variable returns to scale in production and patterns of specialization this paper discusses some trade and welfare implications of the two sector model based on increasing returns to scale irs in one industry and decreasing returns to scale drs in the other it has been shown by horst herberg and murray kemp that given homothetic production functions with irs in one industry and drs in the other the production possibilities frontier ppf is strictly concave to the origin near the irs axis and strictly convex to the origin near the drs axis while this result constitutes an important finding and is contrary to the general impression among economists even twelve years after the publication of herberg and kemp s paper no attempt has been made to analyze its implications for welfare and patterns of specialization in this paper i consider a simple twocommodity model with irs in one industry and drs in the other and discuss some interesting implications of variable returns to scale vrs first i demonstrate that in this model if a small open economy specializes completely in production it will do so in the drs commodity and not in the irs commodity as is generally believed second if at a given price ratio an internal production equilibrium exists a welfaremaximizing small open economy will never specialize completely in production even though the ppf exhibits decreasing opportunity costs over a part of its range third given output generated economies and diseconomies of scale welfare maximization for a small country requires a permanent tax subsidy scheme encouraging expansion of the irs industry and contraction of the drs industry finally in a two country model with identical tastes and technology across the countries free trade equilibrium may result in incomplete specialization by the exporter of the irs commodity and complete specialization by the exporter of the drs commodity in the course of the analysis i argue that tinbergen s formulation of frank graham s case for protecting the irs industry is incorrect i then present a possible reformulation of it in section i the basic production model is introduced in section ii the model is analyzed and in section iii it is argued that all the results continue to hold in the multifactor case

credit market imperfections and economic development theory and evidence abstract a model of credit markets in which there is a costly state verification problem is integrated into a neoclassical growth model the presence of a credit market friction gives rise to credit rationing which in turn impacts on the growth path of an economy the model delivers predictions about the co movements between per capita income credit rationing interest rates and factor prices the implications of the model are generally empirically supported in u s and taiwanese data the model also makes predictions about the consequences of government regulation of credit markets which are supported by the taiwanese data

the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

the role of investment specific technological change in the business cycle this is a quantitative investigation of the importance of technological change speci c to new investment goods for postwar us aggregate uctuations a growth model that incorporates this form of technological change is calibrated to us data and simulated using the relative price of new equipment to identify the process driving investmentspeci c technology shocks the analysis suggests that this form of technological change is the source of about 30 of output uctuations 2000 elsevier science b v all rights reserved

inflation financial markets and long run real activity abstract empirical evidence suggests that real activity the volume of bank lending activity and the volume of trading in equity markets are strongly positively correlated at the same time inflation and financial market activity are strongly negatively correlated in the long run as are inflation and the real rate of return on equity inflation and real activity are also negatively correlated in the long run particularly for economies with relatively high rates of inflation we present a monetary growth model in which banks and secondary capital markets play a crucial allocative function we show that at least under certain configurations of parameters the predictions of the model are consistent with these and several other observations about inflation finance and long run real activity

poverty traps the money growth rule and the stage of financial development abstract this paper investigates how monetary policy influences the emergence of local indeterminacy local bifurcations and multiple steady states depending upon the degree of the commitment parameter that defines financial market imperfection using diamond s overlapping generations model with credit market frictions the analytical results will show that poverty traps happen as an inevitable outcome under a wider range of money growth rates because financial markets are less developed put differently we derive analytically the positive link between financial development and per capita income

inference in nonlinear econometric models with structural change this paper extends the classical test for structural change in linear regression models see chow 1960 to a wide variety of nonlinear models estimated by a variety of different procedures wald lagrange multiplier like and likelihood ratio like test statistics are introduced the results allow for heterogeneity and temporal dependence of the observations in the process of developing the above tests the paper also provides a compact presentation of general unifying results for estimation and testing in nonlinear parametric econometric models

