credit constraints equity market liberalizations and international trade abstract this paper provides evidence that credit constraints are an important determinant of international trade flows i exploit shocks to the availability of external finance and examine the impact of equity market liberalizations on the export behavior of 91 countries in the 1980 1997 period i show that liberalizations increase exports disproportionately more in financially vulnerable sectors that require more outside finance or employ fewer collateralizable assets this result is not driven by cross country differences in factor endowments and is independent of simultaneous trade policy reforms moreover it obtains with equal strength in the full panel of countries as well as in both panel and event study analyses of countries which removed capital controls during the sample period finally the effects of liberalizations are more pronounced in economies with initially less active stock markets indicating that foreign equity flows may substitute for an underdeveloped domestic financial system similarly opening equity markets has a greater impact in the presence of higher trade costs caused by restrictive trade policies

global dynamics in a model with search and matching in labor and capital markets abstract in this paper global macroeconomic dynamics are studied when search frictions are present in both labor and capital markets on the basis of the merz 1995 macroeconomic model with labor market frictions and capital accumulation our paper offers an extension to frictions in capital markets analogously modeled as a search and matching process using the merz model as limit case we consider exogenous as well as endogenous borrowing constraints we also allow the cost of issuing bonds to change endogenously as we show capital market frictions exacerbate and accentuate the interaction between the two markets and magnify the effects of shocks on output consumption employment and welfare this interaction of the frictions in labor and capital markets are also shown to give rise to multiple equilibria on the basis of numerical solution techniques instead of relying on first or second order approximations around a unique steady state our paper uses dynamic programming techniques to compute decision variables and the value function directly and assess the local and global dynamics of the model the steady state solutions are studied by using the hamiltonian and the dynamics are assessed for various model variants by using dynamic programming techniques

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

strategic delegation by unobservable incentive contracts many strategic interactions in the real world take place among delegates empowered to act on behalf of others managers make strategic decisions that affect profits sales persons have power over setting prices and lawyers and sports agents represent their clients in bargaining processes one of the central messages of game theory is that this could be at least partly due to the strategic advantage delegation may provide to the delegating party the idea that signing binding and publicly observable contracts with a third party may serve as a beneficial commitment device goes back at least to schelling 1960 and has been put into use in many areas of economics 1 however the observability of contracts appears to be a precondition for them to play a commitment role and for this reason almost all applications of strategic delegation theory are couched in terms of observable contracts the formalization of this intuition is given by katz 1991 who showed that if contracts are unobservable then the nash equilibrium outcomes of a game with and without delegation coincide in particular delegation through unobservable contracts does not change the predicted outcome of games with a unique nash equilibrium these observations in turn call the empirical relevance of the applied delegation studies into serious question since in most real world transactions the signed contracts are unobservable to the outside parties however there are important strategic environments that fall outside the confines of katz s analysis first katz s model does not include the scenarios in which the outcome of the decision of delegating or not delegating is observable to the outside party in contrast in some models it is natural that the outside party observes the outcome of this decision simply because s he

the real consequences of financial stress abstract we introduce a dynamic banking macro model which abstains from conventional mean reversion assumptions and in which similar to brunnermeier and sannikov 2010 adverse asset price movements and their impact on risk premia and credit spreads can induce instabilities in the banking sector to assess such phenomena empirically we employ a multi regime vector autoregression mrvar approach rather than conventional linear vector autoregressions we conduct bivariate empirical analyses using country specific financial stress indices and industrial production for the u s the uk and the four large euro area countries our mrvar based impulse response studies demonstrate that compared to a linear specification response profiles are dependent on the current state of the economy as well as the sign and size of shocks previous multi regime based studies focusing solely on the regime dependence of responses conclude that during a high stress period stress increasing shocks have more dramatic consequences for economic activity than during low stress conducting size dependent response analysis we find that this holds only for small shocks and reverses when shocks become sufficiently large to induce immediate regime switches our findings also suggest that in states of high financial stress large negative shocks to financial stress have sizeable positive effects on real activity and support the idea of unconventional monetary policy measures in cases of extreme financial stress

production function regressions returns to scale and externalities a number of recent papers have used simple linear regressions in an attempt to identify market structure the extent of returns to scale and possible external effects in u s manufacturing industries the results obtained from these regressions have important implications for several branches of modern macroeconomics as a result the macro literature frequently cites specific numerical evidence from caballero and lyons 1992 and hall 1990 which suggests that there are quantitatively significant increasing returns to scale or external effects in u s manufacturing in contrast it is the argument of this paper that this evidence is not convincing the most robust evidence suggests that the typical u s manufacturing industry displays constant returns with no external effects on the other hand there is significant heterogeneity across industries

