optimal interest rate rules asset prices and credit frictions we study optimal taylor type interest rate rules in an economy with credit market imperfections our analysis builds on the agency cost framework of carlstrom and fuerst 1997 agency costs net worth and business fluctuations a computable general equilibrium analysis american economic review 87 893 910 which we extend in two directions first we embed monopolistic competition and sticky prices second we modify the stochastic structure of the model in order to generate a countercyclical premium on external finance this is achieved by linking the mean distribution of investment opportunities faced by entrepreneurs to aggregate total factor productivity we model monetary policy in terms of simple welfare maximizing interest rate rules we find that monetary policy should respond to increases in asset prices by lowering interest rates however when monetary policy responds strongly to inflation the marginal welfare gain of responding to asset prices vanishes within the class of linear interest rate rules that we analyze a strong anti inflationary stance always attains the highest level of welfare

fired or retired a competing risks analysis of chief executive turnover we apply duration analysis to model the tenure and mode of exit of ceos from ftse 350 companies from 1996 2005 a decade in which corporate governance reforms have sought to increase the accountability of the ceo to shareholders and their representatives on the board we find a greater likelihood of dismissal in the latter part of the period however we also find that the likelihood of forced departure sharply decreases from the fifth year of a ceo s tenure we find evidence that this is because ceos who survive beyond year four are able to entrench themselves in their position

inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

the interaction of monetary and macroprudential policies i analyze a new keynesian dynamic stochastic general equilibrium dsge model where the financing of productive investment is affected by a moral hazard problem i solve for jointly ramsey optimal monetary and macroprudential policies i find that when a financial friction is present in addition to the standard nominal friction the optimal policy can replicate the first best allocation if the social planner can conduct both monetary and macroprudential policy using monetary policy alone is not enough a policy trade off between stabilizing inflation and output gap emerges when policy follows simple rules the source of fluctuations is relevant for the choice of the appropriate policy mix

dynamic incentives and retirement abstract this paper examines multi period compensation contracts when retirement is anticipated short term contracts in long term employment relationships are equivalent to a long term renegotiation proof contract the dynamic of incentive rates is determined by i how and in which periods managerial effort affects the contractible performance measures and by ii the time series correlation of error terms in performance reports the model explains why long term investments can decrease while incentive rates increase as managers approach retirement earnings persistence is negatively associated to earnings based incentive rates but towards retirement high earnings persistence implies increasing earnings based incentive rates

do bank characteristics influence the effect of monetary policy on bank risk abstract we analyze whether bank characteristics affect the impact of monetary policy on bank risk we find that the insulation effects produced by capital and liquidity were lower for banks operating in countries with particularly low interest rates

how financial incentives induce disability insurance recipients to return to work using a local randomized experiment that arises from a sharp discontinuity in disability insurance di policy in norway we provide transparent and credible identification of how financial incentives induce di recipients to return to work we find that many di recipients have considerable capacity to work that can be effectively induced by providing financial work incentives we further show that providing work incentives to di recipients may both increase their disposable income and reduce program costs our findings also suggest that targeted policies may be the most effective in encouraging di recipients to return to work

coordinating monetary and macroprudential policies this paper studies noncooperative games between a monetary authority and a macroprudential regulator whose objectives are a subset of those in the social loss function the analysis is based on a new keynesian model with a financial sector and a financial friction a la gertler and karadi 2011 when the friction affects the financing of all factors of production equally macroprudential policy is shown to be a powerful additional tool fully eliminating inefficiencies regardless of the source of the shock and no matter whether the central bank and the regulator cooperate but when trade offs are present and policy is discretionary the institutional arrangements become crucial while coordination leads to higher welfare than a setting in which each authority takes the decision rule of the other as given namely the nash equilibrium our analysis shows that a noncooperative setting in which the macroprudential authority acts as a leader within the period can be superior to cooperation finally our conclusions are unaffected by whether the macroprudential instrument affects funding costs or acts as a liquidity requirement