symmetrical information and credit rationing graphical demonstrations as this article shows the pro debtor u s bankruptcy code alone can cause credit rationing even without asymmetrical information in the market because the code entails substantial costs to lenders if borrowers file for bankruptcy in the absence of bankruptcy cost lenders are always justified in raising interest rates and clearing markets if the bankruptcy cost is nontrivial however lenders profits are concave in the relevant range of interest rates thus lenders cannot always clear the market by using higher rates the study reported here also found that the use of collateral in debt contracts can reduce rationing but that even 100 percent collateral does not eliminate all rationing possibilities a positive relationship was found between credit risk and the amount of pledged collateral which is not necessarily true with models based on asymmetrical information

bank lending policy credit scoring and the survival of loans to evaluate loan applicants banks increasingly use credit scoring models the objective of such models typically is to minimize default rates or the number of incorrectly classified loans thereby they fail to take into account that loans are multiperiod contracts for which reason it is important for banks not only to know if but also when a loan will default in this paper a bivariate tobit model with a variable censoring threshold and sample selection effects is estimated for 1 the decision to provide a loan or not and 2 the survival time of granted loans the model proves to be an effective tool to separate applicants with short and with long survival times the bank s loan provision process is shown to be inefficient loans are granted in a way that conflicts with both default risk minimization and survival time maximization there is thus no trade off between higher default risk and higher return in the lending policy

how good are standard debt contracts stochastic versus nonstochastic monitoring in a costly state verification environment the authors investigate ex ante efficient contracts in an environment in which implementation is costless in this environment standard debt contracts will typically not be optimal optimal contracts may involve defaults even in states in which the borrower is fully able to repay the authors then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts when model parameters are calibrated to realistic values the welfare loss from exogenously imposing this restriction is extremely small thus if implementation costs are actually nontrivial as seems likely standard debt contracts will be very close to optimal copyright 1994 by university of chicago press

credit rationing and the demand for owner occupied housing abstract this study applies cross sectional data to test whether default risk induced credit constraints affect the demand for owner occupied housing credit constrained households are argued to exhibit different elasticities of demand for housing than less constrained households housing demand elasticities are then estimated separately for households obtaining va insured and non va loans the government guarantee on va loans insures lenders against default enabling lenders to apply easier nonprice terms of credit results indicate that observed demand elasticities differ significantly across va and conventional mortgage holders that marginal changes in credit constraints affect housing demand and that fha financing mitigates the effect of mortgage constraints

inflation and asset returns sustained inflation is detrimental to long run growth and the financial system a recent theoretical literature suggests that high inflation implies low real returns on assets these low returns exacerbate informational frictions interfering with the functioning of financial markets and the allocation of investment we investigate the plausibility of an inverse relationship between inflation and real returns inflation and nominal equity returns are negatively correlated or uncorrelated for all low to moderate inflation economies examined safe nominal rates of return and inflation are only weakly positively correlated however for high inflation economies inflation and nominal returns are strongly positively correlated

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

rent seeking bureaucracies and oversight in a simple growth model abstract following recent cross country empirical work research on public policy and growth has come to examine the impact of inefficient or corrupt bureaucracies most of this work has emphasized the interactions of bureaucracies with private markets by contrast this paper focuses on the relationship between rent seeking bureaucracies and their political authority we show that when oversight is relatively costly as in many developing economies the political authority exercises little monitoring of its agencies which reduces the effectiveness of productive government spending moreover when the technology used to provide public services is poor bureaus better succeed in requesting overly large budgets before triggering any monitoring both of these characteristics contribute to reducing the growth rate of already poor economies

imperfect information and the theory of government intervention in farm credit markets this paper describes some possible economic motivations for government intervention in farm credit markets these motivations are made possible by explicit departures from the perfect information and complete market assumptions that underlie both the neoclassical competitive paradigm and the fundamental theorems of welfare economics to be more precise the analysis focuses on three types of asymmetric information between farmers and prospective outside investors both of whom are assumed to be risk neutral arguably the three informational asymmetries examined here represent natural departures from perfect markets in that unlike the unencumbered neoclassical model each elicits farmers optimal use of debt contracts rather than equity instruments or other contractual forms to raise investment capital despite their consistency with observed contractual choices all three of the models analyzed below yield free market equilibria that diverge from first best perfect information outcomes given the inefficiency of these market equilibria the key question raised and discussed here is can government improve upon the derived competitive outcomes and if so how despite the enormity of the credit rationing literature only a few extant studies address this question in models that are consistent with debt contracts among them are demeza and webb 1987 1988 1989 and innes 1988 which focus on the third type of informational asymmetry considered below the other two information structures posited in this paper have been studied in several analyses of credit markets but with attention focused on positive attributes of the unfettered competitive equilibrium rather than on prospective implications for welfare enhancing government intervention in what follows th s literature is surveyed and for the first two information structures some new policy results a e presented a critical discussion of the paper s limitations concludes the article

