banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

evaluating program impacts on mature self help groups in india despite the popularity and the unique nature of women s self help groups in india evidence on the economic impact of these groups is scant on the basis of two rounds of surveys of 2 517 households we use a strategy of double differences and propensity score matching to assess the economic effects of a program that promoted and strengthened self help groups in andhra pradesh in india our analysis finds that longer exposure to the program has a positive impact on consumption nutritional intake and asset accumulation our investigation into the heterogeneity of these effects suggests that even the poorest households are able to benefit from the program

private information deposit interest rates and the stability of the banking system abstract the regulation of deposit interest rates has received little support from economists the same is true for the original rationale for such regulation that bank competition for deposits generates inherent instability in the banking system this paper develops an adverse selection model of banking in which this rationale is correct moreover in this model instability in the banking system can arise despite the presence of a lender of last resort and despite the absence of any need for deposit insurance however in the world described the regulation of deposit interest rates is shown to be an appropriate response to instability in the banking system finally it is argued that adverse selection models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts

the allocation of credit and financial collapse this paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders it illustrates that 1 the allocation of credit is inefficient and at times can be improved by government intervention and 2 small changes in the exogenous risk free interest rate can cause large discontinuous changes in the allocation of credit and the efficiency of the market equilibrium these conclusions suggests a role for government as the lender of last resort

models of banking instability a partial review of the literature abstract this paper critically examines the theoretical literature on banking instability that has followed diamond and dybvig 1983 it explores the extent to which it a explains banking instability within a theoretical context in which financial intermediaries improve on unintermediated markets and b justifies government involvement in the financial intermediation industry it suggests that the literature has yet to provide a satisfactory theoretical basis for banking instability as such since the intermediaries which arise from it are peculiar mutual funds that bear little resemblance to real world banks in addition the paper challenges the widespread belief that this literature provides a sound foundation for government involvement in the industry it suggests that arguments for government intervention are open to objection on various grounds the most important one being that they are inconsistent with the existence of properly motivated financial intermediation in these models

in which context is the option clause desirable the option clause is a contractual device from free banking experiences meant to prevent banknote redemption duels it has been used within the diamond and dybvig j pol econ 91 401 419 1983 framework to suggest that very simple contractual solutions can act as an alternative to deposit insurance this literature has however been ambiguous on whether the option clause can replace deposit insurance outside of those two contexts it will be argued that the theoretical clause does not generally affect the likelihood that a solvent bank goes bankrupt because of a bank run as empirical evidence suggests it is already near null and that the exercise of the clause will have the effect of diminishing the size of creditor claims on bank assets because it exacerbates the agency problem of bank debt it will therefore be argued that the clause is only desirable in a free banking systems that are historically devoid of bank runs in the first place and have other means of managing debt related agency problems and b under the unrealistic assumption that bank runs are self fulfilling prophecies it will be argued that the agency problem of bank debt makes the option clause undesirable outside of free banking systems

banking as the provision of liquidity this article represents a model economy in which demand deposits represent the optimal financial intermediation because these demand deposits are backed in part by an illiquid asset the in termediary bank is subject to panics in which each agent ration ally decides to withdraw his deposits making all worse off banks ca n prevent panics only through a distortion of the optimal contract t he government can prevent panics without this distortion by guarantee ing the return from deposits the moral hazard introduced by this dep osit insurance induces the government to regulate the intermediary s portfolio and returns copyright 1988 by the university of chicago

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

the intrinsic limits of modern economic theory the emperor has no clothes assumptions of the uniqueness and stability of general equilibrium in a walrasian framework have no theoretical justification this paper argues that the key reason for this is that the walrasian model treats people as acting independently of one another especially in their demand behavior this independence plays an essential role in constructing economies with arbitrary excess demand functions thus making individual behavior dependent or similar may open the way to obtaining meaningful restrictions on aggregate excess demand functions copyright 1989 by royal economic society

capital distribution and macroeconomics core beliefs and theoretical foundations the paper suggests an alternative benchmark model or microfoundations for theorising about macroeconomic phenomena in the case of competitive equilibria this alternative reflects a classical sraffian explanation of relative prices this approach also provides a coherent framework for the analysis of the choice of technique in a multi commodity setting in turn it leads to results which throw into question a number of key propositions of conventional macro theory including the notion of a long run self correcting mechanism for involuntary unemployment in the presence of wage and price flexibility the paper argues that a classical sraffian approach provides a means of reconciling keynesian results with competitive outcomes copyright 2004 oxford university press

the optimum quantity of money rule in the theory of public finance this paper examines optimal tax policy in a monetary economy in which money serves as an intermediate good that helps facilitate the conversion of scarce resources into tinal consumption goods by enabling consumers to economize on the costs of transacting it is shown that in such an environment even though distorting taxes must be levied for revenue purposes the optimal tax structure calls for abstaining from inflationary finance and adopting the optimum quantity of money rule

