the collateral channel how real estate shocks affect corporate investment abstract what is the impact of real estate prices on corporate investment in the presence of financing frictions firms use pledgeable assets as collateral to finance new projects through this collateral channel shocks to the value of real estate can have a large impact on aggregate investment to compute the sensitivity of investment to collateral value we use local variations in real estate prices as shocks to the collateral value of firms that own real estate over the 1993 2007 period the representative us corporation invests 0 06 out of each 1 of collateral jel d22 g31 r30

time consistent public policy in this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure we characterize and solve for markov perfect equilibria of the dynamic game between successive governments the characterization consists of an inter temporal first order condition a generalized euler equation for the government and we use it both to gain insight into the nature of the equilibrium and as a basis for computations for a calibrated economy we find that when the only tax base available to the government is capital income an inelastic source of funds at any point in time the government still refrains from taxing at confiscatory rates we also find that when the only tax base is labour income the markov equilibrium features less public expenditure and lower tax rates than the ramsey equilibrium

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

capital controls and monetary policy in sudden stop economies abstract the dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies this paper studies the benefits of capital controls and monetary policy in a small open economy with financial frictions nominal rigidities and sudden stops without commitment the optimal monetary policy should sharply diverge from price stability the policymakers will also tax capital inflows in a crisis but such taxes may be welfare reducing with commitment capital controls involve a mix of current capital inflow taxes and future capital flow subsidies the optimal policy will never involve macro prudential capital inflow taxes or a departure from price stability whether or not commitment is available

credit constraints and international financial crises abstract a version of the kiyotaki and moore j political econom 105 1997 211 model of credit cycles is used to examine the extent to which a crisis in a country can spread to another seemingly unrelated country the model features two small open economies that face credit constraints and produce a differentiated commodity which they export to a large country a productivity shock to one of the small open economies triggers an adverse terms of trade shock to the other which is then amplified by credit constraints the paper provides a new perspective on the relationship between terms of trade shocks and the balance of payments that differs from existing models which focus on risk sharing and consumption smoothing in particular it is shown that if financial frictions are present a temporary terms of trade shock can trigger capital outflows and a rapid deterioration in the current account

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

exchange rate changes and inflation in post crisis asian economies vector autoregression analysis of the exchange rate pass through macro economic consequences of large currency depreciations among the crisis hit asian economies varied from one country to another inflation did not soar after the asian currency crisis of 1997 98 in most crisis hit countries except indonesia where high inflation followed a very large nominal depreciation of the rupiah the high inflation meant a loss of price competitive advantage a key for economic recovery from a crisis this paper examines the pass through effects of exchange rate changes on the domestic prices in the east asian economies using a vector autoregression analysis the main results are as follows i the degree of exchange rate pass through to import prices was quite high in the crisis hit economies ii the pass through to consumer price index cpi was generally low with a notable exception of indonesia and iii in indonesia both the impulse response of monetary policy variables to exchange rate shocks and that of cpi to monetary policy shocks were positive large and statistically significant thus indonesia s accommodative monetary policy coupled with the high degree of cpi responsiveness to exchange rate changes was an important factor in the inflation depreciation spiral in the wake of the currency crisis

international financial integration and crisis contagion international financial integration helps to diversify risk but also may spread crises across countries we provide a quantitative analysis of this trade off in a two country general equilibrium model with collateral constrained borrowing using a global solution method borrowing constraints bind occasionally depending upon the state of the economy and levels of inherited debt we examine different degrees of international financial integration moving from financial autarky to bond and equity market integration financial integration leads to a significant increase in global leverage substantially escalates the probability of crises for any one country and dramatically increases the degree of contagion across countries outside of crises the impact of financial integration on macroeconomic aggregates is relatively small but the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky thus a trade off emerges between the probability of crises and the severity of crises using a large cross country database of financial crises in developing and developed economies over a forty year period we find evidence in support of the model