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

on sustained growth under uncertainty we analyze a stochastic one sector model of economic growth and investigate the conditions under which long run growth occurs almost surely in contrast to the deterministic version of the model the utility function plays a crucial role in determining the long run behavior of output the central purpose of theories of economic growth is to understand the factors behind long run growth of economies and to explain differences in growth performances of economies in terms of fundamental endowments and choices a wide class of endogenous growth models has been specified in the last decade and they have explored a large array of possible explanatory variables for the differences in observed growth rates between countries with some notable exceptions most of these models are deterministic and therefore ignore the fundamental uncertainties which affect productivity and cause diversity between growth of nations the exceptions which include real business cycle models that examine the consequence of productivity shocks in endogenous growth frameworks use specific utility and production functions drawn from the log linear family see among others king et al 1988 king and rebelo 1988 de hek 1999 jones et al 1999 a general analysis of the phenomenon of sustained growth in economies subject to technological shocks is not yet available and the kind of conditions needed to guarantee sustained stochastic growth are not well understood in this article we address this issue in the simple framework of a stochastic one sector convex growth model when the technology is globally productive in the sense that marginal productivity of investment is bounded above one output and consumption flows can grow indefinitely i e long run growth is feasible whether such growth actually occurs depends on the intertemporal preference structure 2 in the deterministic version of this model this problem was first discussed by gale and sutherland 1968 who extended the classical optimal growth analysis to the case of such a productive technology more recently jones and manuelli 1990 have rigorously characterized the possibility of sustained long run growth in a variant of the one sector deterministic growth model see also rebelo 1991 3 the main result is that long run growth

asymmetric information in the credit market and discount rates for public investment abstract with asymmetric information in the credit market the optimal discount rate for public investment differs from the market interest rate this paper obtains the optimal discount rate for the two state case where returns on private projects can take only two values depending on the magnitudes of collateral costs screening through collateral requirements may or may not occur it is shown that the optimal discount rate is higher than the market interest rate in either case

a theory of corporate capital structure and investment this article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries in the model investors have a generic lending technology that they can improve at a cost those who upgrade become intermediaries to exploit their advantage however conflicts with depositors will limit the banks market presence and they will only lend to moderately endowed firms while bondholders will finance cash rich corporations the article also analyzes the extent to which investors adopt the superior lending technique the nature of bank competition and how corporate and bank conditions affect interest rates and investment copyright 2004 oxford university press

the availability doctrine abstract this paper develops a general equilibrium model in which monetary disturbances have effects reminiscent of roosa s classic description of the availability doctrine the model is a marriage of the modern credit rationing literature and the recent sluggish cash flow models of monetary transmission both elements are crucial the credit rationing aspect leads to a focus upon the quantity or availability of credit however the rationing model in and of itself is a real model and there is no reason for fluctuations in the nominal quantity of fiat money to have any effect on the availability of real credit this is where the sluggish cash flow assumption enters into the analysis under this assumption changes in the nominal supply of fiat money do affect the real supply of credit because a subset of the economy absorbs a disproportionate share of the monetary injection

capital accumulation under different financial agreements abstract this paper develops a simple overlapping generations model where agents income is given both by a stochastic endowment and by the profits generated by a production activity the purpose is to analyze the consequences of different forms of financial agreements on capital accumulation in this model pareto optimality requires that the capital stock is a deterministic function of the previous level of capital agents can eliminate any randomness in the capital accumulation process when contingent claims markets are available when standard loan contracts prevail because of asymmetric information the economy incurs an efficiency loss due to capital stock fluctuations the expected level of capital under this last regime is always smaller than the one achieved when markets for contingent claims exist