contests with multiple rounds this paper studies contests where players have the flexibility to add to their previous efforts after observing their rivals most recent effort in an intermediate stage it is found that 1 contrary to previous findings the stackelberg outcome where the underdog leads and the favorite follows cannot be an equilibrium 2 there are multiple subgame perfect equilibria all occurring on the underdog s usual one shot reaction function in between and including the one shot cournot nash and stackelberg outcome with the favorite leading 3 the total equilibrium effort is typically greater than or equal to what a one shot cournot nash play would predict and 4 in settings where players can choose whether or not to disclose their early actions to the rival both the favorite and the underdog disclose in equilibrium applications in sports lobbying and r d races are discussed

exploring the nexus between financial openness and informational efficiency does the quality of institution matter this article examines the empirical link between financial openness and informational efficiency of stock markets in 27 emerging markets improving on earlier papers this study has used world bank s worldwide governance indicators wgi as the proxy of institutional development in dynamic panel data models estimated by generalized method of moments gmm our results show first financial liberalization by itself has no impact on enhancing efficiency of stock market second for countries with high level of institutional development the interaction of trade openness and financial openness become significant third for the same group of countries interaction effect of financial liberalization and institutional development leads to more efficiency in stock market hence our finding demonstrates the utmost importance of institutional development and its role on liberalization our results conclude that institutional development and trade openness are pre requisites for a country to benefit from financi

on the endogeneity of cournot nash and stackelberg equilibria games of accumulation abstract we characterize equilibria of games with two properties i agents have the opportunity to adjust their strategic variable after their initial choices and before payoffs occur but ii they can only add to their initial amounts the equilibrium set consists of just the cournot nash outcome one or both stackelberg outcomes or a continuum of points including the cournot nash outcome and one or both stackelberg outcomes a simple theorem that uses agents standard one period reaction functions and the one period cournot nash and stackelberg equilibria delineates the equilibrium set applications include contribution oligopoly and rent seeking games

regime dependence of the fiscal multiplier abstract after the financial market meltdown of the years 2007 2008 the obama administration responded with large fiscal stimulus package yet the reaction to this stimulus has been diverse some predicted a multiplier effect in the order of 1 5 others argued that the multiplier will be less than 0 5 such multiplier estimates typically stem from estimated linear vector autoregressions vars or linearized versions of dsge models in this paper we argue that neither conventional var analysis nor linearized dgse models may be appropriate to evaluate demand effects arising from such a stimulus package the reason is as recent research suggests that the timing of demand shocks matters to assess the multiplier s variability we adopt a regime dependent var approach as is shown in detail our model specification is grounded on theoretical considerations the empirical analysis presented here suggests that a regime dependent var specification is favored for u s output and employment data and that the standard one regime var methodology is inappropriate for analyzing multi regime processes although we employ a nonlinear var framework the chosen setup allows the use of largely familiar macroeconometric modeling tools estimating a two regime var we show that the fiscal multiplier varies with the state of the business cycle and the particular specifics of the measure taken for the u s we find for example the fiscal expansion multiplier is much higher in a regime of a low economic activity than in a regime of high activity as we also show it is size dependent

comparing four models of aggregate fluctuations due to self fulfilling expectations abstract this paper compares four equilibrium business cycle models with increasing returns to scale production technologies that allow for aggregate fluctuations due to self fulfilling expectations necessary and sufficient conditions for the existence of stationary sunspot equilibria are derived numerical examples demonstrate that the degree of increasing returns necessary for the existence of stationary sunspot equilibria lies in the upper range of available empirical estimates the paper also shows that persistent fluctuations are not a necessary property of these four models when the only source of fluctuations is changes in people s expectations about the future path of the economy journal of economic literature classification numbers e32 d43

fiscal deficits economic growth and government debt in the usa a simple model illustrates interactions between the primary fiscal deficit total deficit minus interest payments economic growth and debt the deficit income ratio responds countercyclically to growth while growth may respond positively a keynes case or negatively ala merkel to the deficit the recent great recession in the usa was atypical in that there was a weak countercyclical fiscal response the increase in government net borrowing was significantly less than the decrease in private borrowing an historically unprecedented asymmetry econometric esti mates verify the historical pattern and further suggest that there is a strong positive effect on growth of a higher primary deficit even when possible increases in the interest rate are taken into account

hoarding of international reserves in china mercantilism domestic consumption and us monetary policy abstract we develop a two country two period model able to reproduce the key qualitative aspects of the us china co dependency and imbalances as the result of the chinese and american authorities pursuing different but complementary objectives we show that a mercantilist reserve hoarding has served well the chinese policy goals fast gdp expansion and labor mobilization and has been compatible with the us ones high households consumption if the us authorities keep monetary policy sufficiently loose thus reducing the real value of the us liabilities held by china this latter finds less tempting to stop financing the us external deficit appreciate the currency and increase consumption on the contrary if the policy goals in china change from the maximization of gdp growth to higher households standards of living a rebalancing process may be ignited we then discuss the model and its theoretical predictions also in light of the five year plans approved by the chinese ruling party