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

bank runs as an equilibrium phenomenon a standard demand deposit contract in which individuals are entitled to their full deposit at any time provided the bank is solvent is analyzed in a context in which there are no exogenous events on which agents condition their behavior and a unique equilibrium involving a bank run with positive probability is shown to exist

can micro credit bring development abstract we examine the long run effects of micro credit on development in an occupational choice model similar to banerjee and newman jpe 1993 micro credit is modeled as a pure improvement in the credit market that opens up self employment options to some agents who otherwise could only work for wages or subsist micro credit can either raise or lower long run gdp since it can lower use of both subsistence and full scale industrial technologies it typically lowers long run inequality and poverty by making subsistence payoffs less widespread thus an equity efficiency tradeoff may be involved in the promotion of micro credit however in a worst case scenario micro credit has purely negative long run effects the key to micro credit s long run effects is found to be the graduation rate defined as the rate at which the self employed build up enough wealth to start full scale firms we distinguish between two avenues for graduation winner graduation of those who earn above average returns in self employment and saver graduation due to gradual accumulation of average returns in self employment long run development is not attainable via micro credit if winner graduation is the sole avenue for graduation in contrast if the saving rate and self employment returns of the average micro borrower are jointly high enough then micro credit can bring an economy from stagnation to full development through saver graduation thus the lasting effects of micro credit may partially depend on simultaneous facilitation of micro saving eventual graduation of the average borrower rather than indefinite retention should be the goal of micro banks if micro credit is to be a stepping stone to broad based development rather than at best an anti poverty tool

firm heterogeneity internal finance and credit rationing this paper assesses the role of internal net worth holding constant investment opportunities in the allocation of credit in the presence of asymmetric information in the capital market the authors consider an economy in which both symmetric information and information intensive entrepreneurs seek funds from the capital market and they develop a simple general equilibrium model of credit allocation their emphasis is on shocks to borrower net worth depending on levels of net worth the symmetric information allocation a credit collapse or intermediate allocations are possible the model yields predictions corresponding to accelerator effects on investment and output as well as real effects of collateral redistributions copyright 1990 by royal economic society

transformations of the commodity space behavioral heterogeneity and the aggregation problem aggregation in exchange markets is studied by imposing restrictions on distributions of the households characteristics approximate bounds for market demand price elasticities that depend upon specific measures of behavioral heterogeneity are provided increasing behavioral heterogeneity makes aggregate expenditures more independent of prices this has strong consequences for the prevalence in the aggregate of the weak axiom of revealed preference of gross substitutability and on uniqueness and stability of the walrasian exchange equilibrium these strong macroeconomic regularities are obtained essentially through distributional assumptions as no rationality requirements are imposed on individual demand functions other than homogeneity and walras law journal of economic literature classification numbers d11 d41 d50 el 1992 academic press lnc there are still quite a few unpleasant gaps nowadays between macroanalysis and microanalysis of socioeconomic systems a leading instance drawn from social choice theory is arrow s celebrated impossibility theorem 1 which states that any attempt to aggregate individual preferences into a consistent social ordering or a collective choice procedure satisfying a few appealing requirements is bound to fail the impossibility arises however only if one insists that the procedure should work for every possible environment or in other words for all distributions of individual preferences a possible resolution of the problem is therefore to identify broad classes of distributions of preferences for which aggrega the bulk of the research reported in this paper was essentially done at yale university during the fall semester of 1990 i thank all my colleagues for their support and comments especially martin shubik herbert scarf and truman bewley i also had very useful conversations with jorgen weibull mike jerison andreu mas colell christian gouri6roux camille bronsard guy laroque bruno jullien and bernard caillaud i am much indebted to ai klevorick for his comments on an earlier draft but my greatest debt is to werner hildenbrand whose pioneering insights and stubborn insistance have over the years kept quite a few of us struggling beyond the fads of the moment with the aggregation problem our profession is fortunate indeed to have him around

bank suspension of convertibility abstract a banking panic occurs when depositors at all banks seek a large reduction in their deposit holdings suspension of convertibility of demand deposits into currency was the banking system s response to a banking panic when depositors are incompletely informed about the state of bank investments a panic can occur when depositors expect capital losses conditional on having observed noisy indicators of the state of bank investments banks with superior information about the investments can signal to depositors by suspending convertibility that continuation of the long term investments is mutually beneficial

bank runs the deposit currency ratio and the interest rate abstract this paper provides a model of an economy with a banking system which is subject to bank runs the model is then used to explain the rise in short term interest rates during bank runs and the fall in the deposit currency ratio in anticipation of possible runs