monitoring the monitor an incentive structure for a financial intermediary this paper studies financial intermediation i e delegated monitoring in a costly state verification model there are a finite number of agents thus the intermediary cannot fully diversify its portfolio and is subject to default risk the role of the intermediary is to satisfy simultaneously the different portfolio preferences of borrowers and lenders two questions arise when a delegated monitor is subject to non trivial default risk a what arrangement solves the problem of monitoring the monitor b what intermediary portfolio accomplishes optimal asset transformation between borrowers and lenders unlike previous delegated monitoring studies the law of large numbers is not sufficient to obtain our results instead we appeal to a stronger results the large deviation principle which establishes that convergence in the law of large numbers is exponential

monetary policy bank leverage and financial stability abstract this paper shows that with limited liability banks lever up excessively to finance new loans lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out when this constrained is relaxed but the bank faces costly dividend adjustment lower monetary policy rates always worsen risk taking incentives and the effect is persistent the reason is that costly dividend adjustment lowers the opportunity cost of lending in this model capital requirements are closer to the source of the distortion and thus work better than loan to value caps in reducing excessive risk taking

credit rationing concessionary lending and debt maturity abstract a firm raises capital for a two period investment while creditors observe the project status midstream unobservable managerial perks may consume capital each period when the firm is unfortunate early on short term financing results in either concessionary lending or costly liquidation rolling over short term debt may be problematic because the high risk premium creditors demand when asset value is low relative to debt impares managerial motivation precisely when the incentive to defer perk consumption is weakest long term financing may reduce total agency costs be enabling lenders to charge higher initial premia in effect shifting loan repayments to states in which incentive constraints are non binding

moral hazard under commercial and universal banking many claims have been made about the potential benefits and the potential costs of adopting a system of universal banlcing in the united states we evaluate these claims using a model where there is a moral hazard problem between banks and borrowers a moral hazard problem between banks and a deposit insurer and a costly state verification problem under conditions we describe allowing banks to take equity positions in firms strengthens their ability to extract surplus and exacerbates problems of moral hazard the incentives of universal banks to take equity positions will often be strongest when these problems are most severe for many decades commercial banks in the united states have been prohibited from making equity investments in the firms they serve rather they are restricted to providing them with loans in the form essentially of debt contracts this longstanding regulatory restriction1 results in distinctly different roles for bank lenders and equity investors and has had important implications for the entire financial sector the american system of commercial banking presents a sharp contrast with the banking systems of some other countries most notably germany in which banks are permitted to take equity positions under such universal banking arrangements banks can make equity investments as well as loans vote their equity shares and even hold seats on the boards of directors of nonfinancial firms in general they can be actively involved in all aspects of firm decision malqing in germany the control rights the authors have benefitted from the helpful comments of doug diamond joe haubrich ross levine stan longhofer joao santos and an anonymous referee the views expressed herein are those of the authors and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system 1 the key legislation which constrains u s banks equity investments is the glass steagall act of 1933 however a number of other laws also pertain to this issue particularly the bank holding company act of 1956 and its 1970 amendments incidentally there are some important exceptions to the equity investment prohibition in default situations banks are perrnitted to restructure loans into equity positions with the requirement of divestiture after a few years see james 1993 also bank holding companies are permitted to form separately capitalized venture capital subsidiaries for the expressed purpose of investing in start up enterprises john h boyd is a professor of finance in the carlson school of management at the university of minnesota and an adjunct consultant with the federal reserve bank of minneapolis chun chang is an associate professor of finance in the carlson school of management at the university of minnesota bruce d smith is a professor of economics at the university of texas ataustin

short run and long run equilibrium for a small open economy with intermediate goods abstract this paper analyzes the effects of changes in relative commodity prices on factor returns and the allocation of factor supplies in a two sector general equilibrium model with intermediate goods and various time horizons it is shown that when intermediate goods are introduced into the standard heckscher ohlin model there can be i nonstandard very short run and short run income effects and ii nonstandard short run and long run reallocations the paper concludes with a discussion of the possible conflict of interests among factor owners with respect to pricing tariff policy in light of these results