the output and welfare effects of government spending shocks over the business cycle how does the output response to a change in government spending vary over the business cycle what are the welfare eects of spending shocks this paper studies the state dependence of the output and welfare eects of shocks to government purchases in a dsge model with real and nominal frictions and a rich scal nancing structure both the output multiplier the change in output for a one dollar change in government spending and the welfare multiplier the consumption equivalent change in welfare for the same change in spending move signicantly across states but tend to co move negatively with one another in an historical simulation the output multiplier is countercyclical correlation with detrended output of 0 4 and strongly negatively correlated with the welfare multiplier correlation between multipliers of 0 9

endogenous timing in duopoly games stackelberg or cournot equilibria abstract simultaneous versus sequential play is studied in an extended game in a preplay stage players decide whether to select actions in the basic game at the first opportunity or to wait until observing their rivals first period actions in one extended game players first decide when to select actions without committing to actions in the basic game the equilibrium has a simultaneous play subgame unless payoffs in a sequential play subgame pareto dominate those payoffs in another extended game deciding to select at the first turn requires committing to an action both sequential play outcomes are the equilibria only in undominated strategies

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

commitment robust equilibria and endogenous timing abstract this paper investigates which equilibria of a game are still viable when players have the opportunity to commit themselves to that end we study a model of endogenous timing in which players face the trade off between committing early and moving late it is shown that mixed resp pure equilibria of the original game are subgame perfect resp persistent in the timing game only when no player has an incentive to move first consequently mixed equilibria are viable only if no player has an incentive to move first one needs strong evolutionary solution concepts to draw that conclusion for pure equilibria journal of economic literature classification number c72

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

an assessment of the stability and growth pact reform in a small scale macro framework abstract this paper contributes to the debate on emu fiscal governance we simulate a small scale macroeconomic model with forward looking agents augmented with a public finance block we account for positive output stabilization and negative via risk premia effects of debt and deficit we compare the working of the fiscal compact with the maastricht 3 deficit limit status quo and a public investment rule we evaluate their performance in terms of output and inflation during fiscal consolidation and following demand and supply shocks at the steady state all rules guarantee long run sustainability the investment rule robustly displays the lowest output loss followed by the status quo the fiscal compact rule appears to be the most recessionary and deflationary

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

coordination need not be a problem abstract in a game of common interest there is one action vector that all players prefer to every other yet there may be multiple pareto ranked nash equilibria in the game and the coordination problem refers to the fact that rational equilibrium play cannot rule out pareto dominated equilibria in this paper i prove that two elements asynchronicity and a finite horizon are sufficient to uniquely select the pareto dominant action vector in subgame perfect equilibrium play asynchronicity may be exogenously specified by the rules of the game alternatively in a game where players choose when to move asynchronicity may emerge as an equilibrium move outcome

free entry and business cycles under the influence of animal spirits abstract we provide a business cycle model in which endogenous markup fluctuations are the main driving force these fluctuations occur due to some form of animal spirits impelling firms in their entry exit decisions within each sector by contrast to existing models of the business cycle emphasizing the role of animal spirits we do not rely on the sink property of the equilibrium to generate indeterminacy hence while our model does pretty well in accounting for the main features of us business cycles it avoids several criticisms addressed to these former models concerning either their dependence upon strongly increasing returns too high markups or their implication of countercyclical movements of consumption

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

price flexibility and output stability an old keynesian view in this symposium i shall play the role in which i was cast the unreconstructed old keynesian considering the alternatives i do not mind being billed as a keynesian an old keynesian at that but old keynesians come in several varieties and i speak for no one but myself nor do i defend the literal text of the general theory several generations of economists have criticized amended and elaborated that seminal work i shall argue for the validity of the major propositions that distinguish keynesian macroeconomics from old or new classical macroeconomics

external effects in u s procyclical productivity abstract in this paper we highlight a new dimension of the aggregate procyclical productivity phenomenon we show that estimates of the degree of returns to scale are larger for manufacturing as a whole than for two digit industries since this difference must be due to factors that are only internalized at the most aggregate level we term it an external effect this result rules out explanations based on own input variation such as true increasing returns and unmeasured factor utilization tied to own activity as the sole explanations for aggregate procyclical productivity we explore several potential explanations of this external effect

foreign banks financial crises and economic growth in europe abstract using industry data from eurostat and applying the rajan zingales methodology we investigate the short run real growth effects of foreign bank presence in the european union our sample stretches from 2000 until 2012 and includes the phase of rapid financial integration before the global financial crisis as well as the following phase of financial fragmentation and bank deleveraging we find evidence that foreign bank presence had a more than four times stronger growth effect during the crisis than in normal times growth effects are also stronger in times of domestic bank deleveraging in light of these results we conclude that a reintegration of the european banking sector is an important building block of future growth perspectives in the european union