financial integration credit market imperfections and consumption smoothing abstract contrary to standard theoretical reasoning recent empirical research shows that financial integration is associated with higher consumption volatility in developing countries this paper illustrates how domestic credit market imperfections can alter the standard predictions about the consumption smoothing possibilities under financial autarky and international financial integration i use a two country international real business cycle model where the non traded sector in the small country faces borrowing constraints due to contract enforceability problems if the international risk sharing opportunities are non existent households can secure themselves against the shocks in the non traded sector only by adjusting their labor effort which leads to changes in sectorial output and terms of trade the deterioration of the terms of trade acts as a dampening effect on consumption causing it to be less volatile under financial autarky relative to financial integration under financial integration international financial assets provide the insurance against domestic productivity shocks without affecting the relative prices hence allowing the consumption to react more

financial globalization financial crises and contagion abstract two observations suggest that financial globalization played an important role in the recent financial crisis first more than half of the rise in net borrowing of the u s non financial sectors since the mid 1980s has been financed by foreign lending second the collapse of the u s housing and mortgage backed securities markets had worldwide effects on financial institutions and asset markets using an open economy model where financial intermediaries play a central role we show that financial integration leads to a sharp rise in net credit in the most financially developed country and to large asset price spillovers of country specific shocks to bank capital the impacts of these shocks on asset prices are amplified by bank capital requirements based on mark to market

a model of housing and credit cycles with imperfect market knowledge abstract the paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion contraction positive negative development in house prices fuels optimism pessimism and credit expansion contraction which in turn boost dampen housing demand and house prices and reinforce agents optimism pessimism bayesian learning about house prices can endogenously generate self reinforcing booms and busts in house prices and significantly strengthen the role of collateral constraints in aggregate fluctuations the model can quantitatively account for the 2001 2008 u s boom bust cycle in house prices and associated household debt and consumption dynamics it also demonstrates that allowing for imperfect knowledge of agents a higher leveraged economy is more prone to self reinforcing fluctuations

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

monetary and financial interactions in the business cycle this paper develops a computable general equilibrium model in which endogenous agency costs can potentially alter business cycle dynamics the model resembles the influential theoretical work of ben bernanke and mark gertler 1989 two sources of shocks are considered productivity shocks and monetary shocks the model is parametrized to match key features of u s aggregate activity the principal result of the analysis is that agency costs add very little to the basic business cycle dynamics copyright 1995 by ohio state university press

aggregate consequences of limited contract enforceability we study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts because of enforceability problems contracts are constrained efficient we show that limited enforceability amplifies the impact of technological innovations on aggregate output this implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility a key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market

symmetric pass through of tariffs and exchange rates under imperfect competition an empirical test abstract this paper examines the effect of tariffs and exchange rates on u s prices of japanese cars trucks and motorcycles in particular we test whether the long run pass through of tariffs and exchange rates are identical the symmetry hypothesis we find that this hypothesis is easily accepted in our sample we also find that the pass through relation varies across products ranging from about 0 6 for trucks to unity for motorcycles these coefficients have very different implications for trade policy we explain the results based on demand cost and institutional conditions in each industry

micro and macro labor supply elasticities a reassessment of conventional wisdom the response of aggregate labor supply to various changes in the economic environ ment is central to many economic issues especially the optimal design of tax policies conventional wisdom based on studies in the 1980s and 1990s has long held that the analysis of micro data leads one to conclude that aggregate labor supply elasticities are quite small in this paper we argue that this conventional wisdom does not hold up to empirically reasonable and relevant extensions of simple life cycle models that served as the basis for these conclusions in particular we show that several pieces of conventional wisdom fail in the presence of human capital accumulation or labor supply decisions that allow for adjustment along both the extensive and intensive margin we conclude that previous estimates of small labor supply elasticities based on micro data are fully consistent with large aggregate labor supply elasticities jel d91 e24 j22