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

who is credit constrained in the u s economy an important assumption of the life cycle model of consumption is the postulate of perfect capital markets this hypothesis has recently been challenged by substantial empirical evidence hall and mishkin 1982 using the panel study of income dynamics estimate that 20 percent of united states families are liquidity constrained mariger 1986 derives a life cycle model with endogenous liquidity constraints and using a cross section estimates this fraction to be 19 4 percent hubbard and judd 1986 simulate a model with a constraint on net worth which shows that with reasonable assumptions about preferences 19 0 percent of united states consumers are liquidity constrained the emerging consensus points therefore to a fraction of approximately 20 percent of the population behaving in a manner that is inconsistent with the pure life cycle model in addition hayashi 1985 and zeldes 1989 investigate the correlation among consumption wealth and income for various population groups and infer that liquidity constraints are more important for younger families with low levels of wealth and saving the main limitation of these studies is that in their data sets constrained consumers are not observable and have to be identified via indirect evidence thus there is as yet little firm evidence about the characteristics of the consumers who are likely to be credit constrained this paper adopts an approach that differs from previous tests for liquidity constraints because it makes use of data where constrained consumers are observable and explicitly links their existence to credit market imperfections and personal characteristics the data drawn from the 1983 survey of consumer finances scf and described in section ii provide information on individuals whose request for credit has been rejected by financial intermediaries in section iii a model is developed in which consumers and lenders behavior jointly determines the probability that a consumer is rationed in the credit market this probability is then

trade factor prices and the gains from trade with increasing returns to scale existing analyses seem to suggest that national increasing returns to scale are not a very useful tool for analysing trade owing to problems such as multiple equilibria and the tendency towards complete specialization the purpose of this paper is to construct a model in which there are in fact determinant relationships among country size the direction of trade the gains from trade and international factor price differences in the model differences in country size determine the direction of trade which in turn determines factor price differences and limits the possible distribution of the gains from trade commerce international prix des facteurs de production et les gains de l change dans un contexte de rendements croissants a l echelle les analyses conventionnelles semblent suggerer que les rendements croissants h l 6chelle au niveau national ne constituent pas une avenue prometteuse dans l analyse du commerce international parce que de tels rendements creent une presomption en faveur de la specialisation complete et conduisent a des situations d 6quilibres multiples le but de ce m6moire est de construire un mod le dans lequel il existe des rapports determinants entre la dimension du pays la direction des 6changes les gains de l echange et les differentiels internationaux entre les prix des facteurs de production dans ce mod le les differences entre les pays en termes de dimension d6terminent la direction du commerce international laquelle d6termine le differentiel entre les prix des facteurs de production et limite l eventail des r6partitions possibles des gains de l echange

the nature of credit market failure abstract hidden knowledge gives rise to over lending if as evidence suggests the returns distributions preferred by borrowers are also favoured by lenders even the stiglitz weiss model yields over lending when entrepreneurs are sufficiently risk averse

investment adjustment costs an empirical assessment we evaluate empirical evidence for costs that penalize changes in investment using us industry data in aggregate models such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena so far no attempt has been made to estimate these costs directly at a disaggregated level we consider an industry model with investment adjustment costs and estimate its parameters using generalized methods of moments the ndings indicate small costs associated with changing the ow of investment at the industry level the weighted average of the industry elasticities with respect to the shadow price of capital which depends inversely on the adjustment cost parameter is more than seven times larger than the largest estimate based on aggregate data we examine potential sources which may account for the large industry aggregate dierence overall our results suggest

capital market imperfections international credit markets and nonconvergence abstract we consider a two country growth model with international capital markets these markets fund capital investment in both countries and operate subject to a costly state verification csv problem investors in each country require some external finance but also provide internal finance which mitigates the csv problem when two identical except for their initial capital stocks economies are closed they necessarily convergemonotonicallyto the same steady state output level unrestricted international financial tradeprecludesotherwise identical economies from converging and poor countries are necessarily net lenders to rich countries oscillation in real activity and international capital flows can occur journal of economic literatureclassification numbers e00 f00 f34 g14

financial market frictions monetary policy and capital accumulation in a small open economy abstract we consider a small open economy with a costly state verification problem and binding reserve requirements the presence of these frictions leads to the existence of two steady states with credit rationing an increase in the money growth rate the world interest rate or reserve requirements raises lowers gdp in the high low activity steady state however sufficiently large increases in money growth or the world interest rate can transform the high activity steady state from a sink to a source the model also delivers prescriptions for restoring the stability of this steady state in such an eventuality journal of economic literatureclassification numbers e5 f4