family welfare cultures strong intergenerational correlations in various types of welfare use have fuelled a long standing debate over whether welfare receipt in one generation causes welfare participation in the next generation some claim a causal relationship in welfare receipt across generations has created a culture in which welfare use reinforces itself through the family others argue the determinants of poverty or poor health are correlated across generations so that children s welfare participation is associated with but not caused by parental welfare receipt however there is little empirical evidence to sort out these claims in this paper we investigate the existence and importance of family welfare cultures in the context of norway s disability insurance di system to overcome the challenge of correlated unobservables across generations we take advantage of random assignment of judges to di applicants whose cases are initially denied some appeal judges are systematically more lenient which leads to random variation in the probability a parent will be allowed di using this exogenous variation we find strong evidence that welfare receipt in one generation causes welfare participation in the next generation when a parent is allowed di their adult child s participation over the next five years increases by 6 percentage points this effect grows over time rising to 12 percentage points after ten years while these findings are specific to our setting they serve to highlight that welfare reforms can have long lasting effects on program participation since any original effect on the current generation could be reinforced by changing the participation behavior of their children as well the detailed nature of our data allows us to compare the intergenerational transmission with spillover effects in other networks and to explore mechanisms our findings point to a special link between parents and their children with little impact due to close neighbors di participation we find suggestive evidence that what may change as a result of a parent being allowed di is their children s beliefs about the efficacy of trying to get on to the di program or their attitudes about di participation and its stigma

collective moral hazard maturity mismatch and systemic bailouts the paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy when everyone engages in maturity transformation authorities haver little choice but facilitating refinancing in turn refusing to adopt a risky balance sheet lowers the return on equity the key ingredient is that monetary policy is non targeted the ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage while the distortion costs are to a large extent fixed this insight has important consequences first banks choose to correlate their risk exposures second private borrowers may deliberately choose to increase their interest rate sensitivity following bad news about future needs for liquidity third optimal monetary policy is time inconsistent fourth macro prudential supervision is called for we characterize the optimal regulation which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets we establish the robustness of our insights when the set of

the european central bank s monetary pillar after the financial crisis abstract we apply a structural topic model stm to analyze european central bank ecb communication regarding the monetary pillar of its monetary policy strategy we do so by quantifying the transcripts of the ecb president s introductory statements at the press conferences that accompany the regular meetings of the ecb governing council our evidence shows that within its monetary pillar the ecb has gradually shifted its focus away from a genuine monetary analysis towards monitoring the stability of the european financial system we go on to augment a standard taylor rule by quantitative indicators obtained from the stm to assess whether the monetary pillar in general and the shift in focus in particular has had a measurable impact on the ecb s monetary policy stance we find that the monetary analysis has had a bearing on the interest rate setting in the early years of the ecb s existence but this influence completely disappears in the latter years of the sample furthermore we find no evidence that financial stability considerations in the ecb communication have influenced interest rate decisions either before or after the financial crisis

earnings disposable income and consumption of allowed and rejected disability insurance applicants ticipation rate has increased from less than 1 percent to over 5 percent of the adult population in many european countries the increases are even more striking from 1 percent to 7 percent in the united kingdom and from 2 percent to almost 10 percent in norway two key questions in thinking about the size and growth of the di program are to what extent it discourages work and how valuable the insur ance is to individuals and families these questions motivate our paper we begin by describing the earnings disposable income and consumption of awarded and rejected di applicants before and after the disability onset and the allowance decision next we discuss alternative interpretations of these descriptive results either through the lens of the approach taken in bound

employment horizon and the choice of performance measures empirical evidence from annual bonus plans of loss making entities we examine the extent to which employment horizon concerns affect the relative emphasis on financial versus nonfinancial performance measures in annual bonus plans we argue that managers of loss making firms are likely to voluntarily or forcibly depart in the near future and consequently have a shorter employment horizon loss making firms then need to increase the emphasis on forward looking nonfinancial performance measures to motivate long term effort of their managers thus we hypothesize that the emphasis on nonfinancial performance measures is greater in loss making than in profitable firms even after controlling for the informativeness of earnings we find consistent support for our hypothesis using different archival survey and field data sources and various proxies for short employment horizon and the emphasis on nonfinancial performance measures

empirical research on ceo turnover and firm performance a discussion abstract engel hayes wang and farrell whidbee provide new evidence on how firms weight alternative performance measures in making ceo retention and replacement decisions while their results are statistically significant firm performance continues to explain very little of the variation in ceo turnover i argue we have probably reached a point of diminishing returns in estimating logit models that focus on the relation between ceo turnover and firm performance measures we will have to consider other less explored issues to increase our understanding of ceo turnovers and replacements analyzing age related issues is one example

implications for gaap from an analysis of positive research in accounting based on extant literature we review the positive theory of gaap the theory predicts that gaap s principal focus is on control performance measurement and stewardship and that verifiability and conservatism are critical features of a gaap shaped by market forces we recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets but caution against expanding fair values to financial reporting more generally we conclude that rather than converging u s gaap with ifrs competition between the fasb and the iasb would allow gaap to better respond to market forces