private capital flows capital controls and default risk abstract what has been the effect of the shift in emerging market capital flows toward private sector borrowers are emerging market capital flows more efficient if not can controls on capital flows improve welfare this paper shows that the answers depend on the form of default risk when private loans are enforceable but there is the risk that the government will default on behalf of all residents private lending is inefficient and capital controls are potentially pareto improving however when private agents may individually default capital flow subsidies are potentially pareto improving

financial innovation the discovery of risk and the u s credit crisis abstract financial innovation and overconfidence about the risk of new financial products were key factors behind the 2008 u s credit crisis we show that a model with a collateral constraint in which learning about the risk of a new financial environment interacts with fisherian amplification produces a boom bust cycle in debt asset prices and consumption early realizations of a high borrowing ability regime turn agents optimistic about the persistence probability of this regime conversely the first realization of a low borrowing ability regime turns agents unduly pessimistic the model predicts large increases in household debt land prices and excess returns during 1998 2006 followed by a collapse

price discrimination by u s and german exporters the insensitivity of the u s trade balance to the sharp depreciation of the dollar in the past three years has revived interest in the relationship between exchange rates and the trade balance a central issue in most analyses of the relation between the current account and the exchange rate concerns the price adjustment process the simple integrated competitive market model predicts that local currency prices should change in proportion to the nominal exchange rate for a country too small to influence world prices the relationship between local currency import prices and exchange rates has been referred to as the pass through relationship in the empirical literature in international economics if the proportional relationship between import prices and exchange rates holds pass through is said to be complete accounts of recent u s experience cite the failure of dollar prices of imported goods to rise in proportion to exchange rates i e incomplete pass through as an important factor in explaining the persistence of the trade deficit unfortunately observations on pass through alone provide limited insight into the behavior of markets since incomplete pass through is consistent with at least two fundamentally different paradigms one is the standard competitive model of trade in which the law of one price holds but exchange rate fluctuations are associated with large changes in import demand due to other factors for example if dollar appreciation is correlated with increases in world demand and industry marginal cost is increasing then pass through will be less than complete the other is an imperfectly competitive model in which exporters are capable of price discriminating across destination markets a phenomenon paul krugman 1987 has labeled pricing to market in this model incomplete pass through is typically associated with fluctuations in the markup of price over marginal cost on exports 2 these fluctuations in markups are believed to be countryspecific they do not reflect the behavior of prices to other export destinations both models are plausible explanations of recent u s experience unfortunately it is impossible to distinguish between these competing models using only information on import prices and exchange rates for a single country in order to distinguish between the competing models an empirical analysis of goods prices and exchange rates must be capable of measuring either marginal cost or the markup over marginal cost either of these tasks poses formidable empirical problems much of the empirical literature in industrial organization has been concerned with precisely these issues since markups are an important measure of the competitiveness of industries

debt overhang in a business cycle model abstract we study the macroeconomic implications of the debt overhang distortion on firms investment and labor decisions we show that the distortion arises when the levels of investment and labor are non contractible and chosen after the signing of the debt contract the financial friction manifests itself as investment and labor wedges that move counter cyclically increasing during recessions when the risk of default is high their dynamics amplify and propagate the effects of shocks to productivity government spending volatility and funding costs both the size and the persistence of these effects are quantitatively important

a risk centric model of demand recessions and speculation we provide a continuous time risk centric representation of the new keynesian model which we use to analyze the interactions between asset prices financial speculation and macro economic outcomes when output is determined by aggregate demand in principle interest rate policy is highly effective in dealing with shocks to asset valuations however in practice monetary policy faces a wide range of constraints if these constraints are severe a decline in risky asset valuations generates a demand recession this reduces earnings and generates a negative feedback loop between asset prices and aggregate demand in the recession phase average beliefs matter not only because they affect asset valuations but also because they determine the strength of the amplification mechanism in the ex ante boom phase belief disagreements or heterogeneous asset valuations matter because they induce investors to speculate this speculation exacerbates the crash by reducing high valuation investors wealth when the economy transitions to recession which depresses wealth weighted average beliefs macroprudential policy that restricts speculation in the boom can pareto improve welfare by increasing asset prices and aggregate demand in the recession