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

technology shocks capital utilization and sticky prices abstract we quantitatively evaluate a business cycle environment featuring endogenous capital utilization and nominal price rigidity that illustrates a negative relationship between labor hours and technology tfp shocks and a positive relationship between hours and investment mei shocks sticky prices induce firms to suppress changes in output due to tfp shocks through changes in the utilization rate of the existing capital stock and labor demand mei shocks have an indirect impact on output via their link with capital utilization and are shown to be the dominant driver of post 1979 us business cycles

investment shocks and business cycles abstract the origins of business cycles are still controversial among macroeconomists this paper contributes to this debate by studying the driving forces of fluctuations in an estimated new neoclassical synthesis model of the u s economy in this model most of the variability of output and hours at business cycle frequencies is due to shocks to the marginal efficiency of investment imperfect competition and to a lesser extent technological frictions are the key to their transmission although labor supply shocks explain a large fraction of the fluctuations in hours at very low frequencies they are irrelevant over the business cycle this finding is important because the microfoundations of these disturbances are widely regarded as unappealing

a note on the neoclassical ambiguity and the specific factor production model under variable returns to scale abstract this note investigates the relationship between commodity price changes and factor rewards in a specific factor production model that admits variable returns to scale the principal result is that in the presence of variable returns to scale the so called neoclassical ambiguity may be resolved without resorting to detailed knowledge of the mobile factor s preferences that is to say the effect of a commodity price change may as it does with the returns to those factors specific to each industry raise or lower the real reward of the mobile factor in terms of either commodity depending only on the characteristics of the technology

resource policy investment and employment under variable returns to scale abstract this paper utilizes a generalized two sector model of a small open economy that features a binding real minimum wage specific factor and variable returns to scale the results presented indicate that capital accumulation increases total employment in the distorted economy and that all of the growth occurs in the sector that does not employ the specific factor however an increase in the availability of public land will increase total employment in the economy only when the sector that employs the specific factor is not capital intensive relative to the alternate sector

dynamic credit relationships in general equilibrium abstract we construct a general equilibrium model with private information in which borrowers and lenders enter into long term dynamic credit relationships each new generation of ex ante identical individuals is divided in equilibrium into workers and entrepreneurs workers save through financial intermediaries in the form of interest bearing deposits and supply labor to entrepreneurs in a competitive labor market entrepreneurs borrow from financial intermediaries to finance projects which produce privately observed sequences of random returns each financial intermediary holds deposits from a large number of workers and operates a portfolio of dynamic contracts with different credit positions we calibrate the model to the u s economy and find that dynamic contracting is very effective at mitigating the effects of private information moreover restricting borrowers and lenders to use static one period contracts with a costly monitoring technology has adverse effects both on the level of aggregate economic activity and on individual welfare unless monitoring costs are very small finally the optimal provision of intertemporal incentives leads to increasing consumption inequality over time within generational cohorts as in u s data

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

financial crises and recapitalizations we develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods producing firms since financial intermediaries are highly leveraged we show that the welfare gains from their recapitalization in response to large but rare net worth losses are as large as those from eliminating typical business cycle fluctuations we also find that these gains are increasing in the size of the net worth loss are larger when recapitalization funds are raised from the household rather than the real sector and can be larger when lower idiosyncratic risk leads to higher leverage

the beliefs of borrowers and lenders and investment decisions abstract this paper examines the role of beliefs in the determination of equilibrium in a standard model of credit markets and investment project choice with asymmetric information it is shown that with ex ante asymmetric information the beliefs of entrepreneurs are important for the equilibrium level of aggregate investment and with ex post asymmetric information the beliefs of creditors are important for the types of projects selected by entrepreneurs