new keynesian versus old keynesian government spending multipliers renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy because of modelling uncertainty it is essential that policy evaluations be robust to alternative assumptions we find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust government spending multipliers in an alternative empirically estimated and widely cited new keynesian model are much smaller than in these old keynesian models the estimated stimulus is extremely small with gdp and employment effects only one sixth as large and with private sector employment impacts likely to be even smaller we investigate the sensitivity of our findings with regard to the response of monetary policy the zero bound on nominal interest rates and the inclusion of an empirically relevant degree of rule of thumb behaviour in the new keynesian model in addition we relate our findings using estimated structural macroeconomic models to the recent literature using reduced form regression techniques

the state dependent effects of tax shocks abstract this paper studies the state dependent effects of shocks to tax rates we begin with a stylized model in which clean analytical expressions are available the model predicts that a tax rate cut is most stimulative for output in periods in which output is relatively high the model is also used to discuss some conceptual issues related to the construction of tax multipliers we then consider a medium scale dsge model with tax rates on labor and capital income and on consumption the model is solved via a third order perturbation consonant with the intuition from the analytical model tax multipliers for all three types of tax rates vary significantly across states and are most stimulative for output in states in which output is high to evaluate the normative desirability of tax cuts as a tool to combat recessions we also study the properties of the tax cut welfare multiplier which measures the change in aggregate welfare conditional on a tax rate change in contrast to output multipliers welfare multipliers are found to be countercyclical a number of extensions and modifications are considered and our conclusions are generally robust

endogenous business cycles and the dynamics of output hours and consumption abstract this paper studies the business cycle fluctuations predicted by a two sector endogenous business cycle model with sector specific external increasing returns to scale it focuses on aspects of actual fluctuations that have been identified both as defining features of business cycles and as ones standard real business cycle models cannot explain for empirically realistic calibrations of the degree of returns to scale the results suggest that endogenous fluctuations do not provide the dynamic element that is missing in existing real business cycle models jel e32

financial liberalization does it pay to join the party financial liberalization is a highly controversial policy despite the fact that almost all the regions of the world have undergone liberalization of their financial markets its effect on the performance of different economic sectors remains a question in our research we find that financial liberalization reduces the cost of capital boosting the relative growth rates of economic sectors that for technological reasons rely heavily on external to the firm finance this result however depends on the quality of institutions supporting credit markets the effects of financial liberalization are more notable in countries that have and enforce regulations to protect property rights in this sense the answer to the question in the title of the paper is not clear cut the impact of financial liberalization on growth depends on underlying institutional factors

observable contracts strategic delegation and cooperation the role of commitments in noncooperative games is well acknowledged and documented one way to achieve commitments is by letting delegates represent the players of a game in this paper the authors study a delegation game in which the players can use agents strategically to play on their behalf and the contracts they sign with them are common knowledge they show that in such cases every pareto optimal outcome of the game can become the unique subgame perfect nash equilibrium of the delegation game the authors demonstrate this result by discussing the cournot type duopolistic game copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

global capital flows and financing constraints firms often cite financing constraints as one of their primary obstacles to investment global capital flows by bringing in scarce capital may ease the financing constraints of host country firms but if incoming foreign investors borrow heavily from domestic banks foreign direct investment may exacerbate financing constraints by crowding host country firms out of domestic capital markets combining a unique cross country firm level panel with time series data on restrictions on international transactions and capital flows harrison love and mcmillan find that different measures of global flows are associated with a reduction in firm level financing constraints first the authors show that one type of capital inflow foreign direct investment is associated with a reduction in financing constraints second they test whether restrictions on international transactions affects the financing constraints of firms the results suggest that only one type of restriction those on capital account transactions negatively affects firms financing constraints the authors also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of foreign direct investment this implies that foreign direct investment eases financing constraints for non multinational firms finally the authors show that 1 foreign direct investment only eases financing constraints in the non g7 countries and 2 other kinds of flows such as portfolio investment have no impact on financing constraints

capacity utilization under increasing returns to scale abstract this paper overcomes an important objection against the empirical relevance of the benhabib farmer model as a potential account of actual business cycle fluctuations this is attributable to an elasticity effect and a returns to scale effect of capacity utilization these effects are closely related to the empirical puzzles that capital appears to play an insignificant role in explaining cyclical movements in output and that the estimated labor elasticity appears to be larger than labor s share due to these effects multiple equilibria and persistent fluctuations can easily occur in a growth model for externalities mild enough so that the aggregate labor demand curve is downward sloping analyses show that the propagation mechanism generated by capacity utilization under mild increasing returns is capable of explaining the periodic patterns of u s business cycles documented by watson journal of economic literature classification numbers e32 e22 c52