optimal bank regulation and fiscal capacity financial regulation is synchronized across countries despite the fact that countries vary widely in their ability to bail out their banking sector in the event of a nancial crisis this paper addresses the question of whether countries with dierent scal capacity should optimally have dierent ex ante minimum bank capital requirements in an environment with endogenously in complete markets and overinvestment because of moral hazard and pecuniary externalities i show that countries with larger scal capacity should have lower ex ante minimum bank capital require ments this result is the opposite of what one may expect given that countries with larger scal capacity often have stronger moral hazard i also show that in addition to a minimum bank capital requirement regulators in countries with strong moral hazard which are countries with a concen trated nancial sector and large scal capacity should impose a limit on the amount of liquidity pledged by nancial institutions in a crisis state this would entail restricting the amount of put options cds contracts sold by nancial institutions among other measures

house prices and credit constraints making sense of the us experience most us house price models break down in the mid 2000s due to the omission of exogenous changes in mortgage credit supply associated with the sub prime mortgage boom from house price to rent ratio and inverted housing demand models previous models lack data on credit constraints facing first time home buyers incorporating a measure of credit conditions the cyclically adjusted loan to value ratio for first time buyers into house price to rent ratio models yields stable long run relationships more precisely estimated effects reasonable speeds of adjustment and improved model fits

collateral requirements and asset prices many assets derive their value not only from future cash flows but also from their ability to serve as collateral in this article we investigate this collateral premium and its impact on asset returns in an infinite horizon general equilibrium model with heterogeneous agents we document that borrowing against collateral substantially increases the return volatility of long lived assets moreover otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time this premium can be positive even for assets that never pay dividends

a macroeconomic model with a financial sector this paper studies a macroeconomic model in which financial experts borrow from less productive agents we pursue four sets of results i the economy is prone to instability and occasionally enters volatile episodes as volatility spikes agents precautionary motive increases depressing prices even further log linear approximations fail to capture these non linear effects that can cause economies to be significantly depressed for long periods of time ii endogenous risk during volatile episodes increases asset price correlations iii financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion and funding structure iv while risk sharing within the financial sector through securitization and derivatives contracts reduces many inefficiencies it can also amlify systemic risks

quantitative implications of a debt deflation theory of sudden stops and asset prices abstract this paper shows that the quantitative predictions of an equilibrium asset pricing model with financial frictions are consistent with key features of the sudden stop phenomenon foreign traders incur costs in trading assets with domestic agents and a collateral constraint limits external debt to a fraction of the market value of domestic equity holdings when this constraint does not bind standard productivity shocks cause typical real business cycle effects when it binds the same shocks cause strikingly different effects depending on the leverage ratio and asset market liquidity with high leverage and a liquid market the shocks force fire sales of assets and fisher s debt deflation mechanism amplifies the responses of asset prices consumption and the current account precautionary saving makes these sudden stops infrequent in the long run

managing credit booms and busts a pigouvian taxation approach we study a dynamic model in which the interaction between debt ac cumulation and asset prices magni es credit booms and busts we nd that borrowers do not internalize these feedback eects and therefore suf fer from excessively large booms and busts in both credit ows and asset prices we show that a pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare we calibrate the model by reference to i the us small and medium sized enterprise sector and ii the household sector and nd the optimal tax to be countercycli cal in both cases dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms

banking crises and nonlinear linkages between credit and output in this article we analyse the asymmetric causality linkages between credit growth and output growth during banking crises we employ a recently developed procedure based on a bivariate markov switching model to test the hypotheses of independence causality and asymmetric causality between credit and output using a sample of 103 banking crises around the world we find that neither credit nor output takes precedence as a variable in calm and crisis periods although there is evidence of instantaneous interdependence between the banking and real sector during crises the results suggest that shocks propagate mostly within a year between the banking sector and the real economy the linear link between credit growth and output growth is also regime dependent