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

liquidity provision interest rates and unemployment abstract the effective liquidity supply of the economy the weighted sum of all assets that serve as media of exchange matters for interest rates and unemployment we formalize this idea by adding an over the counter market with collateralized trades to the mortensen pissarides model an increase in public liquidity through a higher supply of real government bonds raises the real interest rate crowding out private liquidity and increasing unemployment if unemployment is inefficiently high keeping liquidity scarce can be socially optimal a liquidity crisis affecting the acceptability of private assets as collateral widens the rate of return difference between private and public liquidity also increasing unemployment

the macroeconomic implications of financial deregulation abstract this paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking the central bank is supposed to maximize an objective function in which the probability of bank failure is an argument it is then shown that the usual tradeoffs between policy objectives imply that financial deregulation will lead to more interest rate smoothing than would otherwise take place and further that because of restricted entry into banking deregulation will call for some inflation the transition toward deregulation raises special problems which are likely to require a more gradual approach toward the stationary equilibrium

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

moneylenders and bankers price increasing subsidies in a monopolistically competitive market abstract in many areas of the world a significant part of the cost of obtaining a good or service is the cost of enforcing the contracts entailed in its provision we present models of markets with endogenous enforcement costs motivated by studies of rural credit markets we show that subsidies may have perverse effects under monopolistic competition increasing prices or inducing exit higher prices interest rates result from the loss of scale economies or from negative externalities among suppliers the models are consistent with the puzzling evidence that infusions of government subsidized formal credit have not improved the terms offered by moneylenders

optimal contracts under costly state falsification we examine an exchange economy with two agents one risk neutral with a certain endowment and a second risk averse with a random endowment the realization of the endowment is public but can be falsified by the second agent at a cost for a broad class of falsification cost functions the optimal no falsification contract is noncontingent on a left hand interval and strictly increasing with a slope strictly less than one on a right hand interval under a mild further restriction optimal no falsification contracts are in addition piece wise linear optimal contracts may in general require falsifying the state but for a set of the highest endowment realizations there is no falsification we find simple conditions under which the optimal contract is a no falsification contract the model has applications that include financial insurance and employment contracts and tax policy

should courts enforce credit contracts strictly the intimate linkages between law and nance are currently the centre of wide rangingempirical investigations this article presents a simple banking model with informationasymmetries concerning borrowers entrepreneurial talent it is shown that improvements inthe enforcement of contract by courts reduce agency problems but can also reduce the bank sincentive to screen borrowers adequately thus worsening credit allocation a stricterenforcement of credit contracts therefore may be socially harmful even if costlessly achieved improvements in accounting standards however always make bank screening of borrowers lesscostly and improve credit allocation and social welfare

investment and government intervention in credit markets when there is asymmetric information abstract this paper models private firm investment choices and government credit policy in an entrepreneurial firm financial market wherein firm owners have better information about the quality of their return distributions than do external financiers the analysis shows that despite the absence of an informational advantage the government can often increase social welfare by offering subsidized debt contracts however the paper also finds that some common credit subsidy policies including loan guarantees and government backing of targeted lending institutions yield constrained inefficient outcomes in general

further implications of variable returns to scale abstract among those trade theorists who have studied the implications of variable returns to scale it has been almost standard practice to suppose that the variability of returns in each industry is generated by technical intra industrial externalities in the present paper inter industrial as well as intra industrial externalities are admitted the topology of the set of production possibilities and of the locus of competitive outputs as well as the robustness of several standard trade theorems are examined

monetary policy in a dollarized economy where balance sheets matter abstract does the dollarization of liabilites and the resulting balance sheet vulnerability prevent monetary policy from serving its conventional countercyclical role we study this question in a model of a small open economy in which domestic firms face an imperfect capital market with risk premia depending on net worth as in bernanke and gertler am econ rev 79 1989 14 in spite of the financial fragility channels present in the model the conventional wisdom still holds under a floating exchange rate countercyclical monetary policy does help cushion the impact of foreign real shocks