can targeted food programs improve nutrition an empirical analysis of india s public distribution system abstract despite the widespread belief that a substantial assault on poverty requires targeting scarce resources toward the poor practitioners frequently claim that targeted programs deliver fewer benefits to poor households than do universal programs this article evaluates this concern through an analysis of india s targeted food distribution program the public distribution system it first examines the case for targeting by assessing the responsiveness of caloric intake to the amount of the food grain subsidy a low elasticity suggests that improvements in nutrition may require large subsidies and hence a targeted program it then examines whether targeting adversely affects the probability of poor households participating in the program the empirical analysis identifies the effect of the program by combining time varying policy changes in the value of the program with cross sectional variation in program benefits generated by variation in market prices the results confirm the low responsiveness

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

behind methodological individualism methodological individualism has become a more fashionable slogan for economistsin recent years in specific terms we are being urged to accept a doctrine within whichall explanations of social phenomena have to be couched in terms of statements aboutindividuals however the term has a wide and sometimes ambiguous usage and is beingemployed as a packaging for all kinds of methodological and theoretical prescriptions forexample it has been regarded as a commandment that thou shalt where possible placemacroeconomic statements on firm microeconomic foundations e g blaug 1980 or aninjunction against reckless aggregation particularly in regard to welfare criteria orsocial welfare functions e g kirzner 1980 littlechild 1978 or as an inspiration forrecent theoretical developments in economics with pro market policy conclusions e g furubotn and pejovich 1974 one of the further problems in discussing this topic is that often the term methodo logical individualism carries an ideological charge indeed by both advocates and itsopponents it is too frequently confused with individualism of a political variety however the connection between political and methodological individualism is merely assumed bythese supporters or critics or supported by cursory argument it is never demonstratedwith any rigour although there is a lack of uniformity in the use of the label it is argued here that the keyelement in the classic statements of methodological individualism is a refusal to examinethe institutional or other forces which are involved in the moulding of individual pref erences and purposes we are thus confronted with a remarkable optimism about thepossibility of explanation of social phenomena in terms of individuals but an extremereluctance to give even partial explanations of individual behaviour in social or evenpsychological terms this refusal is both dogmatic and as will be argued below unaccept able on analytical grounds this reduction of explanation and thereby causality solely to individuals has a furtherimplication the explanation of social phenomena proceeds even by a circuitous route

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

teaching modern macroeconomics at the principles level ideas taught at the macroeconomics principles level should satisfy two goals first they should be simple enough to be both understandable and memorable for the beginning student second they should be consistent both with the modem economy and with the macroeconomic models of this economy that are used in practice for policy evaluation there is no necessary conflict between these two goals the greater the consistency between the ideas taught in the classroom and the models used in practice the easier the ideas are to understand and the worthier they are of being remembered it would be an exaggeration to say that a consensus now exists in advanced research about how macroeconomics should evolve in the future debates continue for example about the usefulness of models with representative agents or what it means to have a fully articulated model of money nevertheless at the practical level a common view of macroeconomics is now pervasive in policyresearch projects at universities and central banks around the world this view evolved gradually since the rational expectations revolution of the 1970 s and has solidified during the 1990 s it differs from past views and it explains the growth and fluctuations of the modern economy it can thus be said to represent a modem view of macroeconomics 1 the purpose of this paper is to show how this modem macroeconomics can be taught at the principles level i focus on macroeconomic concepts including economic growth and fluctuations and their graphical representation rather than on techniques of delivery whether active learning experiments or the use of new media 2 the teaching ideas are similar to those used by david romer 2000 and taylor 1998 but the purpose of this paper is to show how closely they represent modern macroeconomics

the microfoundations project in general equilibrium theory the author 1 argues that the long lived microfoundations project based on general equilibrium models has come to an end and 2 shows that non walrasian models intended to provide microfoundations for macroeconomics are inadequate the arguments are derived from the sonnenschein mantel debreu smd demonstration of the arbitrariness of aggregate excess demands in general equilibrium models of the walrasian arrow debreu mckenzie type the issues raised have significance for the proper method of modeling macroeconomic phenomena for instance the smd results have led a growing number of general equilibrium theorists to make assumptions concerning macroeconomic structure in order to analyze other regularities at the macro level these points validate the position that systematic macroeconomic phenomena are intrinsically macroeconomic copyright 1994 by oxford university press

liquidity banking and bank failures a multiperiod model with risk neutral agents is constructed in which a liquidity problem arises in an equilibrium with decentralized tradin g in capital which banking institutions are able to alleviate depos it contracts provide for early withdrawal banks hold debt and agent s who borrow from banks hold compensating balances institutional col lapse or a state of the world when bank failures are experienced is associated with a high demand for liquidity low output and a lower than average level of welfare bank failure is symptomatic of a part icular state of endowments preferences and technology and governme nt intervention is undesirable copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