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

some fiscal calculus what is the impact of fiscal policy on the econ omy how large are the multipliers of govern ment spending and tax cuts this old question has recently received considerable attention in par ticular in the context of the american recovery and reinvestment act arra of 2009 i contribute to answering that question by calculating fiscal multipliers in a baseline neo classical growth model with endogenous labor supply and fiscal policy allowing for govern ment spending transfers government debt and distortionary taxes on labor and capital income the policy experiments are conducted holding transfers consumption taxes and capital income taxes fixed i e changes in taxation require changes in the distortionary labor tax the model is simple and fairly standard as an additional contribution i provide the model in an elegant and tractable form starting from a fairly general formulation and pointing out the key functional form properties for characterizing the dynamics the formulation of the model here or versions

indeterminacy and increasing returns abstract we investigate properties of the one sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms the first involves input externalities the second involves monopolistic competition we show for parameters in close accord with recent literature on real business cycles that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self fulfilling beliefs in our first class of models growth is generated by exogenous increases in factor productivity in the second class the marginal product of capital is large enough for endogenous growth journal of economic literature classification numbers e00 e3 o40

capital account liberalization what do cross country studies tell us capital account liberalization it is fair to say remains one of the most controversial and least understood policies of our day one reason is that different theoretical perspectives have very different implications for the desirability of liberalizing capital flows another is that empirical analysis has failed to yield conclusive results the answer another influential strand of thought contends is that this efficient markets paradigm is fundamentally misleading when applied to capital flows limits on capital movements are a distortion it is an implication of the theory of the second best that removing one distortion need not be welfare enhancing when other distortions are present

monopolistic competition business cycles and the composition of aggregate demand abstract we develop a dynamic general equilibrium model with monopolistically competitive firms and endogenous markups and show the possibility of equilibria with persistent fluctuations driven by self fulfilling revisions of expectations for some parameter values such fluctuations are characterized by time series properties similar to those observed in u s postwar business cycles in contrast with the existing literature our results do not rely on the presence of increasing returns or nominal rigidities a key ingredient of the model is the link between markups and the composition of aggregate demand some econometric evidence on the latter is also reported journal of economic literature classification number d43 d58 e32

foreign interest rate shocks and exchange rate regimes in east asia using a theoretical dynamic stochastic general equilibrium model and an empirical panel vector autoregression we assess the transmission of foreign real interest rate shocks on the volatility of various key macroeconomic variables in nine small open economies in east asia taking into account the role of exchange rate regimes both the theoretical and empirical findings confirm the hypothesis that flexible exchange rate may work as a shock absorber when the economy is hit by foreign real interest rate shocks the findings suggest a clear trade off between the volatility of real exchange rate and real output to foreign interest rate shocks both the us and g7 real interest rates where the responses of real output are mitigated in countries that have more flexible exchange rate regime

a sunspot paradox abstract this paper shows that the local stability properties of dynamic general equilibrium macroeconomic models may depend on the length of a period in the model economy this leads to the following paradoxical situation the economy may be driven by sunspots for some decision frequencies while sunspots can have no impact at other decision frequencies

financial openness market structure and private credit an empirical investigation consistent with recent theoretical models this paper finds that financial openness has a positive effect on private credit in economies characterized by a competitive banking sector but that this effect vanishes and even becomes negative in economies with imperfect banking competition

currency crises capital account liberalization and selection bias are countries with unregulated capital flows more vulnerable to currency crises efforts to answer this question properly must control for self selection bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises we employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries our results suggest that after controlling for sample selection bias countries with liberalized capital accounts experience a lower likelihood of currency crises that is when two countries have the same likelihood of allowing free movement of capital based on historical evidence and a very similar set of economic and political characteristics and one country imposes controls and the other does not the country without controls has a lower likelihood of experiencing a currency crisis this result is at odds with the conventional wisdom and suggests that the benefits of capital market liberalization for external stability are substantial

uncertainty capital flows and maturity mismatch abstract this paper explores a how the financial uncertainty generated by volatile international capital flows interacts with maturity mismatch on the balance sheets of nonfinancial firms to increase the volatility of output investment and total factor productivity tfp in emerging market economies i build a model of a small open economy in which financial frictions force firms to fund long term projects with short term debt in response to changes in the level of uncertainty regarding the availability of foreign borrowing firms adjust their long term investment contributing to the volatility of investment and output as well as generating endogenous fluctuations in aggregate productivity using data from a panel of major emerging markets i show that the volatility of portfolio debt flows negatively affects output by dampening investment while the volatility of equity flows which do not generate maturity mismatch has no effect consistent with the mechanism in the model the negative impact of capital flow volatility is larger at low levels of financial development and in industries with longer time to build lags my estimates imply that shocks to capital flow volatility account for one fifth of the excess output volatility of the emerging markets in my sample relative to a set of small open advanced economies

indeterminacy home production and the business cycle a calibrated analysis abstract in this paper i present a business cycle model with one market sector that produces a standard good and another that produces a non market or home good the model can have multiple equilibria and therefore cycles driven only by self fulfilling expectations with low externalities to market production in particular an upward sloping aggregate labor demand as e g in farmer and guo j economic theory 63 1994 42 72 is not required for indeterminacy the effect of technology shocks is also studied in all cases the time series that are generated have properties that are comparable to the real us postwar series

