debt constrained model exhibiting simple stochastic steady states while the liquidity constrained model has greater persistence of shocks

should the exchange rate be a shock absorber this paper examines the welfare case for the exchange rate as a shock absorber cushioning an economy in face of shocks to world demand for its good we provide an example in which although the exchange rate acts perfectly as a shock absorber stabilizing output around the natural rate and eliminating the impact of nominal rigidities it may in fact be better to prevent the exchange rate from adjusting at all the explanation for this is that with incomplete international financial markets the natural rate is inefficient it does not respond enough to demand shocks while fixing the exchange rate increases the volatility of consumption the pro cyclical nature of monetary policy under a fixed exchange rate allows for a more efficient composition of consumption between home and foreign goods furthermore for the shocks examined a welfare maximizing monetary rule always dampens exchange rate volatility relative to that of a free float and in some cases may imply a fixed exchange rate d 2004 elsevier b v all rigths reserved

overturning mundell fiscal policy in a monetary union central to ongoing debates over the desirability of monetary unions is a supposed trade off outlined by mundell 1961 a monetary union reduces transactions costs but renders stabilization policy less effective if shocks across countries are sufficiently correlated then according to this argument delegating monetary policy to a single central bank is not very costly and a monetary union is desirable this paper explores this argument in a setting with both monetary and fiscal policies in an economy with monetary policy alone we confirm the presence of the trade off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low however fiscal interventions by national governments combined with a central bank that has the ability to commit to monetary policy overturn these results in equilibrium such a monetary union will be welfare improving for any correlation of shocks

international risk sharing and european monetary unification abstract we explore income and consumption smoothing patterns among european community ec countries and among oecd countries during the period 1966 90 we find that for oecd as well as for ec countries about 40 percent of shocks to gdp are smoothed at the one year frequency with about half the smoothing achieved through national government budget deficits and half by corporate saving at the three year differencing frequency only 25 percent of shocks to gdp are smoothed mainly via government lending and borrowing in the absence of alternative income and consumption smoothing mechanisms the restrictions on budget deficits imposed by the maastricht treaty should be relaxed to allow governments to run large temporary deficits in response to output shocks

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

economic and social security in the twenty first century with attention to europe a partly heuristic attempt at exploring long run policies aimed at a second best compromise between ex ante risk sharing efficiency and ex post productive efficiency wage subsidies for low skilled workers financed by taxes on high wages are advocated together with improved risk sharing between capital and labour between generations and between the countries belonging to emu the scope of the advocated policies is limited by considerations of moral hazard time consistency and fiscal competition also estimates of some key economic parameters remain very imprecise several avenues of further research are identified

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

varieties and the transfer problem abstract we revisit the classic transfer problem accounting for two channels of adjustment increased trade in existing goods and services the intensive margin and net creation and destruction of product varieties the extensive margin over the medium term the latter reduces the scope for real exchange rate and terms of trade variability in response to cross border flows we embed our transfer analysis in popular models of current account adjustment where initial imbalances are driven by domestic demand for or foreign supply of net saving possibly associated with over optimistic expectations simulation exercises based on 2006 data suggest that a transfer of the size of the pre crisis u s current account deficit may require only moderate trend depreciation in real terms and that the aggregate welfare impact of the transfer is disconnected from the size of the relative price correction

self fulfilling debt crises a quantitative analysis this paper investigates the role of self fulfilling expectations in sovereign bond markets we consider a model of sovereign borrowing featuring endogenous debt maturity risk averse lenders and self fulfilling crises a la cole and kehoe 2000 in this environment interest rate spreads are driven by both fundamental and nonfundamental risk these two sources of risk have contrasting implications for the maturity structure of debt chosen by the government therefore they can be indirectly inferred by tracking the evolution of debt maturity we fit the model to italian data and find that nonfundamental risk played a limited role during the 2008 2012 crisis

optimal taxation in a limited commitment economy this paper studies optimal ramsey taxation when risk sharing in private insurance markets is imperfect due to limited enforcement in a limited commitment economy there are externalities associated with capital and labor because individuals do not take into account that their labor and saving decisions aect aggregate supply wages

international dimensions of optimal monetary policy abstract this paper provides a baseline general equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms and nominal rigidities an inward looking policy of domestic price stabilization is not optimal when firms markups are exposed to currency fluctuations such a policy raises exchange rate volatility leading foreign exporters to charge higher prices vis a vis increased uncertainty in the export market as higher import prices reduce the purchasing power of domestic consumers optimal monetary rules trade off a larger domestic output gap against lower consumer prices optimal rules in a world nash equilibrium lead to less exchange rate volatility relative to both inward looking rules and discretionary policies even when the latter do not suffer from any inflationary or deflationary bias gains from international monetary cooperation are related in a non monotonic way to the degree of exchange rate pass through

togetheror separately issues on the costs and benefits of political and fiscal unions abstract around the world one observes a tendency toward political separatism the economic literature generally but not always emphasizes several benefits of large fiscal and therefore political jurisdictions in this paper we discuss several politico economic arguments which reconcile this tension between normative economic models and empirical observations

firm heterogeneity in capital labour ratios and wage inequality author s leonardi marco abstract this paper documents the increasing dispersion of capital labor ratios across firms in the us and provides some empirical evidence of a positive correlation at the two digit industry level between the dispersion of capital labor ratios across firms and residual wage inequality to explain this empirical fact the paper adopts a search model where firms differ in their optimal capital investment the exogenous decline in the relative price of equipment capital makes the distributions of capital labor ratios more dispersed in a frictional labor market this force generates wage dispersion among identical workers ols estimates of the relationship between capital dispersion and the relative price of equipment capital support the main hypothesis of the model

dynamic relational contracts under complete information abstract this paper considers a long term relationship between two agents who both undertake an action or investment that produces a joint benefit agents have an opportunity to expropriate some of the joint benefit for their own use agents have quasi linear preferences two cases are considered where agents are risk averse but where limited liability constraints do not bind and where agents are risk neutral and subject to limited liability constraints we ask how to structure the investments and division of the surplus over time to avoid expropriation in the risk averse case the dynamics of actions and surplus may or may not be monotonic depending on whether or not a first best allocation can be sustained agents may underinvest but never overinvest if the first best allocation is not sustainable there is a trade off between risk sharing and surplus maximization surplus may not be at its constrained maximum even in the long run and the amnesia property of pure risk sharing models fails to hold in contrast in the risk neutral case there may be an initial phase in which one agent overinvests and the other underinvests both actions and surplus converge monotonically to a stationary state where surplus is maximized subject to the self enforcing constraints

currency unions and international integration this paper characterizes the integration patterns of international currency unions such as the cfa franc zone we empirically explore different features of currency unions and compare them to countries with sovereign monies by examining the criteria for mundellos concept of an optimum currency area we find that members of currency unions are more integrated than countries with their own currencies for instance we find that currency union members have more trade and less volatile real exchange rates than countries with their own monies business cycles are more highly synchronized across currency union countries than across countries with sovereign monies

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

self enforcing wage contracts we examine long term wage contracts between a risk neutral firm and a risk averse worker when both can costlessly renege and buy or sell labour at a random spot market wage a self enforcing contract is one in which neither party ever has an incentive to renege in the optimum self enforcing contract wages are sticky they are less variable than spot market wages and positively serially correlated they are updated by a simple rule around each spot wage is a time invariant interval and the contract wage changes each period by the smallest amount necessary to bring it into the current interval