budget deficits stability and the monetary dynamics of hyperinflation hyperinflationary processes usually occur in countries with extremely large budget deficits in models of inflationary finance with rational expectations e g buiter 1987 large budget deficits cannot lead to hyperinflation the purpose of this paper is to reconcile the standard theoretical model with the stylized facts it shows that by introducing a lag in the adjustment of the money market into the standard inflationary finance model large budget deficits are indeed the main reason for hyperinflation the paper also provides an explanation for the ineffectiveness of moderate reductions in the deficit in reducing inflation and argues that fiscal lags can be destabilizing copyright 1989 by ohio state university press

assessing the effects of wives earnings on family income inequality we argue that the effect of wives earnings can be assessed meaningfully only by comparing the observed distribution of income with a reference distribution the components of the standard decomposition of the gini coefficient have no implicit reference distribution and therefore should not be interpreted as a measure of the effect of an income source on inequality we suggest several intuitive counterfactual reference distributions and illustrate their use with 1979 and 1989 u s data we conclude that wives earnings reduced inequality in that the income distribution would have been less equal in their absence alternative measures of the impact have mixed results

labor unions bargaining power and corporate bond yield spreads structural credit model perspectives abstract this study investigates labor union effects on bond yield spreads from perspectives of structural credit models by employing american bond observations from 2001 to 2007 this research finds that union strength significantly and positively relates to bond yield spreads this effect is roughly equal to that of issuer rating for one standard deviation change when controlling for well known variables the empirical results also show that the positive effects become weaker when management has higher bargaining power additionally union strength volatility significantly and negatively relates to bond yield spreads and capital structure leverage the above results are robust when controlling for credit ratings collinearity concerns industry effect and tax effect

inflation growth and wage policy a brazilian perspective abstract a growth inflation model based on recent brazilian experience is developed the paper focuses on brazilian compulsory wage policy in order to analyse current stabilization policy issues in this context it is argued that orthodox stabilization policies as exemplified by an autonomous reduction in the rate of monetary growth implies both a temporary and a permanent decrease in output growth if the wage formula as in brazil provides for lagged price indexation the idea of promoting stabilization through full wage indexation is also examined

the austral plan in recent years several countries have experienced extremely rapid inflations but without total collapses of the national currencies argentina was one of those cases by mid 1985 the rate of price increase exceeded 30 percent per month however prices continued to be set in pesos and there remained a sizeable volume of short term nominal contracts the treatment of such inflations poses several questions what is the desirable speed of disinflation what mix of instruments can effectively act on prices without causing an excessive fall in real income how can prices be kept on a stable or moderately rising trend the austral plan announced in june 1985 combined fiscal measures with a price wage freeze and a monetary reform linked to a system for the conversion of debt contracts the program quite successfully managed the transition to a much lower inflation rate while real output recovered rapidly after an initial contraction still inflationary forces remained strong the problem of achieving a sustained stabilization proved quite difficult to solve this paper briefly describes the program and its effects with some references to current debates on stabilization policies see my 1986 study for full discussion and details

the effect of unions on the structure of wages a longitudinal analysis this paper studies the effects of unions on the structure of wages using an estimation technique that explicitly accounts for misclassification errors in reported union status and potential correlations between union status and unobserved productivity the econometric model is estimated separately for five skill groups using a large panel data set formed from the u s current population survey the results suggest that unions raise wages more for workers with lower levels of observed skills in addition the patterns of selection bias differ by skill group among workers with lower levels of observed skill unionized workers are positively selected whereas union workers are negatively selected from among those with higher levels of observed skill despite a large and sophisticated literature there is still substantial disagreement over the extent to which differences in the structure of wages between union and nonunion workers represent an effect of trade unions rather than a consequence of the nonrandom selection of unionized workers over the past decade several alternative approaches have been developed to control for unobserved heterogeneity between union and nonunion workers 2 one method that has been successfully applied in other areas of applied microeconometrics is the use of longitudinal data to measure the wage gains or losses of workers who change union status unfortunately longitudinal estimators are highly sensitive to measurement error even a small fraction of misclassified union status changes can lead to significant biases if the true rate of mobility between union and nonunion jobs is low this sensitivity led lewis 1986 to essentially dismiss the longitudinal evidence in his landmark survey of union wage effects in this paper i present some new evidence on the union wage effect based on a longitudinal estimator that explicitly accounts for misclassification errors in reported union status the estimator uses external information on union status misclassification rates along with the reduced form coefficients from a multi variate regression of wages on the observed sequence of union status indicators to isolate the causal effect of unions from any selection biases introduced by a correlation between union status and the permanent component of unobserved wage heterogeneity recognizing that unions may raise wages more or less for