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

commitment and conflict in bilateral bargaining building on crawford 1982 we study a model of bilateral bargaining in which negotiators can make binding commitments at a low positive cost c our primary solution concept is iterated strict dominance if commitment attempts never fail there are three solutions in two solutions all the surplus goes to one player in the third solution there is a high probility of con ict if commitment attempts succeed with probability q 1 the unique solution entails con ict with probability q 2 when c 0 analogous results hold if the requirement of iterated strict dominance is replaced by iterated weak dominance

dynamic commitment games efficiency and coordination abstract an important form of commitment is the ability to restrict the set of future actions from which choices can be made we study a simple two player dynamic game of complete information which incorporates this type of commitment for a given initial game the players engage in an endogenously determined number of commitment periods before choosing from the remaining actions we show the existence of equilibria with pure strategies in the commitment periods partial characterization results for general games capture the tradeoff between commitment and deterrence the equilibrium outcome is unique and efficient for two classes of games including pure coordination and stag hunt games

liquidity traps and large scale financial crises this paper estimates a nonlinear threshold var to investigate if a keynesian liquidity trap due to a speculative motive was in place in the u s great depression and the recent great recession we find clear evidence in favor of a breakdown of the liquidity effect after an unexpected increase in m2 in the 1921 1940 period this evidence which is consistent with the keynesian view on a liquidity trap is shown to be state contingent in particular it emerges only when a speculative regime identified by high realizations of the dow jones index is considered a standard linear framework is shown to be ill suited to test the hypothesis of a keynesian liquidity trap an investigation performed with the same data for the period 1991 2010 confirms the presence of a liquidity trap just in the speculative regime this last result emerges significantly only when we consider the federal funds rate as the policy instrument and we model the divisia m2 measure of liquidity

monetary policy and asset prices with belief driven fluctuations abstract we present a heterogeneous agents new keynesian model subject to a cost channel of monetary policy transmission constant turnover between long time traders and newcomers in market activities combined with restricted trading opportunities introduces a feedback from the stock market to real activity making stock prices non redundant for the business cycle we show that strict inflation targeting can lead to equilibrium indeterminacy even if the policy rule satisfies the taylor principle a belief driven shock to stock price generates relative volatilities of key financial variables which are very close to what is observed in u s data this result hints to the possibility that the financial instability witnessed since the mid to late 1990s was the result of waves of rational exuberance and pessimism in financial markets our analysis suggests that a mild response to stock prices in the central bank s policy rule can restore equilibrium determinacy and therefore rule out non fundamental volatility

real business cycle models and the forecastable movements in output hours and consumption the authors study the movements in output consumption and hours that are forecastable from a vector autoregression and analyze how they differ from those predicted by standard real business cycle models they show that actual forecastable movements in output have a variance about one hundred times larger than those predicted by the model the authors also find that forecastable changes in the three series are strongly positively correlated with each other on the other hand for parameters whose implications are plausible in other respects the model implies that output consumption and hours should not all be expected to move in the same direction copyright 1996 by american economic association

multilateral bargaining with concession costs this paper presents a new non cooperative approach to multilateral bargaining we consider a demand game with the following additional ingredients i there is an exogenous deadline by which bargaining has to end ii prior to the deadline players may sequentially change their demands as often as they like iii changing one s demand is costly and this cost increases as the deadline gets closer the game has a unique subgame perfect equilibrium prediction in which agreement is reached immediately and switching costs are avoided moreover this equilibrium is invariant to the particular order and timing in which players make demands this is important as multilateral bargaining models are sometimes too sensitive to these particular details in our context players with higher concession costs obtain higher shares of the pie their increased bargaining power stems from their ability to credibly commit to a demand earlier we discuss how the setup and assumptions are a reasonable description for certain real bargaining situations

labor hoarding and the business cycle this paper investigates the sensitivity of solow residual based measures of technology shocks to labor hoarding behavior using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption we estimate the fraction of the variability of the solow residual that is due to technology shocks our results support the view that a significant proportion of movements in the solow residual are artifacts of labor hoarding behavior specifically we estimate that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models in addition our results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate u s output