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

what does a financial shock do first international evidence in this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions we focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis we estimate a panel var for 21 advanced economies based on quarterly data between 1985 and 2011 where financial shocks are identified through sign restrictions we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as gdp and particularly investment but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact the financial development and structure of a given country is found not to matter much for the intensity of the propagation of financial shocks moreover we generally find that these shocks play a role not only in crisis times but also in normal conditions finally we discuss the implications of our findings for monetary policy fabio fornari and livio stracca

markup adjustment and exchange rate fluctuations evidence from panel data on automobile exports abstract this paper uses data on bilateral automobile export prices from the usa germany and japan to gauge the importance of markup adjustment driven by exchange rate movements across several destination markets we find that japanese exports are characterized by a high degree of markup adjustment designed to stabilize the price measured in the buyer s currency there is weak evidence for such behavior on the part of german exporters and no evidence of markup adjustment by us exporters where it exists markup adjustment tends to be highly persistent the dynamic pattern of markup adjustment is consistent with invoicing in the exporter s currency except for exports to the usa and canada

bank assets liquidity and credit cycles abstract we study how bank collateral assets and their pledgeability affect the amplitude of credit cycles to this end we develop a tractable model where bankers intermediate funds between savers and borrowers if bankers default savers acquire the right to liquidate bankers assets however due to the vertically integrated structure of our credit economy savers anticipate that liquidating financial assets i e loans is conditional on borrowers being solvent on their debt obligations this friction limits the collateralization of bankers financial assets beyond that of real assets i e capital in this context increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate thus attenuating capital misallocation as it typically emerges in credit economies a la kiyotaki and moore 1997 we uncover a close connection between the collateralization of bank loans macroeconomic amplification and the degree of procyclicality of bank leverage

the effect of liquidity constraints on consumption a cross sectional analysis this paper examines the effect of liquidity constraints on consumption expenditures using a single year cross section data set a reduced form equation for consumption is estimated on high saving households by the tobit procedure to account for the selectivity bias since high saving households are not likely to be liquidity constrained the estimated equation is an appropriate description of how desired consumption that would be forthcoming without liquidity constraints is related to the variables available in the cross section data when the reduced form equation is used to predict desired consumption the gap between desired consumption and measured consumption is most evident for young households

is a monetary union feasible for east asia the empirical suitability of the east asian economies for potential monetary integration is assessed the structural vector autoregression var method is employed to identify the underlying shocks using a three variable var model across the east asian economies the estimates of the eec are used as a benchmark to compare the size of the underlying shocks and the speed of adjustment to shocks in both regions to determine the feasibility of forming an optimum currency area oca in east asia the empirical results do not display strong support for forming an oca in the east asian region the results do imply however that some small subregions are potential candidates for ocas since their disturbances are correlated and small and these economies adjust rapidly to shocks

evaluating the role of capital controls and monetary policy in emerging market crises abstract this paper explores the interactive role of optimal monetary policy and capital controls in dealing with sudden stop financial crises in emerging market economies the model features collateral constraints embedding pecuniary externalities as well as nominal rigidities in prices and wages we explore the role of policy commitment and macro prudential motives in the design of optimal monetary and capital market responses to crises under alternative exchange rate regimes we find that policy commitment is very important under flexible exchange rates but commitment to the path of capital taxes is only of minor benefit under an exchange rate peg as regards macro prudential policy we find the exact opposite under floating exchange rates the optimal policy has almost no macro prudential elements on the other hand when authorities are constrained by an exchange rate peg macro prudential policy is used aggressively as part of an optimal policy framework an important additional finding is that the direction of capital controls is different under a fixed relative to a flexible exchange rate with flexible exchange rates policy makers impose inflow taxes immediately at the onset of a crisis under pegged exchange rates they will impose capital inflow subsidies