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

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

macroprudential and monetary policies the need to dance the tango in harmony abstract considering a sample of 37 emerging and advanced economies from 2000q1 to 2014q4 we empirically assess how effective macroprudential policies are in curbing domestic credit growth and whether their effectiveness is affected by monetary policy conditions we obtain three important results first our findings suggest in line with previous research that an overall tightening in macroprudential policies is associated with a reduction in credit growth second we show that a restrictive monetary policy enhances the impact of macroprudential tightening on credit growth third our results seem to suggest that monetary policy helps to reduce the transmission delay of macroprudential policy actions consequently our results confirm the need for coordination between the two policies

procyclical leverage and value at risk the availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries empirically we find that intermediary leverage is negatively aligned with the banks value at risk var motivated by the evidence we explore a contracting model that captures the observed features under general conditions on the outcome distribution given by extreme value theory evt intermediaries maintain a constant probability of default to shifts in the outcome distribution implying substantial deleveraging during downturns for some parameter values we can solve the model explicitly thereby endogenizing the var threshold probability from the contracting problem

impact of firm performance expectations on ceo turnover and replacement decisions abstract our analysis suggests that boards focus on deviation from expected performance rather than performance alone in making the ceo turnover decision especially when there is agreement less dispersion among analysts about the firm s earnings forecast or there are a large number of analysts following the firm in addition our results suggest that boards are more likely to appoint a ceo that will change firm policies and strategies i e an outsider when forecasted 5 year eps growth is low and there is greater uncertainty more dispersion among analysts about the firm s long term forecasts

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

leaning against boom bust cycles in credit and housing prices this paper studies the potential gains of monetary and macro prudential policies that lean against house price and credit cycles we rely on a model that features borrowers and savers and allows for over borrowing induced by news shock driven cycles we find that policy that responds to changes in financial variables is socially optimal considering the use of a single policy instrument both types of agents are better off when the interest rate optimally responds to credit growth when we allow for the implementation of both interest rate and ltv policies heterogeneity in the welfare implications is key in determining the optimal use of policy instruments the optimal policy for the borrowers is characterized by a ltv ratio that responds countercyclically to credit growth which most effectively stabilizes credit relative to gdp in contrast the optimal policy for the savers features a constant ltv ratio coupled with an interest rate response to credit growth news shock driven cycles account for most of the gains from a policy response to changes in financial variables

the role of bank capital in the propagation of shocks abstract the recent financial turmoil has underlined the importance of analyzing the link between banks balance sheets and economic activity we develop a dynamic stochastic general equilibrium model in which bank capital mitigates an agency problem between banks and their creditors as a result the capital position of banks affects their ability to attract loanable funds and therefore influences the business cycle through a bank capital channel of transmission we find that the bank capital channel greatly amplifies and propagates the effects of technology shocks on output investment and inflation moreover bank capital shocks create sizeable declines in output and investment

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

interactions of commitment and discretion in monetary and fiscal policies we consider monetary scal interactions when the monetary authority is more conservative than the scal with both policies discretionary 1 nash equilibrium yields lower output and higher price than the ideal points of both authorities 2 of the two leadership possibilities scal leadership is generally better with scal discretion monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks but scal commitment is not similarly negated by monetary discretion second best outcomes require either joint commitment or identical targets for both authorities output socially optimal and price level appropriately conservative or complete separation of tasks jel e61 e63

leverage across firms banks and countries we present new stylized facts on bank and rm leverage during the period 2000 2009 using internationally comparable micro level data from many countries we document the following patterns a there was an increase in leverage for investment banks prior to the sub prime crisis b there was no visible increase in leverage for the typical commercial bank and non nancial rm c o balance sheet items constitute a big fraction of assets especially for large commercial banks in the us whereas investment banks do not report these items d the leverage ratio is procyclical for investment banks and for large commercial banks in the us e banks in emerging markets with tighter bank regulation and stronger investor protection experienced signicantly less deleveraging during the crisis the results suggest that excessive risk taking before the crisis was not easily detectable because the risk involved the quality rather than the quantity of assets