what are the effects of fiscal policy shocks we propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions specifically we use sign restrictions to identify a government revenue shock as well as a government spending shock while controlling for a generic business cycle shock and a monetary policy shock we explicitly allow for the possibility of announcement effects i e that a current fiscal policy shock changes fiscal policy variables in the future but not at present we construct the impulse responses to three linear combinations of these fiscal shocks corresponding to the three scenarios of deficit spending deficit financed tax cuts and a balanced budget spending expansion we apply the method to us quarterly data from 1955 to 2000 we find that deficit financed tax cuts work best among these three scenarios to improve gdp with a maximal present value multiplier of five dollars of total additional gdp per each dollar of the total cut in government revenue 5 years after the shock copyright 2009 john wiley sons ltd

switching costs in frequently repeated games abstract we add small costs of changing actions and frequent repetition to finitely repeated games making some surprising commitments credible naturally switching costs make it credible not to change action however this can occur for small switching costs and gives a unique subgame perfect equilibrium in coordination games when pareto dominance and risk dominance coincide in the prisoners dilemma switching costs reduce the incentive to deviate from mutual cooperation but reduce the incentive to switch from cooperation to punish defection hence whether switching costs enable cooperation depends on which effect dominates switching costs can make complex threats credible enabling a player to earn more than his stackelberg payoff journal of economic literature classification numbers c7 c73

debt deflation financial market stress and regime change evidence from europe using mrvar the economic meltdown since 2008 9 has created disinflation and even deflation in some countries in the euro area in a period with large debt overhang creating the condition for a continuing financial market stress in the euro area as disinflation and deflation push up the real interest rate while growth and income declines the leveraging problem becomes more severe and the economy risks shifting into a regime with high insolvency risk high financial stress rising credit spreads possibly accompanied by strong adverse macroeconomic feedback loops investigating the consequences of those magnifying feedback loops given the debt deflation we demonstrate the possibility of unstable dynamics and downward spirals in the presence of regime dependent macro feedback loops using a theoretical model with decentralized matching mechanisms on both labor and financial markets to explore the amplifying linkages between deflation output labor and financial markets we employ a new solution procedure called nmpc to solve our models variants for out of steady state dynamics we empirically explore deflationary trends in europe and employ a global var gvar model for a large euro area macro data set to estimate the impact of deflation on output moreover we use a four variable multi regime var mrvar model with regime dependent irs to study deflationary as well as well as the financial risk drivers in a mrvar setting new measures for financial risk drivers are employed and multi regime irs for output inflation rates interest rates and financial stress are explored we also study regime changes in central macro relationships such as regime change in the credit output link the phillips curve and in okun s law

heterogeneous job matches and the cyclical behavior of labor turnover abstract worker flows to and from unemployment simultaneously occur over the us business cycle and the size of the flows is positively linked to the unemployment rate unemployment flows and the unemployment rate are highly volatile persistent and countercyclical inflows lead the unemployment rate and the unemployment rate leads outflows over the business cycle the one sector stochastic growth model is augmented by matching frictions in the labor market and match specific productivity shocks that introduce ex post heterogeneous job matches matching frictions help generate the lead lag relationship between unemployment flows and the unemployment rate combined with heterogeneous job matches they generate endogenous unemployment flows and an unemployment rate whose dynamic characteristics match observed data

impatience and equilibrium indeterminacy abstract this paper extends the neoclassical one sector optimal growth model by postulating that individual agents time preference impatience depends on the economy wide average consumption and average income which are social factors taken as external by individual agents the paper shows that with the socially determined individual time preference local equilibrium indeterminacy can arise moreover local indeterminacy can also be associated with global indeterminacy in many cases the results hold in models with bounded and unbounded growth

signaling future actions and the potential for sacrifice we consider extensions of games where some players have the option of signaling future actions by incurring costs the main result is that in a class of games if one player can incur costs then forwards induction selects her most preferred outcome surprisingly the player does not have to incur any costs to achieve this the option alone suffices however when all players can incur costs one player s attempt to signal a future action is vulnerable to a counter signal by the opponent this vulnerability to counter signaling distinguishes signaling future actions from signaling types

animal spirits technology shocks and the business cycle the last few years have witnessed a revival of business cycle models in which beliefs of agents have played a leading role in explaining economic fluctuations 1 most of these models involve strong economy wide increasing returns to scale in order for sunspot equilibria to exist in a recent paper however basu and fernald 1996 present evidence that returns to scale are far from evenly distributed across the u s economy in particular they report that scale economies are present mainly in the domain of durable goods production in the nondurable goods sector of the u s economy evidence of increasing returns to scale cannot be found

firm dynamics and markup variations implications for sunspot equilibria and endogenous economic fluctuations this paper analyzes how the interaction between firms entry and exit decisions and variations in competition gives rise to self fulfilling expectation driven fluctuations in aggregate economic activity and in measured total factor productivity tfp the analysis is based on a dynamic general equilibrium model in which net business formation is endogenously procyclical and leads to endogenous countercyclical variations in markups this interaction leads to indeterminacy in which economic fluctuations occur as a result of self fulfilling shifts in the beliefs of rational forward looking agents when calibrated with empirically plausible parameter values and driven solely by self fulfilling shocks to expectations the model can quantitatively account for the main empirical regularities characterizing postwar u s business cycles and for 65 of the fluctuations in measured tfp