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

collateral constraints and the amplification persistence trade off abstract this note shows in a general equilibrium two agent model featuring concave utility and production functions and neo classical input accumulation that the amplification and persistence of the impact of temporary shocks to aggregate productivity go hand in hand

scale economies the value of time and the demand for money longitudinal evidence from firms compustat data on 12 000 firms for the years 1961 92 indicate that large firms hold less cash as a percentage of sale than small ones whether comparisons are made within or across industries the clasticity of cash balance with respect to sales is about 0 8 firms headquartered in counties with high wages hold more money for a given level of sales a finding consistent with the idea that time can substitute for mony in the provision of transactions services the estimates are consistent with both scale economies in the holding of money and secular declines in velocity

changing credit limits changing business cycles abstract in the last half century capital markets across the industrialized world have undergone massive deregulation involving large increases in the loan to value ltv ratios of households and firms we study the business cycle implications of this phenomenon in an estimated dynamic general equilibrium model with multiple credit constrained agents a progressive relaxation of credit constraints initially leads to both higher macroeconomic volatility and stronger comovement between debt and real activity this pattern reverses at ltv ratios not far from those currently observed in many advanced economies due to credit constraints becoming non binding more often the non monotonic relationship between credit market conditions and macroeconomic fluctuations carries important lessons for regulatory and macroprudential policymakers while reducing the average ltv ratio may unintentionally increase macroeconomic volatility a countercyclical ltv ratio proves to be successful in dampening business cycle fluctuations and most importantly avoiding dramatic output drops

macroprudential policy in the presence of external risks abstract we document the relevance of external risks shocks to the level and volatility of world interest rates in shaping economic activity in emerging market economies emes and characterize optimal macroprudential policy in response to these risks in a small open economy subject to financial crises low and stable interest rates reinforce overborrowing arising from a pecuniary externality generated by collateral constraints that depend on asset prices we show that this mechanism leads to greater exposure to crises typically accompanied by abrupt increases in interest rates and a persistent rise in their volatility as observed during sudden stops in emes a tax on international borrowing that implements a social planner s optimal policy can be decomposed into three factors the severity of future crises the ability of the planner to dampen future crises and the incidence of future crises we show that the effects of interest rate volatility on these factors implies that qualitatively the tax responds non monotonically with respect to the direction of volatility shocks and that quantitatively increasing macroprudential taxes is seldom the optimal response to an increase in interest rate volatility

cash flows and credit cycles aggregate productivity falls in recessions and rises in expansions several empirical studies suggest that the systematic behavior of lending standards with laxer tighter standards applied during expansions recessions is responsible for reverting trends in aggregate productivity we build a dynamic model that rationalizes these findings adverse selection in credit markets emerges as a potential source of macroeconomic instability the key idea modeled is that in order to effectively signal their type to financiers productive entrepreneurs must suffer a cost the effective cost of signaling rises with higher cash flow brought about by stronger economic fundamentals because higher cash flow makes it easier for the unproductive type to mimic the productive type competition among the financiers then results in suboptimally lax lending standards low productivity entrepreneurs obtain financing the producer composition effect inducing a recession this in turn creates conditions weak economic fundamentals and low cash flow conducive to the emergence of tighter lending terms the strong composition effect leading to an economic recovery

taxes regulations and the corporate debt market outstanding credit market debt in the u s corporate sector increased dramatically over the second half of the 20th century during this period tax rates on dividend distributions and corporate income decreased this article argues that the observed decline in dividend and corporate income tax rates generated an improvement in the collateral value of corporate assets and led to an increase in u s corporate debt to analyze this conjecture we build a general equilibrium model with enforcement constraints that induce endogenous limits on debt financing we find that the model can account for the time series features of u s corporate debt data