banking and insurance abstract this paper studies the economic role of financial institutions in economies where agents incomes are subject to privately observable idiosyncratic random events the information structure precludes conventional insurance arrangements however a financial institution perhaps best viewed as a savings bank can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes resulting in a level of expected utility higher than that achievable in simple security markets insurance is incomplete because the bank faces a tradeoff between provision of insurance and maintenance of private incentives

are there lasting impacts of aid to poor areas abstract the paper re visits the site of a large world bank financed rural development program in china 10 years after it began and four years after disbursements ended the program emphasized community participation in multi sectoral interventions including farming animal husbandry infrastructure and social services data were collected on 2000 households in project and non project areas spanning 10 years a double difference estimator of the program s impact on top of pre existing governmental programs reveals sizeable short term income gains that were mostly saved only small and statistically insignificant gains to mean consumption emerged in the longer term though in rough accord with the average gain to permanent income the use of community based beneficiary selection greatly reduced the overall impact given that the educated poor were under covered the main results are robust to corrections for various sources of selection bias including village targeting and interference due to spillover effects generated by the response of local governments to the external aid

the new keynesian view of aggregate demand some reflections from a classical sraffian standpoint the paper argues that the derivation of the aggregate demand curve in the new keynesian literature is insufficient to provide the theoretical ground for the use to which it is usually put namely as a theoretical basis for the claim that long run wage and price flexibility would push a capitalist economy to the full employment or natural level of output it is argued that the derivation solely on the basis of the propositions about optimising household consumption expenditures is insufficient to guarantee a decreasing aggregate demand function without circular reasoning this point is clarified by use of a very simple two commodity production model of long run steady states due to spaventa and nell to guarantee a decreasing aggregate demand function the new keynesian approach must invoke the kinds of propositions used in more traditional derivations propositions which themselves are in question on capital theoretic grounds

macroeconometric modeling and the theory of the representative agent the lucas critique of econometric policy evaluation 1976 argues that to the extent econometric models do not capture the primitive parameters of tastes and technology their coefficients can be expected to vary with changes in policy regimes several econometricians have undertaken empirical work that separates the parameters of tastes technology and policy estimating models that are in principle immune from this critique exemplary contributors to this effort have been thomas sargent 1978 and sargent and lars hansen 1980 the empirical work inspired by the lucas critique has proceeded using representative agent models and aggregate data the treatment of expectations and dynamic optimization has been careful although at times necessarily limited by the analytical requirements of attaining closed form solutions for dynamic programming problems under uncertainty potential problems due to aggregation have usually been ignored although when preferences and technology are quadratic it appears that they can be disposed of quickly assuming a representative firm is only a convenience as the model admits a tidy theory of aggregation sargent 1978 p 1016 it is ironic that a paradigm that emphasizes the isolation of the primitive parameters of tastes and technology has led to empirical work that has ben conducted almost exclusively with aggregate data there are exceptions t macurdy 1983 j biddle 1984 there are several difficulties with this development first the fact that representative agent models with exact aggregation can be constructed is unrelated to whether or not these models are adequate we can also construct models in which agents behavior is unaffected by the policy regime to exclusively model and test one but not the other appears to be a misplacement of emphasis second some of this work has proceeded using representative agents whose behavior cannot be aggregated exactly see m eichenbaum hansen and kenneth singleton 1984 for an example there is a third and most fundamental objection to empirical work which seeks to avoid the lucas critique yet uses aggregate data whenever econometric policy evaluation is undertaken using models estimated with aggregate data it is implicitly presumed that the aggregator function is structural with respect to the policy intervention in question formally aggregator functions are no more structural than are within regime reducedform relations of endogenous to policy variables as a modeling strategy ignoring the sensitivity of aggregators to policy changes seems no more compelling than ignoring the dependence of expectations on the policy regime this paper describes a very modest econometric model in which the effects of ignoring aggregation and of ignoring expectations each within the context of several representative agent models can be appreciated objective functions are quadratic and prices are disparate across agents in these respects the model s assumptions are in the mainstream of lucas and subsequent empirical work the model is carefully contrived so that exact aggregation is always possible this is not essential to the argument in any way but it drastically reduces the number of circumstances to be examined in constructing numerical examples the example pertains to neoclassical production and in each case there are three distinct representative agents one for production one for factor demand professor of economics duke university durham nc 27706 financial support from nsf grant ses8318778 and a sloan research fellowship are gratefully acknowledged a more detailed version of this paper is available on request from the author