trends in employment and earnings of allowed and rejected applicants to the social security disability insurance program since the early 1980s changes in the economic environment and in the process for determining eligibility for the social security disability insurance di program have had significant effects on the program first the economic situation and labor force opportunities for lower skilled people continued to decline leading to lower rates of participation in the labor force for less educated men second changes in the eligibility process made it easier to obtain di benefits based on conditions difficult to clearly identify on medical terms alone such as back pain or depression 1 those two factors have likely contributed to a substantial increase in the number of individuals receiving di as well as a significant change in the characteristics of applicants and new beneficiaries over the same period both applicants and new beneficiaries have become younger longer lived more likely to apply because of nonterminal conditions such as back pain or mental health and more likely to be female 2 as a result recent work projects a rapid increase in program costs as greater numbers of beneficiaries stay on the program for more years e g david h autor and duggan 2006 the concurrent developments in the economy and eligibility rules have also fueled the concern that the generosity of di increasingly induces low income workers to apply for and sometimes receive benefits and that some of those beneficiaries would be able to work in the absence of the program indeed a growing body of research suggests that some workers in difficult economic conditions exit the labor force to

aspects of monetary and banking theory and moral hazard we consider two problems in monetary and banking theory in this paper the first of these deals with differences between monetary and tax transfer resolutions of risk sharing problems in overlapping generations 12 15 models of fiat money under uncertainty our second contribution the scenario for which is also motivated in part by interventions needed for risk sharing reasons is an attempt to provide a rationale for interest rate controls on the liabilities of intermediaries that invest in risky assets both models consider environments in which uncertainty exists private markets are incomplete and most importantly some material payoff relevant actions are not perfectly observable the goal of this research is to provide further momentum to theoretical developments that serve to integrate information based models of investment and intermediation with theories of unbacked fiat money and the control of monetary institutions in recent years there has been a great deal of research interest in explicating the micro economic foundations of fiat money i e valued government created assets which are unbacked by payoffs from productive investments or taxes and the uniqueness and criteria for regulation of depository intermediary firms important contributions have been among others the works of bryant 3 the papers in kareken and wallace 7 fama 6 merton 10 and diamond and dybvig 5 asymmetric information based foundations of intermediary functioning have been provided by the papers of leland and pyle 9 followed by diamond 4 in most of this work there has usually been a dichotomy between models that focus on providing and analyzing a role for fiat money and those which analyze the rationale regulation and pricing of capital market intermediaries and their contracts regrettably we persist in having this dichotomy in our work some recent work like fama 6 does merge these two aspects however by emphasizing perfect information complete market environments in which the financial structure irrelevance theorems of modigliani and miller 10 apply models of unbacked fiat money many different types of which are to be found in kareken and wallace 7 can be usefully dichotomized as being of two types in the first fiat money serves the function of opening up or expanding trading opportunities among contemporaneously living agents who have endowment

bank net worth asset prices and economic activity abstract a dynamic general equilibrium model is proposed to study the interactions between the banking sector asset prices and aggregate economic activity a durable asset serves as a productive input and as a collateral for loans the propagation mechanism of a negative productivity shock is enhanced and prolonged through the interaction of credit constraints and asset prices where the bank loan and the investment are squeezed by a higher bank capital asset ratio for lending and at the same time a stricter collateral requirement for borrowing the model explains why banking crises often coincide with depression in the asset markets the results also bear policy implications for the debates over regulatory bank capital adequacy and credit control policies

does disability insurance receipt discourage work using examiner assignment to estimate causal effects of ssdi receipt abstract we present the first causal estimates of the effect of social security disability insurance benefit receipt on labor supply using all program applicants we use administrative data to matc

macroprudential policy and bank risk abstract this paper investigates the effects of macroprudential policies on bank risk through a large panel of banks operating in 61 advanced and emerging market economies there are three main findings first there is evidence suggesting that macroprudential tools have a significant impact on bank risk second the responses to changes in macroprudential tools differ among banks depending on their specific balance sheet characteristics in particular banks that are small weakly capitalised and with a higher share of wholesale funding react more strongly to changes in macroprudential tools third controlling for bank specific characteristics macroprudential policies are more effective in a tightening than in an easing episode