imputed income from owner occupied housing and income inequality imputed income from owner occupied housing is generally not included in analyses of the distribution of income yet the value of homeownership is undoubtedly an important element distinguishing the economic status of one family from another in this paper using a new method to decompose income inequality by income source we analyze the impact of potential income derived from the net worth of housing on a representative national sample of us homeowners using 1980 survey of residential finance data we find that housing income adds less to inequality per dollar of income than does income from all other sources

union negotiations and corporate policy a study of labor concessions in the domestic steel industry during the 1980s abstract this paper studies managerial compensation financial reporting and dividend policies of the seven major domestic steel producers during requests for union concessions substantial layoffs reported losses and sacrifices by nonunion stakeholders buttressed managers case for union concessions from 1980 to 1988 sample firms reduced their work force by about 300 000 almost two thirds and annual wage payments from 16 1 to 8 6 billion reported income is lower during union negotiations controlling for cash flows as is managerial pay with average ceo salary plus bonus declining 18 dividend reductions and white collar pay cuts are substantial pervasive and clustered during union negotiations

income housing wealth and gender inequality gender inequalities in income are relatively widely documented but their realisation in the housing system is less well understood this paper examines the relationship between incomes access to housing and housing costs among widowed divorced separated and never married single people in australia while the relative financial advantages of single men are sustained throughout the housing system there is some evidence that gender discrepancies in income are reduced once housing costs are taken into account lone mothers however fare least well and face a disproportionate loss of disposable income through housing expenditures

mortgage design under inflation and real wage uncertainty the use of a dual index instrument designing a mortgage system which protects lenders interests in an inflationary environment and at the same time provides continued accessibility to credit for borrowers has been a challenge during the past decade officials of lending institutions and agencies involved with mortgage lending have invariably developed approaches which addressed either the concerns of lenders or those of some borrowers or provided disincentives to lenders instead of focusing upon the problems of lenders or borrowers separately this paper presents a combined approach in which the effects of inflation upon lenders are addressed through indexation of payments to prices while at the same time borrowers have their payments tied to a wage index with any shortfalls in real payments capitalized for later repayment this dual indexed system safeguards the interests of both groups while it provides for continued lending activities the paper presents the underlying logic of a simple financial model that can examine such lending instruments the model can also serve as an analytical tool for various officials involved in sector planning it allows policymakers to analyze the effects of various lending policies alternative norms and design standards various inflation and wage prospects interest rate issues etc

the impact of capital market imperfections on investment cash flow sensitivity abstract we examine the investment cash flow sensitivity of us manufacturing firms in relation to five factors associated with capital market imperfections fund flows institutional ownership analyst following bond ratings and an index of antitakeover amendments we find a steady decline in the estimated sensitivity over time furthermore we find that investment cash flow sensitivity decreases with increasing fund flows institutional ownership analyst following antitakeover amendments and with the existence of a bond rating the overall evidence suggests that investment cash flow sensitivity decreases with factors that reduce capital market imperfections