optimal time consistent macroprudential policy collateral constraints widely used in models of financial crises feature a pecuniary externality agents do not internalize how borrowing decisions made in good times affect collateral prices during a crisis we show that under commitment the optimal financial regulator s plans are time inconsistent and study time consistent policy quantitatively this policy reduces sharply the frequency and magnitude of crises removes fat tails from the distribution of asset returns and increases social welfare in contrast constant debt taxes are ineffective and can be welfare reducing while an optimized macroprudential taylor rule is effective but less so than the optimal time consistent policy

price discrimination and markups in export markets abstract imperfect competition in international markets is one of the key explanations for why prices of similar goods might differ among destination countries this paper develops an empirical model to examine the presence of price discrimination stemming from imperfect competition in the international market for a country s exports the model is used to examine the export behavior of taiwanese exporters of footwear the generalized supply relation allows identification of deviations from competitive pricing in each export market in addition the model provides insights into the extent of exchange rate pass through finally the model is modified in order to estimate the effect of the voluntary export restraint imposed in the u s on footwear imports from taiwan

monetary policy as financial stability regulation this paper develops a model that speaks to the goals and methods of financialstability policies there are three main points first from a normative perspective the model defines the fundamental market failure to be addressed namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short term debt and leave the system excessively vulnerable to costly financial crises second it shows how in a simple economy where commercial banks are the only lenders conventional monetary policy tools such as open market operations can be used to regulate this externality while in more advanced economies it may be helpful to supplement monetary policy with other measures third from a positive perspective the model provides an account of how monetary policy can influence bank lending and real activity even in a world where prices adjust frictionlessly and there are other transactions media besides bank created money that are outside the control of the central bank

intermediary asset pricing abstract we model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary intermediaries face an equity capital constraint risk premia r

collateral constraints and the current account theory and evidence we investigate the impact of domestic financial frictions on the current account dynamics in asian countries before and after the asian financial crisis in 1997 1998 by introducing collateral constraints into the intertemporal current account approach we examine six asian countries before the crisis collateral constraints significantly impact the current account in korea malaysia the philippines and thailand but after the crisis they do not our study shows that the impact of domestic financial frictions on the current account changes before and after a financial crisis jel f32 f41

credit cycles redux theoretical studies have shown that under unorthodox assumptions on preferences and production technologies collateral constraints can act as a powerful amplification and propagation mechanism of exogenous shocks we investigate whether or not this result holds under more standard assumptions we find that collateral constraints typically generate small output amplification large amplification is obtained as a knife edge type of result

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

goods prices and exchange rates what have we learned import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country recent research indicates that common currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets this evidence suggests that incomplete pass through is a consequence of third degree price discrimination while distance matters for market segmentation borders have independent effects the source of the border effect has not been clearly identified furthermore there is little evidence yet to suggest substantial market power is implied by the observed price discrimination

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

on the amplification role of collateral constraints abstract this letter explores the role of costly liquidation of the collateralized asset in a stochastic version of the kiyotaki and moore 1997 model we document that the degree of inefficiency in the debt enforcement procedure plays a key role in the endogenous amplification of productivity shocks generated by collateral constraints

regime switching in emerging market business cycles interest rate volatility and sudden stops abstract we document the presence of discrete regime switching in emerging market business cycles particularly in the volatility of interest rates at which countries borrow internationally using a multi country regime switching vector autoregressive model we study the statistical relationship of such business cycle regimes with episodes of sudden stops periods of high volatility tend to be persistent and are associated with high interest rates the occurrence of sudden stops in external financing and large declines in economic activity most strikingly we show that regime switches drive the countercyclicality of interest rates in emerging markets documented in previous literature neumeyer and perri 2005 and that high volatility regimes forecast sudden stops 6 and 12 months ahead

a quantitative model of international lending of last resort abstract we analyze banking crises and lending of last resort lolr in a quantitative model of financial frictions with bank defaults lolr policies generate a tradeoff between financial fragility due to more highly leveraged banks and milder crises since the policies are effective once in a crisis in the calibrated model the crisis mitigation effect dominates the moral hazard problem and the economy is better off having access to a lender of last resort we characterize the conditions under which pools of small economies can be sustainable lolrs in addition we assess the ability of china a country with ample reserves to be a sustainable international lolr

