evaluating asset pricing models with limited commitment using household consumption data we evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts lustig 2004 has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints these unconstrained households have lower consumption growth rates than all other households in the economy we use household data on consumption growth from the u s consumer expenditure survey to identify unconstrained households to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk we find that for high values of the relative risk aversion coecient the limited enforcement

unemployment in the great recession a comparison of germany canada and the united states this paper looks at the surprisingly different labor market performance of the united states canada germany and several other oecd countries during and after the great recession of 2008 9 a first important finding is that the large employment swings in the construction sector linked to the boom and bust in us housing markets is an important factor behind the different labor market performances of the three countries we also find that cross country differences among oecd countries are consistent with a conventional okun relationship linking gross domestic product growth to employment performance

the impact of natural disaster on energy consumption international evidence abstract this research shows that natural disasters may hurt energy consumption by using data on 123 countries over the period 1990 2015 and classifying them according to their economic development level and region based on world development indicators we employ a two step system gmm method to examine the effect of natural disasters on energy consumption presenting findings that support our hypotheses in the models and show a strong negative effect for low income countries or those in the africa region after considering an alternative proxy for natural disaster we implement quantile regression methods their results find that natural disasters exhibit a negative and significant impact on oil renewable and nuclear energy consumptions the quantile regression models used in the robustness check present that the effects are stronger for low level energy consumption economies

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

storms and jobs the effect of hurricanes on individuals employment and earnings over the long term hurricanes katrina and rita devastated the us gulf coast in 2005 we use job level data to compare the evolution of earnings for affected workers in four states with workers from matched control co

a recursive formulation for repeated agency with history dependence abstract we present general recursive methods to handle environments where privately observed variables are linked over time we show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility and promise keeping conditions journal of economic literature classification numbers d30 d31 d80 d82

house prices home equity based borrowing and the u s household leverage crisis us household leverage sharply increased in the years preceding the 2007 eco nomic recession the top panel of figure 1 shows the steady rise in household debt since 1975 which accelerated beginning in 2002 in just five years the household sector doubled its debt balance in comparison the contemporaneous increase in corporate debt was modest the middle panel shows that the increase in household debt from 2002 to 2007 translated into a striking rise in household leverage as mea sured by the debt to income ratio during the same time period corporate leverage declined the dramatic absolute and relative rise in us household leverage from 2002 to 2007 is unprecedented compared to the last 25 years one reason for the rapid expansion in household leverage during this period is that mortgage credit became more easily available to new home buyers mian and sufi 2009 strong house price appreciation from 2002 to 2006 however which may have been fueled by the availability of mortgage credit to a riskier set of new home buyers could also have had an important feedback effect on household lever age through existing homeowners given that 65 percent of us households already owned their primary residence before the acceleration in house prices the feedback from house prices to borrowing may be an important source of the rapid rise in household leverage that preceded the economic downturn our central goals in this study are to estimate how homeowner borrowing responded to the increase in house prices and to identify which homeowners responded most aggressively we examine this home equity based borrowing channel using a dataset consisting of anonymous individual credit files of a national consumer credit bureau agency we follow a random sample of over 74 000 us homeowners who owned their homes as of 1997 at an annual frequency from the end of 1997 until the end of 2008 the bottom panel of figure 1 plots the growth in debt of 1997 homeowners over time and shows that existing homeowners borrow significantly more debt as their house prices appreciate from 2002 to 2006 while the aggregate trend is suggestive

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

retrospectives the cyclical behavior of labor productivity and the emergence of the labor hoarding concept the concept of labor hoarding at least in its modern form was first fully articulated in the early 1960s by arthur okun 1963 by the end of the 20th century the concept of labor hoarding had become an accepted part of economists explanations of the workings of labor markets and of the relationship between labor productivity and economic fluctuations the emergence of this concept involved the conjunction of three key elements the fact that measured labor productivity was found to be procyclical rising during expansions and falling during contractions a perceived contradiction with the theory of the neoclassical firm in a competitive economy and a possible explanation based on optimizing behavior on the part of firms each of these three elements fact contradiction and explanation has a history of its own dating back to at least the opening decades of the twentieth century telling the story of the emergence of the modern labor hoarding concept requires recounting these three histories histories that involve the work of economists motivated by diverse purposes and often not mainly if at all concerned with the questions that the labor hoarding concept was ultimately used to address as a final twist to the story the long standing positive relationship between labor productivity and output in the us economy began to disappear in the late 1980s and during the great recession labor productivity rose while the economy contracted

inflation targeting as a shock absorber abstract we study the characteristics of inflation targeting as a shock absorber using quarterly data for a large panel of countries to overcome an endogeneity problem between monetary regimes and the likelihood of crises we propose to study large natural disasters we find that inflation targeting improves macroeconomic performance following such exogenous shocks it lowers inflation raises output growth and reduces inflation variability compared to alternative monetary regimes this performance is mostly due to a different response of monetary policy and fiscal policy under inflation targeting finally we show that only hard but not soft targeting reaps the rewards deeds not words matter for successful monetary stabilization

bubbles and self enforcing debt we characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods first we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period second we provide an equivalence result whereby the resulting set of equilibrium allocations with self enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles in contrast to the classic result by bulow and rogoff 1989a positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives

employment protection and takeovers labor restructuring is a key driver of takeovers and the associated synergy gains worldwide in a difference in differences research design we show that major increases in employment protection reduce takeover activity by 14 27 and the combined firm gains synergies by over half consistent with the labor channel behind these effects deals with greater potential for workforce restructuring show a greater reduction in volume number and synergies the reforms do impede layoffs and the associated wage costs match the magnitude of synergy losses offer prices are not fully adjusted with both bidders and targets exhibiting lower returns following the reforms

deep impact geo simulations as a policy toolkit for natural disasters adverse post natural disaster outcomes in low income regions like elevated internal migration levels and low consumption levels are the result of market failures poor mechanisms for stabilizing income and missing insurance markets which force the affected population to respond and adapt to the shock they face in a spatial environment with multiple locations with independent but inter connected markets these transitions quickly become complex and highly non linear due to the feedback loops between the micro individual level decisions and the meso location wise market decisions to capture these continuously evolving micro meso interactions this paper presents a spatially explicit bottom up agent based model to analyze natural disaster like shocks to low income regions the aim of the model is to temporally and spatially track how population distributions income and consumption levels evolve in order to identify low income workers that are food insecure the model is applied to the 2005 earthquake in northern pakistan which faced catastrophic losses and high levels of displacement in a short time span and with market disruptions resulted in high levels of food insecurity the model is calibrated to pre crisis trends and shocked using distance based output and labor loss functions to replicate the earthquake impact model results show how various factors like existing income and saving levels distance from the fault line and connectivity to other locations can give insights into the spatial and temporal emergence of vulnerabilities the simulation framework presented here leaps beyond existing modeling efforts which usually deals with macro long term loss estimates and allows policy makers to come up with informed short term policies in an environment where data is non existent policy response is time dependent and resources are limited

liquidity constrained markets versus debt constrained markets this paper compares two different models in a common environment the first model has liquidity constraints in that consumers save a single asset that they cannot sell short the second model has debt constraints in that consumers cannot borrow so much that they would want to default but is otherwise a standard complete markets model both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates in a stochastic environment the two models have quite different dynamic properties with the debt constrained model exhibiting simple stochastic steady states while the liquidity constrained model has greater persistence of shocks

insurance and taxation over the life cycle we consider a dynamic mirrlees economy in a life cycle context and study the optimal insurance arrangement individual productivity evolves as a markov process and is private information we use a first order approach in discrete and continuous time and obtain novel theoretical and numerical results our main contribution is a formula describing the dynamics for the labour income tax rate when productivity is an ar 1 our formula resembles an ar 1 with a trend where i the auto regressive coefficient equals that of productivity ii the trend term equals the covariance productivity with consumption growth divided by the frisch elasticity of labour and iii the innovations in the tax rate are the negative of consumption growth the last property implies a form of short run regressivity our simulations illustrate these results and deliver some novel insights the average labour tax rises from 0 to 37 over 40 years whereas the average tax on savings falls from 12 to 0 at retirement we compare the second best solution to simple history independent tax systems calibrated to mimic these average tax rates we find that age dependent taxes capture a sizable fraction of the welfare gains in this way our theoretical results provide insights into simple tax systems copyright 2013 oxford university press

the shocking origins of political transitions evidence from earthquakes do earthquakes trigger political transitions using a rich panel dataset of 160 countries observed over 1950 2007 we find that earthquake shocks measured in terms of the effect of ground motion amplitude on death toll have two contradicting effects on political change on the one hand earthquakes drive transitions into democracy due to an affective shock which we interpret to be the reaction of citizens by which they hold the incumbent government responsible for earthquake damages on the other hand earthquakes indirectly hasten transitions into a less democratic regime because they increase the income level contemporaneously possibly due to short term emergency response and recovery expenditures and thus raising the opportunity cost of contesting the incumbent government overall we show that while not leading to a full fledged regime transition earthquake shocks open a new democratic window of opportunity but this window is narrowed by improved economic conditions

from sick man of europe to economic superstar germany s resurgent economy in the late 1990s and into the early 2000s germany was often called the sick man of europe indeed germany s economic growth averaged only about 1 2 percent per year from 1998 to 2005 including a recession in 2003 and unemployment rates rose from 9 2 percent in 1998 to 11 1 percent in 2005 today after the great recession germany is described as an economic superstar in contrast to most of its european neighbors and the united states germany experienced almost no increase in unemployment during the great recession despite a sharp decline in gdp in 2008 and 2009 germany s exports reached an all time record of 1 738 trillion in 2011 which is roughly equal to half of germany s gdp or 7 7 percent of world exports even the euro crisis seems not to have been able to stop germany s strengthening economy and employment how did germany with the fourth largest gdp in the world transform itself from the sick man of europe to an economic superstar in less than a decade we present evidence that the specific governance structure of the german labor market institutions allowed them to react flexibly in a time of extraordinary economic circumstances and that this distinctive characteristic of its labor market institutions has been the main reason for germany s economic success over the last decade

leverage and house price dynamics in u s cities we use city level data to analyze the relationship between homeowner borrowing patterns and house price dynamics our principal finding is that in cities where a greater fraction of homeowners are highly leveraged i e have high loan to value ratios house prices react more sensitively to city specific shocks such as changes in percapita income this finding is consistent with recent theories that emphasize the role of borrowing in shaping the behavior of asset prices

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

the inefficiency of refinancing why prepayment penalties are good for risky borrowers abstract this paper provides a theoretical analysis of the efficiency of prepayment penalties in a dynamic competitive lending model with risky borrowers and costly default when considering improvements in the borrower s creditworthiness as one of the reasons for refinancing mortgages we show that refinancing penalties can be welfare improving and that they can be particularly beneficial to riskier borrowers in the form of lower mortgage rates reduced defaults and increased availability of credit thus a high concentration of prepayment penalties among the riskiest borrowers can be an outcome of efficient equilibrium in a mortgage market we also provide empirical evidence that is consistent with the key predictions of our model

securitization and distressed loan renegotiation evidence from the subprime mortgage crisis abstract we examine whether securitization impacts renegotiation decisions of loan servicers focusing on their decision to foreclose a delinquent loan conditional on a loan becoming seriously delinquent we find a significantly lower foreclosure rate associated with bank held loans when compared to similar securitized loans across various specifications and origination vintages the foreclosure rate of delinquent bank held loans is 3 to 7 lower in absolute terms 13 to 32 in relative terms there is a substantial heterogeneity in these effects with large effects among borrowers with better credit quality and small effects among lower quality borrowers a quasi experiment that exploits a plausibly exogenous variation in securitization status of a delinquent loan confirms these results

stochastic house appreciation and optimal mortgage lending w e characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income costly foreclosure and a risky borrower who requires incentives to repay his debt we show that many features of subprime loans can be consistent with properties of the optimal contract and that when house prices decline mortgage modification can create value for borrowers and lenders our model provides a number of empirical predictions that relate the features of mortgage contracts originated in a housing boom and the extent of their modification in a slump to location and borrowers characteristics jel g20 g21 g33

the effectiveness of hiring credits this article analyses the effectiveness of hiring credits using comprehensive administrative data we show that the french hiring credit implemented during the great recession had significant positive employment effects and no effects on wages relying on the quasi experimental variation in labour cost triggered by the hiring credit we estimate a structural search and matching model simulations of counterfactual policies show that the effectiveness of the hiring credit relied to a large extent on three features it was non anticipated temporary and targeted at jobs with rigid wages we estimate that the cost per job created by permanent hiring credits either countercyclical or time invariant in an environment with flexible wages would have been much higher

natural disasters in a two sector model of endogenous growth using an endogenous growth model with physical and human capital accumulation this paper considers the sustainability of economic growth when the use of a polluting input e g fossil fuels intensifies the risk of capital destruction through natural disasters we find that growth is sustainable only if the tax rate on the polluting input increases over time the long term rate of economic growth follows an inverted v shaped curve relative to the growth rate of the environmental tax and it is maximized by the least aggressive tax policy of those that asymptotically eliminate the use of polluting inputs unavailability of insurance can accelerate or decelerate the growth maximizing speed of the tax increase depending on the relative significance of the risk premium and precautionary savings effects welfare is maximized under a milder environmental tax policy especially when the pollutants accumulate gradually

house prices collateral and self employment this paper explores the role of the collateral lending channel to facilitate small business starts and self employment in the period before the financial crisis of 2008 we document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries this increase in small business employment was particularly pronounced in industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral our results highlight the importance of the collateral lending channel during the period of the house price boom in the creation of small establishments we show that this effect is separate from the aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation

inflexible prices and procyclical productivity hall has shown that with perfect competition and price flexibility total factor productivity measured using labor s share either in revenues or in costs will be acyclical regardless of the level of labor hoarding we show that if firms producing a homogeneous good under constant returns must pick their prices before demand is known both measures of productivity become procyclical the model implies that productivity should be more procyclical the more important is labor hoarding empirically productivity is more procyclical in industries and in nations where labor hoarding appears more important

consumption dynamics during recessions when will durable expenditures respond strongly to economic stimulus we build from micro evidence and show that in a heterogeneous agent business cycle model with xed costs of durable adjustment responsiveness is substantially dampened during recessions our model estimates imply that during the great recession durable expenditures were half as responsive to additional stimulus as during the boom in the 1990s this procyclical responsiveness is driven by changes in the distribution of households desired durable holdings over the cycle we directly test our model by estimating this distribution empirically using psid micro data and nd that the distribution in the data moves cyclically as predicted in addition to this micro evidence we also provide support for our model s procyclical responsiveness using aggregate time series data and we show this time series evidence is inconsistent with simpler models featuring smooth adjustment costs

the rise in student loan defaults abstract we examine the rise in student loan defaults in the great recession by linking administrative student loan data at the individual borrower level to student loan borrowers individual tax records a blinder oaxaca style decomposition shows that shifts in the composition of student loan borrowers and the massive collapse in home prices during the great recession can each account for approximately 30 of the rise in student loan defaults falling home prices affect student loan defaults by impairing individuals labor earnings especially for low income jobs by contrast when comparing the default sensitivities of homeowners and renters we find no evidence that falling home prices affect student loan defaults through a home equity based liquidity channel the income based repayment ibr program introduced by the federal government in the wake of the great recession reduced both student loan defaults and their sensitivity to home price fluctuations thus providing student loan borrowers with valuable insurance against negative shocks

why economic dynamics matter in assessing climate change damages illustration on extreme events extreme events are one of the main channels through which climate and socioeconomic systems interact and it is likely that climate change will modify the probability distribution of the losses they generate the long term growth models used in climate change assessments however cannot capture the eects of such shortterm shocks to investigate this issue a non equilibrium dynamic model nedym is used to assess the macroeconomic consequences of extreme events this exercise allowed us to dene the economic amplic ation ratio as the ratio of the overall production loss due to an event to its direct costs this ratio could be used to improve the cost benet analysis of prevention measures we found also that unlike a solow like model nedym exhibits a bifurcation in gdp losses for each value of the capacity to fund reconstruction gdp losses remain moderate if the intensity and frequency of extremes remain under a threshold value beyond which gdp losses increase sharply this bifurcation may partly explain why some poor countries that experience repeated natural disasters cannot develop applied to the specic issue of climate change this model suggests that changes in the distribution of extremes may entail signican t gdp losses in absence of specic adaptation it suggests therefore that to avoid inaccurately low assessments of damages researchers must take into account the distribution of extremes instead of their average cost and make explicit assumptions on the organization of future economies

did financial frictions stifle r d investment in europe during the great recession abstract we investigate the role of financial frictions in r d spending in a large sample of european firms our identification strategy exploits the contraction in credit supply that followed the 2008 09 global financial crisis and 2012 euro area sovereign debt crisis together with differences in financial frictions across firms and industries to identify a causal effect of financial constraints on investment in innovation we show that firms that are more likely financially constrained in industries more dependent on external finance invest disproportionally less in r d during periods of tight credit supply smaller private firms with weaker balance sheets also have a lower share of r d in total investment suggesting r d drops more than total investment during these crisis episodes these results are robust to different proxies of financial constraints and fixed effects identification strategies

persistent private information this paper studies the design of optimal contracts in dynamic environments where agents have private information that is persistent in particular i focus on a continuous time version of a benchmark insurance problem where a risk averse agent would like to borrow from a risk neutral lender to stabilize his utility the agent privately observes a persistent state variable typically either income or a taste shock and he makes reports to the principal i give verifiable sufficient conditions showing that incentive compatible contracts can be written recursively conditioning on the report and two additional state variables the agent s promised utility and promised marginal utility of the private state i then study two examples where the optimal contracts can be solved in closed form showing how persistence alters the nature of the contract unlike the previous discrete time models with independent and identically distributed i i d private information the agent s consumption under the contract may grow over time furthermore in my setting the efficiency losses due to private information increase with the persistence of the private information and the distortions vanish as i approximate an i i d environment

firm level employment labour market reforms and bank distress abstract we explore the impact of financial frictions on the employment effect of labour market reforms our study combines a new cross country reform database on labour market reforms with matched firm bank data for nine euro area countries over the period 1999 to 2013 while we find that labour market reforms are overall effective in increasing employment restricted access to bank credit can undo up to half of medium to long term employment gains at the firm level entrepreneurs without sufficient access to credit cannot reap the full benefits of more flexible employment regulation

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

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

natural disasters and macroeconomic performance recent empirical research has shown that output and gdp per capita in the aftermath of natural disasters are not necessarily lower than before the event in many cases both are not significantly affected and surprisingly sometimes they are found to respond positively to natural disasters here we propose a novel economic theory that explains these observations specifically we show that gdp is driven above its pre shock level when natural disasters destroy predominantly durable consumption goods cars furniture etc disasters destroying mainly productive capital in contrast are predicted to reduce gdp insignificant responses of gdp can be expected when disasters destroy both durable goods and productive capital we extend the model by a residential housing sector and show that disasters may also have an insignificant impact on gdp when they destroy residential houses and durable goods we show that disasters irrespective of whether their impact on gdp is positive negative or insignificant entail considerable losses of aggregate welfare

household income strategies and natural disasters dynamic livelihoods in rural nicaragua this paper assesses the impact of hurricane mitch on livelihood strategies of rural households in nicaragua through destruction or distress sales of productive assets a hurricane or another natural hazard could induce people with relatively remunerative livelihoods to choose more defensive strategies which allow them to survive but at a permanently lower welfare level than before using panel data from before and after hurricane mitch we find that livelihood strategies can be grouped into three welfare categories annual farming and farm employment generate low incomes whereas nonfarm wage employment and livestock farming result in relatively high incomes perennial farming nonfarm self employment and annual cropping with nonfarm employment take an intermediate position high welfare strategies were associated with high levels of capital and the number of people involved was very similar between different years suggesting that households following low welfare strategies were trapped in poverty however many households moved actively between strategies of different welfare levels this indicates that there was no absolute poverty threshold but also that being able to initiate a relatively profitable livelihood strategy was no guarantee that this strategy could be maintained there is no evidence that hurricane mitch affected livelihood strategy transitions livelihood mobility was similar for households inside and outside mitch affected areas

the employment effects of credit market disruptions firm level evidence from the 2008 9 financial crisis this article investigates the effect of bank lending frictions on employment outcomes i construct a new data set that combines information on banking relationships and employment at 2 000 nonfinancial firms during the 2008 9 crisis the article first verifies empirically the importance of banking relationships which imply a cost to borrowers who switch lenders i then use the dispersion in lender health following the lehman crisis as a source of exogenous variation in the availability of credit to borrowers i find that credit matters firms that had precrisis relationships with less healthy lenders had a lower likelihood of obtaining a loan following the lehman bankruptcy paid a higher interest rate if they did borrow and reduced employment by more compared to precrisis clients of healthier lenders consistent with frictions deriving from asymmetric information the effects vary by firm type lender health has an economically and statistically significant effect on employment at small and medium firms but the data cannot reject the hypothesis of no effect at the largest or most transparent firms abstracting from general equilibrium effects i find that the withdrawal of credit accounts for between one third and one half of the employment decline at small and medium firms in the sample in the year

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

forced sales and house prices the market for housing differs in several important ways from the textbook model of a liquid asset market with exogenous fundamentals this implies that the price at which a house is sold can be influenced not only by general supply and demand conditions but also by idiosyncratic factors including the urgency of the sale and the effects of the ownership transfer on the physical quality of the house first houses are productive only when people are living in them owning an empty house is equivalent to throwing away the dividend on a financial asset second houses are fragile assets that need maintenance and are vulnerable to van dalism unoccupied houses are particularly vulnerable and expensive to protect third short term rental contracts involve high transactions costs resulting from the moving costs of renters and the need of homeowners to protect their property against damage fourth houses are expensive indivisible and heterogeneous assets each house has certain unique characteristics which are likely to appeal to certain poten tial buyers and not to others so selling a house requires matching it with an appro priate buyer because of the high costs of intermediation in housing this task is normally undertaken by a real estate broker rather than a dealer fifth most home owners must finance their purchases using mortgages collateralized debt contracts that transfer home ownership to the mortgage lender through a foreclosure process if the homeowner defaults the expansion of mortgage credit in the early 2000s and the recent decline in house prices have led to an unprecedented increase in foreclosures since 2006 foreclosures transfer houses to financial institutions which must maintain and pro tect them until they can be sold foreclosed houses are likely to sell at low prices both because they may have been physically damaged during the foreclosure pro cess and because financial institutions have an incentive to sell them quickly in a liquid market an asset can be sold rapidly with a minimal impact on its price but

evolutionary modelling of the macro economic impacts of catastrophic flood events this paper examines the possible contribution of evolutionary economics to macro economic modelling of flood impacts to provide guidance for future economic risk modelling most macro economic models start from a neoclassical economic perspective and focus on equilibrium outcomes either in a static or dynamic way and describe economic processes at a high level of aggregation as a consequence they typically fail to account for the complexity of social interactions and other behavioural responses of consumers and producers to disasters which may affect the macroeconomic impacts of floods employing evolutionary principles and methods such as agent based modelling may help to address some of the shortcomings of current macro economic models we explore and discuss the implications of applying consumer and producer heterogeneity bounded rationality network effects social and technological learning co evolution and adaptive policy making concepts into existing economic frameworks for the assessment of macro economic impacts of floods authors abstract

the great recession lessons from microeconomic data crises and sharp economic downturns while undesirable provide economists with a unique opportunity to test and hone economic theory indeed some of the most influential advance ments in economic thought including milton friedman s monetarist tradition john maynard keynes fiscal theory and irving fisher s debtdeflation hypothesis emerged from analysis of the great depression the current economic malaise which we refer to as the great recession provides another watershed moment to reevaluate our core economic beliefs however in contrast to our peers in previous crises we are fortunate to have access to large scale microeconomic datasets and advancements in computational capacity these advantages allow for a more rigorous analysis of the current recession and therefore a more informed understanding of its origins propagation and consequences our purpose is to highlight how a micro level analysis of the great recession provides us with important clues to understand the origins of the crisis the link between credit and asset prices the feedback effect from asset prices to the real economy and the role of household leverage in explaining the downturn we hope that our discussion also serves as an example of the useful ness of incorporating microeconomic data and techniques in answering traditional macroeco nomic questions i what were the origins of the credit cycle credit demand or credit supply

can natural disasters have positive consequences investigating the role of embodied technical change it has been suggested that disasters might have positive economic consequences through the accelerated replacement of capital this possibility is referred to as the productivity effect this effect is investigated using a model with embodied technical change in this framework disasters can influence the production level but cannot influence the growth rate in the same way than the saving ratio in a solow like model depending on reconstruction quality indeed accounting for embodied technical change can either decrease or increase disaster costs but is never able to turn disasters into positive events moreover a better but slower reconstruction amplifies the short term consequences of disasters but pays off over the long term regardless the productivity effect cannot prevent the existence of a bifurcation when disaster damages exceed the reconstruction capacity potentially leading to poverty traps c 2008 elsevier b v all rights reserved

optimal contracts under costly state falsification we examine an exchange economy with two agents one risk neutral with a certain endowment and a second risk averse with a random endowment the realization of the endowment is public but can be falsified by the second agent at a cost for a broad class of falsification cost functions the optimal no falsification contract is noncontingent on a left hand interval and strictly increasing with a slope strictly less than one on a right hand interval under a mild further restriction optimal no falsification contracts are in addition piece wise linear optimal contracts may in general require falsifying the state but for a set of the highest endowment realizations there is no falsification we find simple conditions under which the optimal contract is a no falsification contract the model has applications that include financial insurance and employment contracts and tax policy

the establishment level behavior of vacancies and hiring this paper is the first to study vacancies hires and vacancy yields at the establishment level in the job openings and labor turnover survey a large sample of u s employers to interpret the data we develop a simple model that identifies the flow of new vacancies and the job filling rate for vacant positions the job filling rate moves counter to aggregate employment but rises steeply with employer growth rates in the cross section it falls with employer size rises with worker turnover rates and varies by a factor of four across major industry groups we also develop evidence that the employer level hiring technology exhibits constant returns and that at the employer level and that employers rely heavily on other instruments in addition to vacancies as they vary hires we also develop evidence that effective recruiting intensity per vacancy varies over time accounting for about 41 of movements in aggregate hires in the 2007 to 2009 period our evidence and analysis provide useful inputs for assessing developing and calibrating theoretical models of search matching and hiring in the labor market

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

naturally negative the growth effects of natural disasters abstract growth theory predicts that natural disasters should on impact lower gdp per capita however the empirical literature does not offer conclusive evidence most existing studies use disaster data drawn from damage records of insurance companies we argue that this may lead to estimation bias as damage data and the selection into the database may correlate with gdp we build a comprehensive database of disaster events and their intensities from primary geophysical and meteorological information in contrast to insurance data our geomet data reveal a substantial negative and robust average impact effect of disasters on growth the worst 5 disaster years come with a growth damage of at least 0 46 percentage points that average effect is driven mainly by very large earthquakes and some meteorological disasters poor countries are more strongly affected by geophysical disasters rich more by meteorological events international openness and democratic institutions reduce the adverse effect of disasters

the impact of deregulation and financial innovation on consumers the case of the mortgage market we develop a technique to assess the impact of changes in mortgage markets on house holds exploiting an implication of the permanent income hypothesis the higher a household s expected future income the higher its desired consumption ceteris paribus with perfect credit markets desired consumption matches actual consump tion and current spending forecasts future income because credit market imperfec tions mute this effect the extent to which house spending predicts future income measures the imperfectness of mortgage markets using micro data we find that since the early 1980s mortgage markets have become less imperfect in this sense and securitization has played an important role the u s mortgage market has experienced phenomenal change over the last 35 years gone are the days when most households get a cookie cutter 30 year fixed rate level payment mortgage from a savings and loan that takes deposits at 3 and lends at 6 also gone are the days when the typical lender holds that mortgage on its books until the maturity of the loan today consumers choose from an extensive menu of mortgages offering flexibility along almost every dimension furthermore most lenders hold the mortgage for only a short time typically they sell the mortgage on the secondary market many researchers have argued that this transformation has enhanced effi ciency by integrating the mortgage market with the broader financial markets however there has been comparatively little research investigating how or even whether the transformation of mortgage markets has directly affected

competitive risk sharing contracts with one sided commitment this paper analyzes dynamic equilibrium risk sharing contracts between profit maximizing intermediaries and a large pool of ex ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex post in any given period after having observed her income the agent can walk away from the contract while the intermediary cannot i e there is one sided commitment we consider the extreme scenario that the agents face no costs to walking away and can sign up with any competing intermediary without any reputational losses we demonstrate that not only autarky but also partial and full insurance can obtain depending on the relative patience of agents and financial intermediaries insurance can be provided because in an equilibrium contract an up front payment effectively locks in the agent with an intermediary we then show that our contract economy is equivalent to a consumption savings economy with one period arrow securities and a short sale constraint similar to bulow and rogoff 1989 from this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable even though a risk allocation superior to autarky can be achieved

financing of firms labor reallocation and the distributional role of monetary policy we analyze monetary policy in a heterogenous firms environment where cash con strained firms finance operations through external financing and cash unconstrained firms operate by using internal funds we show that firms respond differently to shocks expansionary monetary policy sharply increases the relative employment of the cash constrained firms while positive productivity shocks induce a rise in the relative employment of the cash unconstrained firms our analysis points to a clear role of monetary policy in reallocating resources across sectors that differ in their financing capabilities furthermore the predictions of our model match the empirical evidence implying that financially constrained firms react sharply to monetary policy shocks but are less cyclical than unconstrained firms following productivity shocks

equilibrium subprime lending this paper develops an equilibrium model of a subprime mortgage market our goal is to offer a benchmark with which the recent subprime boom and bust can be compared the model is tractable and delivers plausible orders of magnitude for borrowing capacities as well as default and trading intensities we offer simple explanations for several phenomena in the subprime market such as the prevalence of teaser rates and the clustering of defaults in our model both nondiversifiable and diversifiable income risks reduce debt capacities thus debt capacities need not be higher when a larger fraction of income risk is diversifiable

firm leverage consumer demand and employment losses during the great recession this article argues that firms balance sheets were instrumental in the transmission of consumer demand shocks during the great recession using micro level data from the u s census bureau we find that establishments of more highly levered firms experienced significantly larger employment losses in response to declines in local consumer demand these results are not driven by firms being less productive having expanded too much prior to the great recession or being generally more sensitive to fluctuations in either aggregate employment or house prices likewise at the county level we find that counties with more highly levered firms experienced significantly larger declines in employment in response to local consumer demand shocks accordingly firms balance sheets also matter for aggregate employment our results suggest a possible role for employment policies that target firms directly besides conventional stimulus