banking market structure and financial stability evidence from the texas real estate crisis in the 1980s abstract this paper examines the relationship between banking market structure and financial stability using data on thrifts a type of banking institution specializing in residential mortgage lending i test two related hypotheses first competition reduces franchise value second reduced franchise value induces risk taking testing the second hypothesis exploits predictions that when hit by an exogenous shock the slope of risk with respect to franchise value becomes more negative because thrifts adopt bang bang strategies and choose minimal or maximal risk using the texas real estate collapse in the 1980s as a natural experiment i find evidence supporting both hypotheses

whether top executives turnover influences environmental responsibility from the perspective of environmental information disclosure we have empirically examined the relationship between top executives turnover and the corporate environmental responsibility by identifying the influence of ten specific turnover reasons resulting in the chairman s departure and two important types of chairman s succession using a sample of 782 manufacturing listed companies across 3 years in china we find that the corporate environmental responsibility is negatively associated with the involuntary and negative turnover i e dismissal health and death and forced resignation and positively associated with improving corporate governance and not associated with the normal turnover i e retirement and contract expiration and the types of chairman s succession i e independence and internal or external promotion our study significantly contributes to research in environmental disclosure by revealing the relationship between chairman s turnover and the corporate environmental responsibility a feasible way is suggested to regulators and other stakeholders in monitoring or assessing the possible abnormality of environmental responsibility when firms experience involuntary and negative chairman s turnover in the emerging economies

a contracting perspective on earnings quality abstract this paper analyzes the impact of signal to noise ratios and the autocorrelation of a performance measure on the principal s welfare in dynamic agencies with renegotiation we consider the impact of changes in the persistent transitory and reversible components of accounting earnings on its usefulness in valuation versus contracting increasing the persistent components and reducing the reversible components are generally desirable for valuation but not for contracting eliminating transitory components of earnings is generally desirable for valuation but not necessarily for contracting we discuss the contracting implications of differences in the autocorrelations of accounting earnings versus stock returns

managerial legacies entrenchment and strategic inertia this paper argues that the legacy potential of a firm s strategy is an important deter minant of ceo compensation turnover and strategy change a legacy makes ceo replacement expensive because firm performance can only partially be attributed to a newly employed manager boards may therefore optimally allow an incumbent to be entrenched moreover when a firm changes strategy it is optimal to change the ceo because the incumbent has a vested interest in seeing the new strategy fail even though ceos have no specific skills in our model legacy issues can explain the empirical association between ceo and strategy change this paper proposes a model of ceo replacement and puts forward a novel determinant for turnover decisions the legacy potential of a firm s strategy we mean by this the extent to which a manager s decisions affect future firm cash flows potentially beyond the manager s own tenure the replacement of a ceo is arguably one of the most important decisions a firm takes yet the theoretical and empirical finance literature has relatively little to say about the firm and manager specific characteristics that lead to one manager being fired and replaced by another as brickley 2003 points out the only variable that predicts turnover empirically is poor firm performance but it has little pre dictive power theoretical papers on managerial turnover tend to reduce ceo successions to a sequence of static interactions see below for more details as such they do not distinguish between a ceo who is hired and can start a fresh project or one who is constrained in this choice because he inherits a prede cessor s long term strategy our paper focuses on this latter phenomenon and investigates turnover decisions when strategy choices have a legacy potential the fact that a dynamic link exists between a ceo and his predecessor is probably more recognized in the accounting literature than in finance pourciau both authors are from the toulouse school of economics and the institut d administration des

dynamic agency with renegotiation and managerial tenure this paper proves the renegotiation proofness principle for a dynamic len linear contracts exponential utility normal distributions model and examines the impact of repeated renegotiation on incentives and managerial tenure when performance information is serially correlated in addition to providing a general solution to a multiperiod agency problem with serially correlated performance measures this paper characterizes optimal managerial tenure turnover policies as a function of the time series properties of performance measures with negatively correlated performance measures the principal prefers longer managerial tenure and no turnover is optimal with positively correlated performance measures absent a switching cost turnover every period is optimal in the presence of a fixed switching cost interior optimal turnover policies exist if the performance measures are positively correlated switching costs are necessary but not sufficient for interior optimal tenure the optimal turnover policies present an alternative to theories of performance driven managerial turnover and are consistent with evidence that a majority of managerial turnovers are age related normal retirements