inflationary inertia in a wage price spiral model abstract this paper examines theoretical issues of inflationary inertia by use of a wage price spiral model in which wage and price decisions are staggered it is shown that within such a framework inflation is inertial in the following sense a monetary disinflation cannot immediately succeed and the rate of inflation declines gradually it is also shown that from another aspect of inflationary inertia which is the effect of cost shocks inflation is less inertia even in a wage price spiral model a temporary cost shock has no continuing effect on the rate of inflation only permanent changes in costs have an inertial effect and they raise the rate of inflation in consecutive periods as well

unionization and profitability evidence of spillover effects ruback and zimmerman s 1984 event study which showed that formal union organizing activity significantly lowers a firm s market value provides compelling evidence that unionization reduces a firm s profitability union organizing activity may also have sizable cross firm or spillover effects on the performance of neighboring firms thus the total impact of union organizing on the wealth of firm owners may be substantially understated by focusing only on the firm in which the union organizing activity occurs this paper presents an alternative approach for estimating union spillover effects on profitability using a data set and methodology similar to ruback and zimmerman s we find that the total negative effects of unionization on profits after cross firm or spillover effects are included are nearly three times as large as the own firm effects reported by ruback and zimmerman the hypothesis that changes in unionization have spillover effects on nonunion firms is well known formal union organizing activity at one firm may increase the threat of unionization at other firms neighboring firms may respond to the greater threat of unionization

balance of payments crises in a cash in advance economy the author shows that a flexible prices sidrauski type model with a cash in advance constraint is capable of depicting some of the phenomena associated with a balance of payments crisis like the onesrecently observed in argentina and mexico current accounts deficits and appreciation of the real exchange rat e it is also shown that these phenomena become exacerbated as the rate of devaluation before the crisis occurs becomes smaller copyright 1987 by ohio state university press

the impact of labor unions on investment cash flow sensitivity abstract this paper empirically examines how labor unions affect investment cash flow sensitivity using samples from the us covering the period of 1984 2009 we find a significant positive union effect using a q model of investment the capital expenditures of firms are 1 71 times more sensitive to internal cash flows when unionization rates increase one standard deviation from the mean this effect holds when we control for other proxies of financial constraints in addition unionized firms are associated with lower cash cash flow sensitivity which suggests that the higher investment cash flow sensitivity in unionized firms is primarily driven by the incentive of these firms to reduce liquidity and enhance bargaining power against the union we also show that the above union effects become more pronounced during labor contract negotiation years

fiscal reforms and stabilisation four hyperinflation cases examined this paper discusses a hypothesis that is common to several recent explanations for the needs of hyperinflations of the 1920s namely that fiscal reforms had been responsible for their sudden end it is suggested that the very presence of these reforms can be disputed once evidence is provided on the fact that budget deficits were mostly caused by the so called oliveira tanzi effect i e deficits were mostly generated by inflation itself some observations are offered on other issues to be addressed if an alternative explanation for the stabilizations are to be found copyright 1990 by royal economic society

investment behavior observable expectations and internal funds we use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment spending we find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow even for firms typically thought to be liquidity constrained these results have two key implications first fundamentals may be more important for investment spending than would be suggested by the results to date from investment q models second the positive cash flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints jel d92 e22

corporate investment with financial constraints sensitivity of investment to funds from voluntary asset sales we examine the importance of financial constraints for firm investment by looking at the relationship between investment expenditures and proceeds from voluntary asset sales asset sales provide a cleaner indicator of liquidity than cash flows since it appears not to be positively correlated with investment opportunities the cross sectional differences in firm investment are examined using an endogenous switching regression model with unknown sample separation we find that cash obtained from asset sales is a significant determinant of corporate investment and that the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be financially constrained

from hyperination to stable prices argentina s evidence on menu cost models we review and extend several comparative statics results of xed menu cost models of price setting rms facing real idiosyncratic shocks such as the type studied by golosov and lucas 2007 as well as by many others these results are confronted with their empirical counterparts using the micro data underlying argentina s consumer price index for a time period where ination rates vary from almost 5000 per year