the growth effects of property rights the role of finance summary using a variety of statistical approaches we show that the relationship between property rights and growth is nonlinear stronger enforcement of property rights raises growth up to a point before growth begins to decline we provide a simple theoretical rationale for this conclusion using a model with informational asymmetries in the financial sector stronger property rights have two opposing effects on the one hand it increases capital formation and growth on the other hand it encourages bad borrowing practices thus there exists an optimal level of property rights which maximizes growth however as financial markets mature the negative effects associated with stronger property rights become weaker

on the possibility of credit rationing in the stiglitz weiss model contrary to what is consistently assumed in the literature the return function cannot be hump shaped in the stiglitz weiss 1981 model this has important consequences for the possible occurrence of credit rationing and redlining with a single class of borrowers banks offer credit in two stages demand possibly exceeds supply in stage one but not in stage two with several observationally distinguishable borrower classes the firms in a borrower class are redlined only under circumstances which imply that they would not get credit in a perfect capital market either die rendite funktion kann im stiglitz weiss 1981 modell nicht so wie das in der literatur durchgangig angenommen wird hugelformig sein das hat wichtige implikationen fur die moglichkeit von kreditrationierung einerseits und fur die moglichkeit des ausschlusses ganzer kreditnehmergruppen vom kapitalmarkt andererseits mit nur einer klasse von kreditnehmern erfolgt die kreditvergabe in zwei stufen wahrend auf der ersten stufe eine ubernachfrage vorliegen kann herrscht auf der zweiten stufe marktraumung bei mehreren unterscheidbaren kreditnehmerklassen wird eine klasse nur unter den bedingungen vom kreditmarkt ausgeschlossen bei deren vorliegen sie auch in einem vollkommenen kreditmarkt keinen kredit erhalten wurde

inflation investment and economic performance the role of internal financing abstract this paper studies a link between inflation and economic activity that is built on two hypotheses first firms mitigate informational frictions in financial markets by accumulating retained earnings over a period of time second firms allocate earnings among three competing uses dividends current investment and the accumulation of internal funds and inflation directly distorts this allocation decision as well as the real value of accumulated internal funds the model predicts that the level of inflation both unanticipated and expected inflation as well as the variability of inflation distort firms internal financing decisions increases frictions in financial markets reduces the level and efficiency of investment and reduces aggregate output the marginal effects of inflation are increasing in the inflation rate

deposit insurance a reconsideration abstract this paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs the way in which they are priced and the way in which they fund revenue shortfalls in our economy the central issue in analyzing deposit insurance is how the government will make up any fdic losses deposit insurance premia matter only in so far as they affect the level of implied fdic revenue shortfalls moreover local variations in the magnitude of fdic losses will generically be irrelevant for the determination of any equilibrium quantities that affect agent welfare however large enough changes in these losses can matter there is no presumption that keeping these shortfalls low is a good idea finally we show that multiple pareto ranked equilibria can be observed the potential for multiplicity of equilibria may depend on components of fdic policy our analysis provides counterexamples to the following propositions 1 actuarially fair pricing of deposit insurance is always desirable 2 implicit fdic subsidization of banks through deposit insurance is always undesirable 3 large fdic losses are necessarily symptomatic of a poorly designed deposit insurance system 4 risk based deposit insurance premia can easily be used to reduce moral hazard problems associated with deposit insurance provision

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

equilibrium subprime lending this paper develops an equilibrium model of a subprime mortgage market our goal is to offer a benchmark with which the recent subprime boom and bust can be compared the model is tractable and delivers plausible orders of magnitude for borrowing capacities as well as default and trading intensities we offer simple explanations for several phenomena in the subprime market such as the prevalence of teaser rates and the clustering of defaults in our model both nondiversifiable and diversifiable income risks reduce debt capacities thus debt capacities need not be higher when a larger fraction of income risk is diversifiable

the effects of technology shocks on hours and output a robustness analysis we analyze the effects of neutral and investment specific technology shocks on hours and output long cycles in hours are removed in a variety of ways hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks the percentage of the variance of hours output explained by neutral shocks is small large the opposite is true for investment specific shocks news shocks are uncorrelated with the estimated technology shocks copyright 2009 john wiley sons ltd