valuation effect of capital account liberalization evidence from the chinese stock market this paper examines the valuation effect of capital account liberalization using an event study approach and the policy announcement for rmb qualified foreign institutional investors short for rqfii as the event date we find that overall the stock market responded positively to the capital account liberalization announcement in addition we provide some heterogeneity that firms with more stringent financing constraints earn higher returns than their counterparts finally existing local institutions play an important role in determining announcement returns

endogenous games and mechanisms side payments among players we characterize the outcomes of games when players may make binding offers of strategy contingent side payments before the game is played this does not always lead to efficient outcomes despite complete information and costless contracting the characterizations are illustrated in a series of examples including voluntary contribution public good games cournot and bertrand oligopoly principal agent problems and commons games among others

financial stress sovereign debt and economic activity in industrialized countries evidence from dynamic threshold regressions we analyze how the impact of a change in the sovereign debt to gdp ratio on economic growth depends on the level of debt the stress level on the financial market and the membership in a monetary union a dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non linear manner due to amplifications from the financial sector employing dynamic country specific and dynamic panel threshold regression methods we study the non linear relation between the growth rate and the debt to gdp ratio using quarterly data for sixteen industrialized countries for the period 1981q1 2013q2 we find that the debt to gdp ratio has impaired economic growth primarily during times of high financial stress and only for countries of the european monetary union and not for the stand alone countries in our sample a high debt to gdp ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm

a theory of endogenous commitment commitment is typically modelled by assigning to one of the players the ability to take an initial binding action the weakness of this approach is that the fundamental question of who has the opportunity to commit cannot be addressed as it is assumed this paper presents a framework in which commitment power arises endogenously from the fundamentals of the model we construct a finite dynamic game in which players are given the option to change their minds as often as they wish but pay a switching cost if they do so we show that for games with two players and two actions there is a unique subgame perfect equilibrium with a simple structure this equilibrium is independent of the order and timing of moves and is robust to other protocol specifications moreover despite the perfect information nature of the model and the costly switches strategic delays may arise in equilibrium the flexibility of the model allows us to apply it to various environments in particular we study an entry deterrence situation its equilibrium is intuitive and illustrative of how commitment power is endogenously determined copyright 2008 wiley blackwell

learning by doing short sightedness and indeterminacy this article introduces firm specific learning by doing into a real business cycle rbc model this assumption results in indeterminacy of the wage over a large portion of the parameter space when firms use sufficiently high discount factors and when newly employed labour is relatively unproductive when firms and households use the same discount factor the effects of indeterminacy are limited to adding volatility to the wage rate if these discount factors differ however then indeterminacy also destabilises newly employed labour and total hours this result helps to explain the high amount of volatility that newly employed labour exhibits in the us data

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32

estimating fiscal multipliers news from a non linear world we estimate non linear vars to assess to what extent fiscal spending multipliers are countercyclical in the us we deal with the issue of non fundamentalness due to fiscal foresight by appealing to sums of revisions of expectations of fiscal expenditures this measure of anticipated fiscal shocks is shown to carry valuable information about future dynamics of public spending results based on generalised impulse responses suggest that fiscal spending multipliers in recessions are greater than one but not statistically larger than those in expansions however non linearities arise when focusing on extreme events that is deep recessions versus strong expansionary periods

on the stability of the two sector neoclassical growth model with externalities we study a class of two sector growth models with sector specific externalities in which one sector produces consumption and the other sector produces investment the novelty is that investment allocated to the consumption sector is an imperfect substitute for investment allocated to the investment sector we show analytically that in this case local indeterminacy near the steady state is impossible for every empirically plausible specification of the model parameters more specifically we show that a necessary condition for local indeterminacy is an upward sloping aggregate labor demand curve in the investment sector which requires a counterfactual strength of the externality we show numerically that an elasticity of substitution of plausible size implies determinacy near the steady state these findings differ sharply from the standard result for two sector models that if the investments allocated to the two sectors are perfect substitutes then local indeterminacy occurs for a wide range of plausible parameter values

capital account liberalization financial development and industry growth a synthetic view this paper synthesizes studies analyzing the effects of capital account liberalization on industry growth while controlling for financial crises domestic financial development and the strength of institutions we find evidence that financial openness has positive effects on the growth of financially dependent industries although these growth enhancing effects evaporate during financial crises further analysis indicates that the positive effects of capital account liberalization are limited to countries with relatively well developed financial systems good accounting standards strong creditor rights and rule of law it suggests that countries must reach a certain threshold in terms of institutional and economic development before they can expect to benefit from capital account liberalization