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

inflation stabilization risk in economies with incomplete asset markets abstract in economies with high inflation nominal financial markets disappear in the context of a general equilibrium model with incomplete asset markets this paper shows that this phenomenon can be explained by an inflation process characterized by a high expected inflation coupled with a low probability of a stabilization of the price level and that the disruption of trade in nominal contracts is socially costly

reserve and exchange rate cycles abstract many latin american countries appear locked into cycles of reserve loss devaluation and temporary reserve gains this paper shows how a dual exchange rate system with leakages may generate cycles in reserves and the premium between official and parallel exchange rates we study the dynamics of these cycles and their asymptotic behavior both analytically and numerically

union rent seeking intangible capital and market value of the firm abstract this study considers the effect of unions on intangi ble capital investment and profitability within the context of a market value rather than a more traditional accounting based approach theory is provided suggesting unions are able to affect profitability by sharing in the economic returns to firm specific intangible capital in support of this hypothesis we find unionization reduces the returns to r d and produces a corresponding limiting influence on r d investment at the firm level i introduction a n extensive literature in economics has ex amined the determinants of profitability with much of the focus centering on the role of market structure only recently however have the effects of labor unions on profitability been analyzed ths is surprising since labor economists long have emphasized union influences on wages and productivity that in turn may affect profitabil ity in recent studies freeman 1983 and karier 1985 report a significant limiting influence of unions on price cost margins in high concentra tion manufacturing industries using firm level data and the market based tobin s

dollarization in post hyperinflationary argentina abstract this paper analyzes the continued dollarization of the argentine economy which experienced a rapid decline in inflation following its hyperinflations of the 1980s first a measure of dollar currency circulating in argentina is developed thereby improving upon previous studies of dollarization and currency substitution that focused on dollar deposit holdings only second cointegration analysis of peso money demand in argentina finds a negative ratchet effect from inflation the reduction in peso money demand attributable to the ratchet mirrors the estimated stock of all dollar assets held domestically by argentine residents consistent with the hypothesis of irreversible dollarization

inflationary rigidities and orthodox stabilization policies lessons from latin america orthodox stabilization programs in latin american countries have been notoriously unsuccessful in combating inflation despite the imposition of stringent cuts in government deficits in most cases inflation came down only slowly and temporarily with concomitant declines in growth and employment the bolivian program one of the only latin american successes is contrasted with those of argentina brazil chile and mexico the problems of dealing with chronic inflation are compared with those of hyperinflationary countries and the influence of price and wage rigidities expectations and credibility is explored the study shows that fiscal restraint is a necessary but not sufficient condition for success and that sound management of nominal variables the exchange rate and money supply are also necessary the critical role of credibility is linked with price and wage rigidities in the chronic inflation countries whereas the unsuitability of hyperinflation is seen to increase the credibility of and thus the potential for successful stabilization programs

exchange rate rules black market premia and fiscal deficits the bolivian hyperinflation with dual exchange rates where a managed official exchange rate co exists with a floating black market rate a given budget deficit may be consistent with many different inflation rates rather than two which is the normal result in closed economy systems further all these inflation equilibria are saddle point stable a policy of adjusting the official exchange rate towards the black market rate may cause the economy to converge to a high inflation saddle point stable equilibrium where money inflation elasticity exceeds unity the analytics are motivated and illustrated by the bolivian hyperinflation of 1984 1985

high inflation heterodox stabilization and fiscal policy abstract in 1985 86 argentina bolivia brazil and israel introduced stabilization programs aimed at drastic and immediate reductions in inflation besides traditional fiscal and monetary policies the stabilization packages included a number of heterodox elements such as wage and price freezes exchange rate pegging and deindexation measures this paper delineates the analytical relationship between the traditional and heterodox policies discusses the role and impact of the heterodox policies in the programs and examines in detail the role of traditional fiscal policy when coupled with heterodox policies and applied with the aim of moving quickly from very high to very low inflation

a policy game approach to the high inflation equilibrium abstract the high inflation equilibrium hie refers to a steady state solution where inflation is higher than the one which maximizes seigniorage i e inflation is on the falling segment of the laffer curve it has been claimed that the hie can be stable when the adjustment of expectation is fast however adjustment is fast because inflation is high so the argument is circular in this paper we rationalize the hie using the policy game approach which distinguishes between discretionary and precommitment regimes we expand and demonstrate rigorously using a technique developed by obstfeld barro s suggestion that a hie may result from a discretionary regime we show that this is not possible under precommitment in addition we demonstrate that a hie may result from non fiscal factors such as the motivation to reduce unemployment in a discretionary regime we conclude with a simple diagrammatic exposition of the difference between our approach and the previous one

inflation unemployment and distributional conflict in argentina 1984 90 the cycle of various economic stabilisation efforts in argentina during the 1980s has often been characterised as reflecting either policy confusion on the part of officials or their unwillingness to depart from an obsolete model of economic development hence according to some the alternation between orthodox and heterodox policy approaches has revealed an absence of either economic policy wisdom or political conviction less attention has been paid to the underlying real class based conflict for income that has manifested itself in terms of high rates of inflation and at times hyperinflation interpreting the issue from this perspective allows us to appreciate the essential continuity of the process of neo liberal reform of the argentine political economy that commenced with the post peronist military coup in 1976 and has more recently culminated with the rise of the nominally peronist regime of carlos menem

competitive banks and the inflation tax abstract the purpose of this note is to show that the presence of a competitive banking sector has important quantitative implications for the revenue maximizing rate of inflation

investment and union certification using data on union certification elections we estimate the impact of unionization on firms investment behavior employing both a standard q model and an investment surprises technique we find that union certification significantly reduces investment in the year following the election we find that a winning certification election has on average about the same effect on investment in the year following the event as would given the elasticity measures taken from the public finance literature a 33 percentage point increase in the corporate tax the magnitude of the response in years further away from the election is less certain

hyperinflations their origins development and termination abstract this paper summarizes and critically surveys research on hyperinflation appraisal and review of the literature considers the origins development termination and the lessons to be learned from hyperinflations the historical evidence as well as the econometric evidence is analyzed it is concluded that while the lessons to be learned from such episodes perhaps have been overstated a number of useful implications may be derived from studying hyperinflations such as an understanding of the forces which link monetary and fiscal policies to inflation and policy makers role in influencing individuals expectations

the impact of negative cash flow and influential observations on investment cash flow sensitivity estimates abstract kaplan and zingales quart j econ 112 1997 169 and clearly j finance 54 2 1999 673 diverge from the large literature on investment cash flow sensitivity by showing that investment is most sensitive to cash flow for the least financially constrained firms we examine if this result can be explained by the fact that when firms are in sufficiently bad shape incurring cash losses investment cannot respond to cash flow we find that while cleary s results can be explained by such negative cash flow observations the kaplan zingales results are driven more by a few influential observations in a small sample we also record a decline in investment cash flow sensitivity over the 1977 1996 period particularly for the most constrained firms

making sense of a crank case monetary diversity in argentina 1999 2003 based on empirical data this study discusses the introduction acceptance and circulation of two complementary currencies in argentina that do not fit well in the main approaches to the nature of money these two monetary circuits provincial and community currencies were introduced as units of account to denominate the value of debt and circulated as means of payment to overcome monetary stringency during the crisis of 1999 2003 after discussing several theories on the nature of money we reflect on the institutional significance of currency circuits as concurrent and rather stable pairs of trade and money we suggest that several theories of money need to be combined to account for the variety and heterogeneity of daily monetary practices in a broad spectrum of countries

theory and estimation in the economics of housing demand the main purpose of this paper is to review recent theoretical and empirical developments in the economics of housing demand in particular we ask what is known concerning the permanent income elasticity of housing demand vis a vis the current or measured income elasticity what is known concerning price elasticities what is the appropriate functional form for housing demand equations what is the role of demographic variables what is known concerning dynamic aspects of housing demand what appear to be the major sources of bias in existing estimates of demand equations

unionization incomplete contracting and capital investment this article examines empirically the hypothesis that incomplete contracts and resulting opportunistic behavior over the return to sunk assets reduces investment union firm contracts are incomplete because they 1 do not prevent all actions aimed at changing the existing contract 2 cover a relatively short time period and 3 do not extend to union members yet to be hired the primary response of firms is to reduce investment in specific durable assets and also to reduce employment growth and increase debt the authors find fairly strong evidence of these effects in a sample of large publicly traded firms using firm specific measures of unionization copyright 1993 by university of chicago press

the economic consequences of labor unionization evidence from stock price crash risk this study investigates the impact of labor unionization on stock price crash risk we find that labor unionization is negatively associated with stock price crash risk such negative relation is more pronounced when firms can intimate more credible evidence on unfavorable prospects and when firms face more powerful labor unions our findings are consistent with the notion that firms take strategic actions to reduce the bargaining advantages enjoyed by labor unions and that labor unions force firms to take less risky investments and discontinue underperformed projects more timely which leads to lower stock price crash risk

approximating the effective protection coefficient without reference to technological data when proposals for reform of tariff or subsidy policies are made attempts to predict the effect on incentives are frequently hampered by the need for input output technical data this article develops and illustrates the use of a methodology for approximating effective protection coefficients epcs when such data are unavailable or outdated it derives the equations which approximate the epc from statistical analysis of a cross section of existing epc studies for four agricultural commodities corn cotton rice and wheat informational requirements for computing approximations include the nominal protection coefficients on output and tradable inputs and readily available macroeconomic data these approximation equations perform well in an out of sample test

inflation in argentina stop and go since the austral plan the austral plan launched in 1985 was argentina s most recent stabilization strategy for reducing high inflation a heterodox program it combined orthodox components tight fiscal policy and monetary restraint with less conventional wage and price controls the austral plan failed to bring inflation down on a sustained basis but it provided useful lessons about the design of heterodox stabilization programs the difficulties of sustaining this type of effort and the consequences of failure

union membership determination and industry characteristics recent literature on the economics of unionism has expanded beyond its customary focus on the wage and nonwage effects of collective bargaining and given increased attention to the determinants of union membership previous union membership studies have been couched primarily within an individual choice framework whereby utility maximizing individuals choose either to join or not to join a union empirical work typically treats membership as a function of some vector of personal characteristics 1 2 10 11 21 it is our contention that such studies can best be interpreted as explaining the determination of the union status of jobs and that several industry and firm characteristics in addition to personal characteristics can be expected to affect significantly union membership in this paper theory and evidence relating to the effects of firm and industry characteristics on union membership are presented industry level data are bridged with a large microdata set containing individual characteristics in order to examine the determinants of unionism among workers in manufacturing utilizing a simultaneous model and controlling for sample selection bias we find that product market concentration capital intensity establishment size and job risk significantly affect the likelihood of union membership

stabilization with exchange rate management stabilization programs in open economies typically consist of two stages in the first stage the rate of currency devaluation is reduced but the fiscal adjustment does not eliminate the fiscal deficit that causes growth of debt and loss of reserves making a future policy change necessary only later at a second stage is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit we study how different second stage policy changes affect economic dynamics during the first stage these changes include tax increases budget cuts on traded and nontraded goods and increases in the growth rate of money

union effects on productivity profits and growth has the long run arrived this article interprets literature examining union effects on economic performance production function studies indicate small overall union impacts on productivity positive effects where they exist appear to result from management response to decreased profit expectations and from a natural selection process lower profitability among unionized firms is well established more interesting is the possibility that unions appropriate quasi rents deriving from long lived tangible and intangible capital the connection between unions investment behavior and productivity growth emerges as a particularly fruitful line of empirical inquiry although it does not encourage a sanguine view of unionism s long run impact

investment cash flow sensitivities are useful a comment on kaplan and zingales arecent paper in this journal by kaplan and zingales reexamines a subset of erms from work of fazzari hubbard and petersen and criticizes the usefulness of investment cash eow sensitivities for detecting enancing constraints we show that the kaplan and zingales theoretical model fails to capture the approach employed in the literature and thus does not provide an effective critique moreover we describe why their empirical classiecation system is eawed in identifying both whether erms are constrained and the relative degree of constraints across erm groups we conclude that their results do not support their conclusions about the usefulness of investment cash eow sensitivities in a recent paper in this journal kaplan and zingales 1997 hereinafter kz argue that investment cash eow sensitivities do not provide useful evidence about the presence of enancing constraints because kz use a subset of the same erms and the same regressions as fazzari hubbard and petersen 1988 hereinafter fhp and claim page 176 that fhp can legitimately be considered the parent of all papers in this literature it is appropriate that we respond based on a simple theoretical model kz reach the provocative conclusion page 211 that the investment cash eow sensitivity criterion as a measure of enancial constraints is not well grounded in theory in section i we show that the kz model does not capture the theoretical approach employed in fhp and many subsequent studies most of the kz paper attempts to show that empirical investment cash eow sensitivities do not increase monotonically with the degree of enancing constraints within the 49 low dividend erms from the fhp sample in section ii we explain why the kz classiecation of the degree of constraints is eawed in identifying both whether or not erms are constrained absolute constraints as well as the relative degree of constraints across erms as a result we argue in section iii that there is no expected ex ante pattern for the

public sector price increases credibility and welfare abstract this paper examines the dynamics of inflation and unemployment when the government increases public sector prices and wage indexation prevents the labor market from clearing in the short run credible reforms are virtually certain to be immediately deflationary and welfare improving even when the labor market clears very slowly temporary price increases however usually produce higher inflation after a short period of time and often reduce welfare when higher inflation provokes the government to reverse the reform there exist multiple self fulfilling equilibria

how sensitive is investment to cash flow when financing is frictionless i analyze the sensitivity of a rm s investment to its own cash ow in the benchmarkcase where nancing is frictionless this sensitivity has been proposed as a measure of nancing constraints in earlier studies i nd that the investment cash ow sensitivities that obtain in the frictionless benchmarkare very similar both in magnitude and in patterns they exhibit to those observed in the data in particular the sensitivity is higher for rms with high growth rates and low dividend payout ratios tobin s q is shown to be a more noisy measure of near term investment plans for these rms does a high sensitivityof a rm s investment to its own cash ow indicate that the rm is nancially constrained a large body of research starting with fazzari hubbard and petersen 1988 hereafter fhp suggests that rms facing nancing constraints should exhibit high investment cash ow sensitivities re ecting the wedge between the costs of external and internal funds empirical ndings seem to give support to this hypothesis since rms classi ed as constrained on a priori criteria such as size dividend payout or leverage do have higher cash ow sensitivities even after controlling for their investment opportunities by conditioning on tobin s q however the reliability of these results critically depends on whether q is a proper control for the investment opportunity set if q performs worse for certain classes of rms higher sensitivities may obtain for these rms simply because cash ow re ects information about investment opportunities this critique is not new in his discussion of fhp poterba 1988 was the rst to point out that measurement error in q may cloud the empirical results similar concerns have been raised in subsequent studies as well while the qualitative point is well known its quantitative impact on the investment cash ow sensitivity has not been analyzed can the linkbetween cash ow and the investment opportunity set account for the observed magnitudes of the sensitivity or are these magnitudes too large to be explained without nancing frictions

exchange rate based stabilisation durables consumption and the stylised facts in this article we show that a model featuring durable consumer goods imperfect substitution between domestic and foreign assets and weak credibility can explain the qualitative and quantitative aspects of the stylised facts associated with exchange rate based stabilisation including the tremendous increase in real interest rates following a temporary reduction in the crawl total consumption spending rises 14 26 the real exchange rate appreciates 20 37 and the current account deficit swells to 10 15 of gross domestic product despite large capital inflows the real interest rate increases from 10 to 20 100