evidence on the role of cash flow for investment abstract recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks evidence for such a mechanism also known as the financial accelerator consists largely of firm level studies showing that cash flow is an important predictor of investment but this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities in this paper we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a fundamental versus its role in alleviating credit frictions for firms with access to commercial paper and bond markets we find that the perfect capital markets model of investment can fully account for the role of cash flow for firms with only limited access to capital markets as indicated by lack of participation in public debt markets however investment appears to be excessively sensitive to fluctuations in cash flow these results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator

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

quantitative asset pricing implications of endogenous solvency constraints we study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible we solve analytically for efficient allocations and for the corresponding asset prices portfolio holdings and solvency constraints for a simple example then we calibrate a more general model to u s aggregate as well as idiosyncratic income processes we find equity premia risk premia for long term bonds and sharpe ratios of magnitudes similar to the u s data for low risk aversion and a low time discount factor article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

macro finance linkages in this survey i review the academic and policy oriented literature on the linkages between financial markets and the rest of the economy first i summarize the leading economic theories for why the financial sector can influence the macroeconomy second i consider empirical research on spillovers from the financial sector to the rest of the economy as well as across financial markets in different countries third i discuss key monetary policy debates regarding the appropriate response of central banks to financial conditions finally i conclude with an overview of the major gaps in the existing literature

collateral constraints and the amplification mechanism abstract kiyotaki and moore j polit economy 105 1997 211 have offered a theory for how common shocks to credit constrained firms are amplified through changes in collateral values and transmitted as fluctuations in output i clarify and extend their model by showing that their collateral amplification mechanism is not robust to the introduction of markets that allow these firms to hedge against common shocks a theory of incomplete hedging is proposed in which the supply of hedging available in the economy is constrained by the aggregate value of collateral i illustrate how the constraint reinstates amplification effects and discuss empirical implications of this new mechanism

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

land price dynamics and macroeconomic fluctuations with nonseparable preferences abstract in this paper we introduce a complementary relationship between consumption and labor hours by revising the household s period utility function in liu et al 2013 the revision concomitantly allows for a finite frisch elasticity of labor supply and a stronger consumption smoothing motive we find that in general the estimation of liu et al 2013 is quite robust in addition the propagation mechanism of the credit constraint triggered by a housing demand shock still persists however the amplification effect of the credit constraint triggered by the housing demand shock on key macroeconomic variables is greatly muted we also find that except for land price fluctuations the housing demand shock cannot act as the primary force to drive the fluctuations in other macroeconomic variables

exchange rate pass through and currency invoicing implications for monetary integration in east asia exporter s price setting behaviour and currency invoicing play a key role in the literature on the new open economy macroeconom ics this paper estimates exchange rate pass through coefficients for the exports of four asean

pecuniary externalities in economies with downward wage rigidity abstract a pecuniary externality in economies with downward nominal wage rigidity leads firms to hire too many workers in expansions which leads to too much unemployment in recessions when firms hire more workers firms fail to internalize that competition for workers between firms pushes up the aggregate wage which imposes a negative externality over other firms the externality can be resolved by a macroprudential tax on labor in expansions in the calibrated model the tax reduces the welfare cost of downward nominal wage rigidity by up to 90 as it makes the economy significantly less exposed to unemployment crises

international comparisons of pricing to market behavior this paper measures the degree of price discrimination across export destinations that is associated with exchange rate changes using u s u k german and japanese industry level data given the industries sampled more price discrimination across destinations is observed in the u k german and japanese data for industries that match across source countries however behavior is very similar across source countries furthermore destination specific price adjustment on exports to the united states from germany and japan is similar to price adjustment observed on shipments to other destinations most variation in the data appears to be related to industry copyright 1993 by american economic association