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

to blame or not to blame analysts reactions to external explanations for poor financial performance abstract managers often provide self serving disclosures that blame poor financial performance on temporary external factors results of an experiment conducted with 124 financial analysts suggest that when analysts perceive such disclosures as plausible they provide higher earnings forecasts and stock valuations than if the explanation had not been provided however we also show that these disclosures can backfire if analysts find them implausible specifically implausible explanations that blame poor performance on temporary external factors lead analysts to provide lower earnings forecasts and assess a higher cost of capital than if the explanation had not been provided

heterogeneous transmission mechanism monetary policy and financial fragility in the eurozone the eurozone economic activity and banking sector have shown substantial fragility over the last years with remarkable country heterogeneity using detailed data on lending conditions and standards we analyse along several key dimensions of heterogeneity how financial fragility has affected the transmission mechanism of the single eurozone monetary policy the analysis shows that the monetary transmission mechanism is time varying and influenced by the financial fragility of the sovereigns banks firms and households the impact of monetary policy on aggregate output is stronger during the financial crisis especially in countries facing increased sovereign financial distress this amplification mechanism moreover operates through the credit channel both the bank lending and the non financial borrower balance sheet channels our results suggest that the bank lending channel has been to a large extent neutralized by the ecb non standard monetary policy interventions but the policy framework until the end of 2011 was insufficient to overcome credit availability problems stemming from deteriorated firm net worth and risk conditions especially for small firms in countries under stress matteo ciccarelli angela maddaloni and jose luis peydro

optimal monetary policy in a model with agency costs this paper integrates a fully explicit model of agency costs into an otherwise standard dynamic new keynesian model in a particularly transparent way a principal result is the characterization of agency costs as endogenous markup shocks in an output gap version of the phillips curve the model s utility based welfare criterion is derived explicitly and includes a measure of credit market tightness that we interpret as a risk premium the paper also fully characterizes optimal monetary policy and provides conditions under which zero inflation is the optimal policy finally optimal policy can be expressed as an inflation targeting criterion that depending upon parameter values can be either forward or backward looking

fiscal multipliers in recessions standard business cycle models have difficulties generating large state dependent fiscal multipliers employing a model of costly financial intermediation based on curdia woodford we show that fiscal multipliers can be strongly state dependent fiscal expansions during recessions may lead to multiplier values exceeding two while similar expansions during economic booms would produce values falling short of unity this pattern obtains if the spread the financial friction is more sensitive to fiscal policy during recessions than during expansions a feature that is present in the data our results are consistent with recent empirical work documenting the state contingency of multipliers

credit externalities macroeconomic effects and policy implications financial crises are often preceded by peri ods of credit expansion during which firms and households become increasingly vulnerable to a reversal in economic conditions when eco nomic conditions actually worsen financing constraints become tighter causing a deeper contraction of economic activity these events have led to policy proposals for preventing excessive borrowing during normal times if rational agents evaluate financing decisions from a privately optimal standpoint why would the debt level not be socially efficient the theoretical literature has offered an answer to this question based on a pecuniary externality that arises due to the presence of financial frictions private agents tend to under value net worth during a period of financial distress because they fail to internalize the fact that additional net worth would have positive spillovers on other agents balance sheets 1 as a result private agents borrow excessively the quantitative implications of these credit exter nalities however remain largely unknown in particular these key questions have not been addressed

excessive dollar debt financial development and underinsurance we propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar denominated external debt present in these markets we show that when financial constraints affect borrowing and lending between domestic agents agents undervalue insuring against an exchange rate depreciation since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars this result implies that domestic agents choose excessive dollar debt we also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets the retarded entry reinforces the underinsurance problem

capital regulation and monetary policy with fragile banks optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky a monetary expansion and a positive productivity shock increase bank leverage and risk risk based capital requirements amplify the cycle and are welfare detrimental within a class of simple policy rules the best combination includes mildly anticyclical capital ratios as in basel iii and a response of monetary policy to asset prices or bank leverage

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed