banking in computable general equilibrium economies abstract in this paper we develop a computable general equilibrium economy that models the banking sector explicitly banks intermediate between households and between the household sector and the government sector households borrow from banks to finance their purchases of houses and they lend to banks to save for retirement banks pool households savings and they purchase interest bearing government debt and non interest bearing reserves we use this structure to answer two sets of questions one normative in nature that evaluates the welfare costs of alternative monetary and tax policies and one positive in nature that studies the real effects of following a procyclical interest rate policy rule

comment on cole the view that small rms face greater problems in obtaining credit thanlarge rms has a long history going back at least as far as the loan relationshipmodels of hodgeman 1961 and wood 1975 and the credit rationing work ofja ee and modigliani 1969 nevertheless there are few studies that provideor analyze direct evidence that credit is rationed with nonprice terms to rms at the macro level most empirical studies of business credit availability use in direct proxies ranging from early studies such as ja ee and modigliani 1969 who gauged availability by the share of small sized loans among all bank loans to more modern models that point to a role of cash ow as a determinant ofinvestment at the micro level empirical studies have indirectly tested forthe existence of credit rationing by assessing the behavior of loan pricing e g berger and udell 1992 1995 testing whether liquidity or cash owhas a greater impact on investment by smaller rms relative to larger rms e g fazzari et al 1988 or investigating whether smaller rms more heavilyuse expensive trade credit during periods of tight credit e g ja ee 1971 pe tersen and rajan 1994 cole 1998 lls a void in the literature on credit availability by testing how rm characteristics a ect a small rm s likelihood of experiencing a loan denialusing a unique cross section data set that provides direct evidence of nonpricecredit rationing this paper nds that preexisting nancial service relationshipswith a lender have a positive e ect on the probability of loan approvals con sistent with prior studies arguing that banks gain information about credit riskfrom monitoring borrower deposit activity e g black 1975 fama 1985 nakamura 1993 in addition results indicate that much of the e ect of

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

strategic pricing with customer rationing the case of primary metals firms in primary metal industries often charge subcompetitive prices and in periods of high demand they may ration their customers a model is developed to ex plain these empirical regularities in the model firms with market power are aware that the price they charge today affects their demand tomorrow in addition the strategic interaction among firms reinforces this intertemporal effect in the equilibrium of the two stage game oligopolists can price below marginal cost and when capacity constraints are introduced the equilibrium can involve rationing model predictions are assessed using market structure and technology data for several primary metal industries

formative experiences and portfolio choice evidence from the finnish great depression we trace the impact of formative experiences on portfolio choice plausibly exogenous variation in workers exposure to a depression allows us to identify the effects and a new estimation approach makes addressing wealth and income effects possible we find that adversely affected workers are less likely to invest in risky assets this result is robust to a number of control variables and it holds for individuals whose income employment and wealth were unaffected the effects travel through social networks individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments

investment under uncertainty with price ceilings in oligopolies abstract we study the impact of price cap regulation on the level and timing of investment in an oligopolistic cournot industry facing stochastic demand we find that a price ceiling affects investment decisions in two mutually competing ways it makes the option to defer investment more valuable but at the same time it reduces the incentive for firms to strategically underinvest in order to raise prices we show that while sensible price cap regulation speeds up investment a low price cap can be a disincentive for investment there exists an optimal price cap independent of market concentration the competitive investment price trigger that maximizes investment incentives and in the long term increases industry installed capacity this optimal price cap becomes less effective and less robust as the market becomes more competitive and as demand volatility increases errors in estimation of the optimal price cap have asymmetric effects underestimation has more dire consequences than overestimation

nonlinear liquidity growth dynamics with corridor stability abstract the paper presents a dynamic model of the financial real interaction in particular it shows that i liquidity when facilitated through credit can operate procyclically ii credit may add to the asymmetry of business cycles and iii endogenous propagation mechanisms in monetary economies are shock dependent using a variant of foley s growth cycle model we demonstrate that the portrayal of financial read forces exhibits corridor stability in this case small shocks have no lasting effects but large enough shocks can lead to persistent cycles or unstable non periodic fluctuations the hopf birfurcation theorem is rendered inapplicable due to the fact that the trajectories are stable in the vicinity of equilibrium a global characterization of the dynamics is required instead as credit by growing makes itself grow so when distrust has taken the place of confidence failure and panic breed panic and failure marshall 1879 99

the behavior of the currency deposit ratio during the great depression comment in the coefficient of assets from 1 14 or 1 22 to 0 66 is not entirely due to economies of scale or a change in the mix of activities our results agree with revell 1980 in identifying the source of efficiency improvement as productivity gains proper second the sample group uses its offices more intensively than do the top 150 in either 1967 or 1979 this sample group has 14 29 employees per office versus 9 81 in 1967 and 7 69 in 1979 for the top 150 banks finally it is noteworthy that the smaller banks used fewer branches and employees relative to their assets than did the 1979 top 150 this is consistent with some recent evidence in tschoegl 1982 suggesting the possible existence of diseconomies of scale it is also consistent with the findings of benston et al 1982 for a sample of united states banks that where possible the banks expanded output by opening more offices as well as through output growth in each office and that this results in operating cost scale diseconomies

were price changes during the great depression anticipated abstract this paper reassesses whether the large swings in prices during the 1930 s were anticipated we argue that uncertainty about monetary fiscal and exchange rate policies induced systematic differences between the rate of price change expected by economic agents at the time and the time series forecasts of inflation our analysis of nominal interest rates and ex post inflation strongly supports this view in fact our results suggest that the deflation of the early depression years and the inflation that followed were both largely unanticipated

strategic investment under uncertainty a synthesis abstract investment is a central theme in economics finance and operational research traditionally the focus of analysis has been either on assessing the value of flexibility investment under uncertainty or on describing commitment effects in competitive settings industrial organization research contributions addressing the intersection of investment under uncertainty and industrial organization have become numerous in recent years in this paper we provide an overview aimed at categorizing and relating these research streams we highlight managerial insights concerning the nature of competitive advantage first versus second mover advantage the manner in which information is revealed firm heterogeneity capital increment size and the number of competing firms

a long run perspective on saving historical estimates of long run gross savings rates are provided for 11 countries which represent about 48 per cent of world product in real terms and close to half of world savings even though savings rates declined over the past decade in nine of the 11 countries present rates are usually well above their prewar levels factors which influence savings rates are also examined

what does an oligopoly maximize a monopolist maximizes a well defined objective function monetary profit in a competitive industry although each individual pursues selfish objectives the market behaves as if an agent was maximizing an objective function social welfare can we say the same for an oligopoly do firms pursuing selfish objectives and behaving strategically act as if an agent was maximizing a fictitious objective function necessary and sufficient conditions for nash equilibria of static and state space games to be observationally equivalent to single optimization problems are derived nash equilibria of the game that are not maxima of the function are shown to be generically unstable copyright 1994 by blackwell publishing ltd

the economic impacts of climate change evidence from agricultural output and random fluctuations in weather fisher et al 2012 hereafter fhrs have uncovered coding and data errors in our paper deschenes and greenstone 2007 hereafter dg we acknowledge and are embarrassed by these mistakes we are grateful to fhrs for uncovering them we hope that this reply will also contribute to advancing the literature on the vital question of the impact of climate change on the us agricultural sector fhrs main critiques of dg are as follows i there are errors in the weather data and climate change projections used by dg ii the climate change projections are based on the hadley 2 model and scenarios rather than the more recent hadley 3 model and scenarios iii standard errors are biased due to spatial correlation iv the inclusion of state by year fixed effects does not leave enough weather variation to obtain meaningful estimates of the relationship between agriculture profits and weather v storage and inventory adjustment in response to yield shocks invalidate the use of annual profit data and vi fhrs argue that a better specified hedonic model produces robust estimates unlike the results reported in dg four of these critiques have little basis and we respond to them here in the introduction specifically with respect to ii the more recent daily climate predictions were not available when we wrote dg nevertheless the most important issue is providing the reliable estimates of climate change and in this note we report estimates based on the climate model we used in dg and a more recent one that we gained access to in the meantime iii in the primary table on agricultural profits dg reports two sets of standard errors with the first clustered at the county level and the second based on a variance covariance matrix that accounts for spatial correlation using the method proposed in conley 1999 thus the claim of fhrs 2012 seems overblown nevertheless to ease comparisons of papers in this literature this note will adopt the fhrs convention of reporting estimated standard errors clustered at the county and state levels we find that inference is largely unaffected by the choice between these different assumptions about the variance covariance matrix

a dynamic duopoly investment game without commitment under uncertain market expansion abstract we model capacity building investments in a homogeneous product duopoly facing uncertain demand growth capacity building is achieved through the addition of production units that are durable and lumpy and whose cost is irreversible while building their capacity over time firms compete a la cournot in the product market given their installed capacity there is no exogenous order of moves no commitment regarding future decisions and no finite horizon we investigate markov perfect equilibrium mpe paths of the investment game which may include episodes during which firms invest at different times a preemption pattern and episodes in which firms invest simultaneously a tacit collusion pattern these episodes may alternate and are typically several when firms have yet to invest in capacity the sole pattern that is mpe compatible is a preemption episode firms invest at different times but have equal value the first such investment may occur earlier and therefore be riskier than socially optimal when both firms hold capacity tacit collusion episodes may be mpe compatible firms invest simultaneously at a postponed time hence holding back production in the meantime thereby generating an investment wave in the industry such investment episodes are more likely with higher demand volatility faster market growth and lower cost of capital discount rate

great expectations and the end of the depression what ended the great depression in the united states this paper suggests that the recovery was driven by a shift in expectations this shift was triggered by president franklin delano roosevelt s fdr policy actions on the monetary policy side roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre depression levels on the fiscal policy side roosevelt expanded real and deficit spending which helped make his policy objective credible the key to the recovery was the successful management of expecta tions about future policy roosevelt s rise to power is modeled as a policy regime change as in thomas sargent 1983 and peter temin and barry wigmore 1990 this paper formalizes temin and wigmore s argu ment in a repeated game setting using a dynamic stochastic general equilibrium dsge model and argues that the regime change can account for the recovery in the model a regime change means the elimination of certain policy dogmas that constrain the actions of the government the regime change generates an endogenous shift in expectations due to a coordination of mon etary and fiscal policy this coordination ended the great depression by engineering a shift in expectations from contractionary i e the private sector expected future economic contrac tion and deflation to expansionary i e the public expected future economic expansion and inflation the expectation of higher future inflation lowered real interest rates thus stimulating demand while the expectation of higher future income stimulated demand by raising permanent income

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

how capital regulation and other factors drive the role of shadow banking in funding short term business credit abstract this paper empirically analyzes how capital regulation risk and other factors altered the relative use of shadow banking funded short term business debt since the early 1960s results indicate that the share was affected over the long run not only by changing information and reserve requirement costs but also by shifts in relative regulation of bank versus nonbank credit sources such as basel i in 1990 and reregulation in 2010 in the short run the shadow bank share rose when deposit interest rate ceilings were binding on traditional banks the economic outlook improved or risk premia declined and fell when event risks arose

financial crisis and the great depression a regime switching approach i explore the timing of and effects of the u s financial crisis of the 1930s in a regime switching framework estimated conditional probabilities over the state of the financial sector suggest that a prolonged period of crisis begins not with the 1929 stock market crash but with the first banking panic of october 1930 these probabilities also suggest that the crisis persists until the introduction of federal deposit insurance in early 1934 consistent with the view that this financial crisis had real effects these conditional probabilities contain additional explanatory power for output fluctuations this is in addition to that provided by the money stock

seigniorage and the case for national money in countries with high rates of inflation there is typically movement away from the use of the local currency the paper analyzes the costs and benefits of using a local currency with emphasis on the seigniorage foregone by using a foreign money even if it should be desirable for a country to fix its exchange rate it still loses seigniorage if it does not use its own money the case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply alternative methods of imposing discipline are discussed estimates of the amount of seigniorage raised by different governments are presented seigniorage amounts in some cases to about 10 percent of government revenue estimates are also presented of both the annual flow and one time stock costs of giving up use of domestic currencies and instead using the dollar the flow cost is typically about 1 percent of gnp and the stock cost is around 10 percent of gnp

do capital market imperfections exacerbate output fluctuations abstract we develop a dynamic general equilibrium macroeconomic model where a proportion of firms are credit constrained due to asymmetric information in general a macroeconomic shock has additional effects created by a reallocation of funds between credit constrained and unconstrained firms as they have different marginal productivities we show however that the output response to shocks is not necessarily amplified and can be dampened by the presence of asymmetric information this depends on the impact of the shock on the composition of external and internal funds for credit constrained firms

irreversible investment under uncertainty and the threat of bankruptcy abstract the firm level theory of irreversible investment under uncertainty is extended to account for bankruptcy with a sufficiently large risk of bankruptcy firms prefer to defer their investment decision to a later date simulated option values reach as high as 30 percent

timing of investments in oligopoly under uncertainty a framework for numerical analysis abstract we present a modeling framework for the analysis of investments in an oligopoly market for a homogenous commodity the demand evolves stochastically and the firms carry out investment projects in order to adjust their production cost functions or production capacities the model is formulated as a discrete time state space game where the firms use feedback strategies the firms are assumed to move sequentially to ensure a unique markov perfect nash equilibrium once the equilibrium has been solved monte carlo simulation is used to form probability distributions for the firms cash flow patterns and accomplished investments such information can be used to value firms operating in an oligopoly market an example of the model is given in a duopoly market the example illustrates the trade off between the value of flexibility and economies of scale under competitive interaction

the great depression versus the great recession in the u s how fiscal monetary and financial polices compare abstract this study reviews the financial distress that triggered and amplified the financial crises of the great depression and great recession and compares macroeconomic and financial policy responses shadow banking funded the build up of the financial excesses that preceded both the quicker and forceful response of monetary and fiscal policy during the great recession and stronger action to restore market functionality mitigated the downturn and aided recovery nevertheless actions to address the mortgage debt overhang were slower post depression reforms focused on preventing deposit runs and post great recession reforms on preventing runs on bank debt and shadow banks while boosting capital buffers

contributions to financial crisis research an assessment of the literature in social science citation index journals from 1990 to 2008 research in the field of financial crisis has generated a considerable amount of literature in the past yet there has neither been any study to assess the contributions to the literature made by individuals or institutions nor any to measure the impact of the articles and researchers this study represents an attempt to 1 investigate the major journals in publishing financial crisis research 2 assess the contributions of individual researchers and institutions using the credited contribution approach and 3 measure the impact of individual publications and individual researchers on the financial crisis literature through citation analysis based on the publications in social science citation index ssci journals from 1990 to 2008 the findings provide a useful benchmark for assessing individual and institutional research productivity and trends for future research and venues for publications are identified

the nonmonetary effects of financial factors during the interwar period i introduction in a monetary history of the united states friedman and schwartz 1963 attributed the enormous decline in real output and prices during the great depression of 1929 1933 to an unprecedented fall in the supply of money while there is much support today for the view that money played an important role in this episode many economists feel that this variable alone does not provide a sufficiently complete explanation of the link between the chaotic conditions in the u s financial sector and aggregate output and prices bernanke 1983 contended in an influential paper that financial shocks had important nonmonetary effects on aggregate economic activity in addition to their effects via the supply of money rather than consider the 1929 33 episode outside of its context bernanke widened his sample to include the entire interwar period which he defined as january 1919 december 1941 the major purpose of this paper is to present empirical evidence on the importance of the nonmonetary effects of financial factors in explaining fluctuations in real output and prices during the interwar period we define the interwar period as august 1922 june 1938 by omitting from our sample a few years immediately following world war i and immediately preceding world war ii we avoid the potential problems connected with war related government expenditures and autonomous gold flows discussed in joines 1985 our interwar period corresponds closely to the four peacetime cycles identified by firestone 1960 the theoretical literature on the nonmonetary effects of financial factors focuses on two related but distinct aspects 1 first studies by bernanke and blinder 1988 williamson 1987a 1987b bernanke and gertler 1987 and scheinkman and weiss 1986 demonstrate that the efficiency with which banks perform their intermediation function is an independently important determinant of the level of real economic activity second bernanke and gertler 1989 1990 gertler and hubbard 1988 and calomiris and hubbard 1990 focus on the effects of shocks to borrowers net worth positions on aggregate economic activity this approach suggests that exogenous shocks to borrowers net worth may be a source of economic fluctuations therefore for example to the extent that a deflation is unanticipated it is likely to erode borrowers net worth and thereby adversely affect aggregate economic activity beginning with fisher 1933 this deflation story has played an important role in studies such as bernanke 1983 hamilton 1987 and bernanke and james 1990 that attempt to explain the great depression in evaluating the effects of financial sector shocks during the great depression bernanke 1983 argued that in addition to the traditional monetary effects of adverse shocks to financial intermediation stressed by friedman and schwartz 1963 these shocks increased the cost of credit intermediation which in turn led to credit contraction rejection of otherwise profitable projects and subsequent falls in output to test this hypothesis bernanke included the deposits of failing banks and the liabilities of failing businesses as joint proxies for the cost of credit intermediation in a barro 1977 type output equation that also included unanticipated money both the deposits of failing banks and liabilities of failing businesses were found to be significant moreover dynamic simulations of the path of output for the period between mid 1930 and march 1933 accounted for substantially more of the actual decrease in output than was captured when only unanticipated money was included in the output equation in place of the joint proxies bernanke also used the yield differential between baa corporate and long term u s government bonds as a proxy for credit intermediation costs in all cases entry of the credit cost proxies significantly increased the percentage of the decline in output that was captured

irreversible investment under uncertainty in oligopoly abstract an oligopoly is studied where firms facing a stochastic inverse demand curve use capacity as strategic variable capacity may be adjusted continuously over time with linear cost the analysis uses the technique of a fictitious social planner and the theory of irreversible investment under uncertainty examples indicate that qualitatively the price process will be similar in oligopoly and competitive equilibrium when firms are nonidentical e g in initial size and even if they are alike in other respects substantial time may pass until they are all the same size much of that time one firm may dominate the market

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

environment asset characteristics and optimal effluent fees this article investigates theissue of optimal effluent fees in a frameworkwhere waste emissions are abated by investingin capital of which the pay off is uncertainand the cost is fully sunk the stock of wasteemissions harms an individual firm sproduction but the firm will underestimatethis external effect upon investing consequently the firm will invest lesscapital and thereby pollute more than issocially desirable the regulator who can useeffluent fees to correct this should imposelower effluent fees on irreversible investmentsthan on costlessly reversible ones whenuncertainty arises

financial frictions and employment during the great depression abstract we provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the great depression using a novel hand collected dataset of large industrial firms our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze local bank failures inhibited firms ability to substitute public debt for private debt which exacerbated financial constraints we estimate a large and negative causal effect of financing frictions on firm employment we find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933

gresham s law or gresham s fallacy gresham s law often takes two forms the rule that bad money drives out good money and a qualified version of that rule that requires a fixed exchange rate between the two monies yet history contr

option exercise games an application to the equilibrium investment strategies of firms under the standard real options approach to investment under uncertainty agents formulate optimal exercise strategies in isolation and ignore competitive interactions however in many real world asset markets exercise strategies cannot be determined separately but must be formed as part of a strategic equilibrium this article provides a tractable approach for deriving equilibrium investment strategies in a continuous time cournot nash framework the impact of competition on exercise strategies is dramatic for example while standard real options models emphasize that a valuable option to wait leads firms to invest only at large positive net present values the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold copyright 2002 oxford university press

money credit constraints and economic activity when government expenditures exceed current tax revenues the resulting deficit must be financed either by issuing bonds which imply obligations to levy future taxes or by creating high powered money the choice between money and bonds is often thought to be of great moment for both real and nominal variables that is monetary policy matters there is by now a wide empirical consensus that monetary policy has effects on real variables like output and employment but there is far less agreement about why this is so the purpose of this paper is to take issue with some currently fashionable views of why money has real effects and to suggest a new theory or rather resurrect an old one the loanable funds theory and give it new improved microfoundations this abstract was borrowed from another version of this item

investment in competitive equilibrium the optimality of myopic behavior there is an extensive literature on the optimal irreversible investment strategy of a solitary firm facing an exogenous price process this paper shows that the investment strategies that this literature derives may be optimal in competitive equilibrium even though the price process is now endogenous this provides a simple means for computing equilibrium investment strategies

the deposits channel of monetary policy we propose and test a new channel for the transmission of monetary policy we show that when the fed funds rate increases banks widen the interest spreads they charge on deposits and deposits ow out of the banking system we present a model in which imperfect competition among banks gives rise to these relationships an increase in the nominal interest rate increases banks market power inducing them to increase deposit spreads and hence restrict deposit supply households respond to the increase in deposit prices by substituting from deposits into less liquid but higheryielding assets consequently changes in the nominal interest rate aect banks cost of capital and lending using branch level data on the universe of u s banks we show that following an increase in the fed funds rate deposit spreads increase by more and supply falls more in areas with less deposit competition we control for changes in banks lending opportunities by comparing branches of the same bank we control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change and even if this change is fully anticipated our results imply that monetary policy has a signicant impact on how the nancial system is funded on the quantity of safe and liquid assets it produces and on its provision of loans to the real economy

a laissez faire approach to monetary stability this paper develops some diverse hints for a new monetary system offered separately by fischer black eugene fama and robert e hall for reasons that will become evident though we should perhaps say payments system instead of monetary system none of the economists mentioned has actually proposed the particular system set forth here nor examined all its properties and we call it the bfh system not to implicate them but only to give credit for some component ideas and to have a convenient label l regardless of who if anyone may actually advocate the system contemplating it is instructive it illuminates by contrast some characteristics of our existing and recent systems

america s historical experience with low inflation the inflation of the 1970s was a marked deviation from america s typical peacetime historical pattern as a hard money country we should expect america to continue to be a hard money low inflation country in the future at least in peacetime the low rate of future inflation that we thus forecast changes the balance of macroeconomic risks and opportunities the risk of debt deflation mediated recessions is somewhat higher because a low trend rate of goods and services price index inflation somewhat increases the chances of deflation but it does not raise such risks as much as one might think the failure of the fisher effect to hold empirically means that a low inflation era will in all likelihood be a high real interest rate era but such high real interest rates do not appear to significantly discourage investment or growth

temperature and income reconciling new cross sectional and panel estimates this paper presents novel evidence and analysis of the relationship between temperature and income first using sub national data from 12 countries in the americas we provide new evidence that the negative cross country relationship between temperature and income also exists within countries and even within states second we provide a theoretical framework for reconciling the substantial negative association between temperature and income in the cross section with the even stronger short run effects of temperature estimated by panel models the theoretical framework suggests that half of the negative short term effects of temperature may be offset in the long run through adaptation this abstract was borrowed from another version of this item

understanding the accumulation of bank and thrift reserves during the u s financial crisis abstract the level of aggregate excess reserves held by u s depository institutions increased significantly at the peak of the 2007 2009 financial crisis although the amount of aggregate reserves is determined almost entirely by the policy initiatives of the central bank that act on the asset side of its balance sheet the motivations of individual banks in accumulating reserves differ and respond to the impact of changes in the economic environment on individual institutions we undertake a systematic analysis of this massive accumulation of excess reserves using bank level data for more than 7000 commercial banks and almost 1000 savings institutions during the u s financial crisis we propose a testable stochastic model of reserves determination when interest is paid on reserves which we estimate using bank level data and censored regression methods we find evidence primarily of a precautionary motive for reserves accumulation with some notable heterogeneity in the response of reserves accumulation to external and internal factors of the largest banks compared with smaller banks we combine propensity score matching and a difference in differences approach to determine whether the beneficiaries of the capital purchase program of the troubled asset relief program accumulated less cash including reserves than non beneficiaries contrary to anecdotal evidence we find that banks that participated in the program accumulated less cash including reserves than nonparticipants in the initial quarters after the capital injection

an integrated view of tests of rationality market efficiency and the short run neutrality of monetary policy abstract this paper analyzes an important class of models in which expectations play an important role topics included in the analysis are tests of 1 rationality of forecasts in either market or survey data 2 capital market efficiency 3 the short run neutrality of monetary policy and 4 granger causality in macroeconometric models the common elements of these tests are highlighted in particular cross equation tests for rationality or the short run neutrality of money are shown to be equivalent to more common regression tests in the literature these results demonstrate that the exact specification of the relevant information set used in rational forecasts is not necessary for the cross equation tests to have desirable asymptotic properties also discussed are the conditions for identification of coefficients and testability of hypotheses

using weather variability to estimate the response of savings to transitory income in thailand this paper measures the extent to which farmers are able to use savings and dissavings to smooth consumption in response to unexpected shocks to income time series information on regional rainfall is used to construct estimates of transitory income due to rainfall shocks the relationship between these measures of transitory income and savings indicates that farm households save a significantly higher fraction of transitory income than nontransitory income jel d91 016 the incomes of farm households in developing countries are notorious for being both low and uncertain policies that increase the incomes of farmers may well be different

irreversible investment financing and bankruptcy decisions in an oligopoly this paper examines a firm s debt level investment timing and investment scale choices in a continuous time model where the output price of a good that the firm produces depends on a stochastic demand shift variable and the total industry supply of the good using the simple symmetric cournot nash equilibrium assumption that all firms are identical and therefore follow the same financing and investment strategies we show that competition decreases the output price and hence encourages a firm to wait for a higher demand level before it is profitable to invest we also demonstrate how uncertainty bankruptcy costs and corporate taxation affect the firm s financing and investment decisions

does trade cause capital to flow evidence from historical rainfall abstract we use a historical quasi experiment to estimate the causal effect of trade on capital flows we argue that fluctuations in regional rainfall within the ottoman empire capture the exogenous variation in exports from the empire to germany france and the u k during the period of 1859 1913 the identification is based on the following historical facts first only surplus production was allowed to be exported from the empire provisionistic policy second different products grown in different regions were subject to variation in regional rainfall third different bundles of products were exported to germany france and the u k by the empire using the export bundle weighted regional rainfall as an instrument for ottoman exports to each country our instrumental variable regression suggests the following when a given region of the empire received more rainfall than others the resulting surplus production was exported more to countries that historically imported more of those products and this leads to higher foreign investment by those countries in the empire our findings support theories predicting complementarity between trade and finance in which causality runs from trade to capital flows

the geography of trade in goods and asset holdings gravity models have been widely used to describe bilateral trade in goods portes and rey portes r rey h 2005 the determinants of cross border equity flows journal of international economics 65 2 269 296 applied this framework to cross border equity flows and found that distance which proxies information asymmetries is a surprisingly very large barrier to cross border asset trade we adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework providing different instruments for both endogenous variables we show that a 10 increase in bilateral trade raises bilateral asset holdings by 6 to 7 the reverse causality is also significant albeit smaller controlling for trade the impact of distance on asset holdings is drastically reduced keywords gravity models international finance international trade simultaneous equations

trade and capital flows a financial frictions perspective the classical heckscher ohlin mundell paradigm states that trade and capital mobility are substitutes in the sense that trade integration reduces the incentives for capital to ow to capital scarce countries in this paper we show that in a world with heterogeneous nancial development the classic conclusion does not hold in particular in less nancially developed economies south trade and capital mobility are complements within a dynamic framework the complementarity carries over to nancial capital ows this interaction implies that deepening trade integration in south raises net capital in ows or reduces net capital out ows it also implies that at the global level protectionism may back re if the goal is to rebalance capital ows when these are already heading from south to north our perspective also has

does the liquidity of a debt issue increase with its size evidence from the corporate bond and medium term note markets to investigate the liquidity of large issues this study tests for yield differences between corporate bonds and medium term notes mtns in the sample mtns have an average issue size of 4 million compared with 265 million for bonds among mtns that have the same issuance date the same maturity date and the same corporate issuer we find no relation between size and yields moreover bonds and mtns have statistically equivalent yields thus rather than suggesting that large issues have greater liquidity these findings indicate that large and small securities issued by the same borrower are close substitutes the objective of this study is to test for a relation between the size of corporate debt offerings and their yields if investors value large offerings for their greater liquidity then large issues will have lower yields than small issues alternatively if investors view securities of the same borrower as close substitutes there may be no relation between issue size and yields to investigate whether issue size is a significant determinant of liquidity we test for yield differences between medium term notes mtns and bonds of the same corporate issuers in most respects mtns are similar to corporate bonds however mtns have an average issue size of around 5 million in contrast most offerings in the bond market raise at least 100 million thus if liquidity increases with issue size bonds will have lower yields than mtns and large mtns will have lower yields than small mtns the data we use consist of 4 182 mtns and 68 bonds offered by four large borrowers between october 1987 and december 1992 the issues in the sample range in size from 102 000 to 1 2 billion a disperse distribution that allows us to make reliable inferences about the relation between issue size and yields to test for a size effect within the mtn market we create subsamples of mtns that have the same issuance date the same maturity date and the same corporate issuer mtns in these subsamples are identical except for their yields and size on average yields on large mtns in the subsamples are 0 35 basis point higher than yields on small mtns a finding that is inconsistent with the liquidity hypothesis we also test for a yield difference between bonds

the macroeconomic implications of financial deregulation abstract this paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking the central bank is supposed to maximize an objective function in which the probability of bank failure is an argument it is then shown that the usual tradeoffs between policy objectives imply that financial deregulation will lead to more interest rate smoothing than would otherwise take place and further that because of restricted entry into banking deregulation will call for some inflation the transition toward deregulation raises special problems which are likely to require a more gradual approach toward the stationary equilibrium

open loop equilibria and perfect competition in option exercise games the investment boundaries defined by grenadier 2002 for an oligopoly investment game determine equilibria in open loop strategies as closed loop strategies they are not equilibria because any firm by investing sooner can preempt the investments of other firms and expropriate the growth options the perfectly competitive outcome is produced by closed loop strategies that are mutually best responses in this equilibrium the option to delay investment has zero value and the simple npv rule is followed by all firms the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

investment in oligopoly under uncertainty the accordion effect this paper studies investments in new markets where more than two anticipated identical competitors are present in case of three firms an accordion effect is detected an exogenous demand shock results in a change of the wedge between investment thresholds of the first and second investor that is qualitatively different from the change of the wedge between the second and third investment threshold furthermore it turns out that in the three firm case the investment timing of the first investor lies in between the one and the two firm case these results are numerically extended to the n firm case

determinants of the foreign equity share of international joint ventures abstract due to host government restrictions a multinational corporation is required to form a joint venture with a local partner rather than set up a wholly owned subsidiary both parties to the joint venture simultaneously decide their respective equity shares and the time to exercise an irreversible investment project via nash bargaining since the multinational corporation has a cost advantage over its local partner it will therefore hold a share larger than its relative bargaining power however if its cost advantage is less significant uncertainty is greater or the cost of exercising the investment option is increasing over time at a lower rate the multinational firm will hold a smaller share and will also be more hesitant as regards exercising the investment option

unexpected monetary disturbances during the gold standard era abstract this empirical paper uses the barro methodology of estimating unexpected monetary shocks to determine the effect these shocks had on real output in the u s during the gold standard era between 1880 and 1913 it also investigates whether changes in a measure of financial intermediation had real effects the results indicate that neither expected nor unexpected money shocks affected output changes in financial intermediation however were significantly correlated with output this result lends support to theories which stress the endogeneity of broad measures of the money supply

the devolution of declining industries in declining industries capacity must be reduced in order to restore profitability who bears this burden where production is all or nothing there is a unique subgame perfect equilibrium the largest firms exit first ghemawat and nalebuff 1985 in this paper firms continuously adjust capacity again there is a unique subgame perfect equilibrium all else equal large firms reduce capacity first and continue to do so until they shrink to the size of their formerly smaller rivals intuitively bigger firms have lower marginal revenue and correspondingly greater incentives to reduce capacity this prediction is supported by empirical findings

developing real option game models by mixing concepts from both game theoretic analysis and real options theory an investment decision in a competitive market can be seen as a game between firms as firms implicitly take into account other firms reactions to their own investment actions we review two decades of real option game models suggesting which critical problems have been solved by considering game theory and which significant problems have not been yet adequately addressed we provide some insights on the plausible empirical applications or shortfalls in applications to date and suggest some promising avenues for future research

housing and the great depression this article considers the structural stability of the relationship between the real housing price and real gdp per capita for an annual sample that includes the great depression we test for structural change in parameter values using a sample of annual us data from 1890 to 1952 the article examines the long run and short run dynamic relationships between the real housing price and real gdp per capita to determine whether these relationships experienced structural change over the sample period we find that temporal granger causality exists between these two variables only for subsamples that include the great depression for the other subsample periods as well as for the entire sample period no relationship exists between these variables

how big a problem is too big to fail a review of gary stern and ron feldman s too big to fail the hazards of bank bailouts this review essay examines whether too big to fail is as serious a problem as gary stern and ron feldman contend this essay argues that stern and feldman overstate the importance of the too big to fail problem and do not give enough credit to the fdicia legislation of 1991 for improving bank regulation and supervision however this criticism of the stern and feldman book does not detract from many of its messages the policy recommendations in their book have merit even if the too big to fail problem is currently not that serious because these policies make it less likely that a banking crisis will occur even if driven by other factors

us food aid and civil conflict we study the effect of us food aid on conflict in recipient countries our analysis exploits time variation in food aid shipments due to changes in us wheat production and cross sectional variation in a country s tendency to receive any us food aid according to our estimates an increase in us food aid increases the incidence and duration of civil conflicts but has no robust effect on interstate conflicts or the onset of civil conflicts we also provide suggestive evidence that the effects are most pronounced in countries with a recent history of civil conflict jel d74 f35 o17 o19 q11 q18 we are unable to determine whether our aid helps or hinders one or more parties to the conflict it is clear that the losses particularly looted assets constitutes a serious barrier to the efficient and effective provision of assistance and can contribute to the war economy this raises a serious challenge for the humanitarian community can humanitarians be accused of fueling or prolonging the conflict in these two countries medecins sans frontieres amsterdam 1

is bank supervision central to central banking whether central banks should play an active role in bank supervision and regulation is being debated both in the united states and abroad while the bank of england has recently been stripped of its supervisory responsibilities and several proposals in the united states have advocated removing bank supervision from the federal reserve system other countries are considering enhancing central bank involvement in this area many of the arguments for and against these proposals hinge on the effect this change would have on the ability of the central bank to conduct monetary policy we find that confidential supervisory information on bank ratings significantly improves

suspension of payments bank failures and the nonbank public s losses abstract we present evidence on the effects of suspensions of payments from an episode that is close to a controlled experiment for examining those effects in 1861 about 44 of the banks in wisconsin closed 81 of the banks in illinois closed and noteholders suffered substantial losses the historical record suggests that an effective suspension of payments in wisconsin but not in illinois may explain the difference our statistical evidence indicates that the suspension of payments increased the probability of a bank remaining open by about 21 percentage points and decreased noteholders losses by about 14 cents per dollar

credit markets and the propagation of korea s 1997 financial crisis we consider the roles of monetary shocks and tightening credit market conditions in the transmission of south korea s 1997 financial crisis to the real sector and compare the relative impacts of these factors on production in light and heavy industries using structural regression equations vector autoregressive models and the accompanying dynamic forecasts we find that the ratio of commercial bills dishonored to the total value of bills to be cleared can explain the decline in industrial production more fully than either the decline in the real stock of money or the spread between yields on corporate and government bonds these results are most emphatic in light industry for which small and medium sized firms account for more than 70 of the total value added since fluctuations in the dishonored bills ratio may reflect components related to increases in the cost of credit intermediation and its effect on small and medium sized firms more precisely than the corporate government bond spread we interpret the evidence as suggestive of a credit channel and flight to quality at work

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

the great recession us dynamics and spillovers to the world economy abstract this paper provides an empirical investigation of both the within us and international channels of transmission of macroeconomic and financial shocks by means of a 50 country macroeconometric model estimated over the 1980 2009 period including measures of excess liquidity and financial fragility specifically designed in order to evaluate the relevance of the boom bust credit cycle view put forward as an interpretation of the recent great recession episode we find that such a view is consistent with the empirical evidence moreover concerning the real effects of financial shocks within the us we detect stronger evidence of an asset prices channel rather than a liquidity channel concerning the spillovers to the world economy we find that while financial disturbances are transmitted to foreign countries through us house and stock price dynamics as well as excess liquidity creation the trade channel is the key trasmission mechanism of real shocks

strategic capacity investment under uncertainty this article considers investment decisions within an uncertain dynamic and duopolistic framework each investment decision involves to determine the timing and the capacity level the simultaneous analysis of timing and capacity decisions extends work on entry deterrence accommodation to consider a timing delay element we find that when applying an entry deterrence policy the first investor or incumbent overinvests in capacity for two reasons first it delays the investment of the second investor or entrant second the entrant will invest in less capacity we also find that greater uncertainty makes entry deterrence more likely

monetary factors in the great depression this paper examines the role of monetary policy in the early stages of the great depression and considers the mechanism whereby this policy may have affected real activity i conclude that the depression was preceded by a dramatic shift towards a highly contractionary monetary policy the economic impact of this policy seems unlikely to have come through the conventional keynesian channels of a shortage of liquidity and high ex ante real interest rates but instead may have operated through unanticipated deflation and after 1930 through the disruption of financial intermediation as a consequence of the banking panics

strategic entry and market leadership in a two player real options game abstract we analyse the entry decisions of competing firms in a two player stochastic real option game when rivals earn different but correlated uncertain profitabilities from operating in the presence of entry costs decision thresholds exhibit hysteresis the range of which is decreasing in the correlation between competing firms a measure of the expected time of each firm being active in the market and the probability of both rivals entering within a finite time are explicitly calculated the former latter is found to decrease increase with the volatility of relative firm profitabilities implying that market leadership is shorter lived the more uncertain the industry environment in an application of the model to the aircraft industry we find that boeing s optimal response to airbus launch of the a380 super carrier is to accommodate entry and supplement its current product line as opposed to the riskier alternative of committing to the development of a corresponding super jumbo

investment and competition this paper examines how industry structure affects corporate investment patterns real options theory shows that deferring irreversible investment in the face of uncertainty is valuable theory also shows that the value of waiting to invest falls if investment opportunities are contestable consistent with these theories we find that firms in monopolistic industries exhibit lower investment q sensitivity and are slower to invest than firms in competitive industries however we find that investment q sensitivity and investment speed are highest in oligopolistic industries suggesting that the value of investing strategically can outweigh the value of waiting indeed oligopolistic industries experience less entry and more exit than other industries

who borrows from the lender of last resort understanding why banks borrow from the lender of last resort lolr during a nancial crisis is crucial to understanding the macroeconomic impact of such largescale interventions we document a strong divergence among banks take up of lolr assistance during the nancial crisis in the euro area as banks which borrowed heavily also used increasingly risky collateral we propose four explanations for this divergence

bank asset liquidation and the propagation of the u s great depression we hypothesize that financial disintermediation during and after the great depression arose from the slow liquidation of failed bank deposits empirical results from incorporating the stock of failed national bank deposits for the period 1921 40 in vector autoregression var models suggest that the stock of deposits in closed banks undergoing liquidation is as important as money stock in terms of explaining output changes over forecast horizons from one to three years hence we infer that the dynamic effects of banking sector shocks were cumulative and pervasive during and after the depression

cross of euros the eurozone currently confronts severe short run macroeconomic adjustment problems and a deficient institutional architecture that has to be reformed in the longer run europe s efforts at economic and monetary union are historically unprecedented however the gold standard provides lessons regarding what will and won t work macroeconomically and politically in the short run while us history provides long run lessons regarding appropriate institutional structures the latter also suggests that institutional reform only happens at times of great crisis and that it cannot be taken for granted the eurozone s leaders may therefore ultimately have to take heed of the lessons of history regarding currency union breakups