how debt markets have malfunctioned in the crisis the financial crisis that began in 2007 is especially a crisis in debt markets a full understanding of what happened in the financial crisis requires investigation into the plumbing of debt markets during a financial crisis when funds often cannot be raised easily or quickly the fundamental values for certain assets can become separated for a time from market prices with consequences that can echo into the real economy this article will explain in concrete ways how debt markets can malfunction with deleterious consequences for the real economy after a quick overview of debt markets i discuss three areas that are crucial in all debt markets decisions risk capital and risk aversion repo financing and haircuts and counterparty risk in each of these areas feedback effects can arise so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral i will document the remarkable rise in the premium that investors placed on liquidity during the crisis next i will show how these issues caused debt markets to break down indeed fundamental values and market values seemed to diverge across several markets and products that were far removed from the toxic subprime mortgage assets at the root of the crisis finally i will discuss briefly four steps that the federal reserve took to ease the crisis and how each was geared to a specific systemic fault that arose during the crisis

subsistence response to market shocks microeconomic models posit that transaction costs isolate subsistence producers from output market shocks we integrate microeconomic models of many heterogeneous households into a general equilibrium model and show that supply on subsistence farms may respond in apparently perverse ways to changes in output market prices price shocks in markets for staple goods are transmitted to subsistence producers through interactions in factor markets in the case presented a decrease in the market price of maize reduces wages and land rents stimulating maize production by subsistence households however real incomes of subsistence households fall

firm dynamics and financial development abstract using comprehensive firm level datasets this paper studies the impact of cross country variation in financial market development on firms financing choices and growth in less financially developed economies small firms grow faster and have lower leverage than large firms as financial development improves the growth difference between small and large firms shrinks while the leverage difference rises the paper then develops a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk the model explains the observed cross country variations in firm size leverage and growth in response to changes in financial frictions

the composition of u s east asia trade and changing comparative advantage abstract this paper examines the composition of trade between the united states and eight asian pacific economies from 1962 to 1992 analysis of the time series pattern of individual commodities at the sitc four digit level reveals economically significant changes in the pattern of trade reflecting changing comparative advantage based on changing factor proportions technology transfer and product cycles the composition of the eight bilateral trade relationships shows both increasing specialization over time and a sequence from japan to the four tigers korea taiwan singapore and hong kong and then to the remaining three east asian economies malaysia indonesia and thailand

agricultural household models extensions applications and policy this book presents the basic model of an agricultural household that underlies most of the case studies undertaken so far the model assumes that households are price takers and is therefore recursive the decisions modeled include those affecting production and the demand for inputs and those affecting consumption and the supply of labor comparative results on selected elasticities are presented for a number of economies the empirical significance of the approach is demonstrated in a comparison of models that treat production and consumption decisions separately and those in which the decisionmaking process is recursive the book summarizes the implications of agricultural pricing policy for the welfare of farm households marketed surplus the demand for nonagricultural goods and services the rural labor market budget revenues and foreign exchange earnings in addition it is shown that the basic model can be extended in order to explore the effects of government policy on crop composition nutritional status health saving and investment and to provide a more comprehensive analysis of the effects on budget revenues and foreign exchange earnings methodological topics primarily the data requirements of the basic model and its extensions along with aggregation market interaction uncertainty and market imperfections are discussed the most important methodological issues the question of the recursive property of these models is also discussed

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

the global credit boom challenges for macroeconomics and policy the recent financial crisis has put the spotlight on the rapid rise in credit which preceded it in this paper we provide an empirical and theoretical analysis of the credit boom and the macroeconomic context in which it developed we find that the boom was unusually long and associated with neither particularly strong growth nor rising inflation in the economies in which it took place we show that this type of credit and financial cycle is hard to reconcile with existing economic theory and argue that while the global savings glut may account for the cycle s initial phase other factors such as the conduct of monetary policy and perceptions of declining macroeconomic risk were more important from the mid 2000s onwards we conclude by identifying some of the challenges now facing macroeconomics and policy

when credit bites back using data on 14 advanced countries between 1870 and 2008 we document two key facts of the modern business cycle relative to typical recessions financial crisis recessions are costlier and more credit intensive expansions tend to be followed by deeper recessions in financial crises or otherwise and slower recoveries we use local projection methods to condition on a broad set of macro economic controls to study how past credit accumulation impacts key macro economic variables such as output investment lending interest rates and inflation the facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle

sudden stops and phoenix miracles in emerging markets a decade has passed since the salvos from mexico s tequila crisis of 1994 1995 echoed around the financial world since then many more crises have taken place in emerging market economies ems furthermore crises have tended to bunch together bringing to the forefront the systemic nature of these events true every new crisis has its own idiosyncratic features but useful policy lessons must be derived from robust empirical regularities this is the research strategy we have pursued in the last few years we will report on two types of regularities that strike us as highly robust across em crises a sudden stops of capital inflows and b phoenix miracles a sudden stop is a sharp fall in capital inflows relative to their past trajectory sudden stops are not a common feature in developed economies and display a large degree of temporal bunching suggesting that global capital market turmoil acts as a coordinating factor external to ems as shown in section i however balance sheet effects namely the interaction of large changes in the real exchange rate during sudden stops and liability dollarization i e foreign exchange denominated debts are key in influencing the likelihood of a sudden stop thus even though the initial shock is in principle exogenous to the economy whether or not it materializes into a sudden stop depends on domestic financial vulnerabilities on the other hand a phoenix miracle is defined as a case in which output recovers relatively quickly from a sharp collapse with virtually no recovery in credit or capital inflows and a very weak recovery in investment hence the reference to the mythical bird rising from the ashes the existence of phoenix like recoveries suggests that financial frictions play a key role in pushing economies to the abyss from which in some way or another they can crawl back to safe ground by means less than apparent to the conventional observer looking for standard fundamentals and thus may appear miraculous interestingly the great depression of the 1930s shares some of the key features of phoenix miracles in ems but shows salient differences as well that suggest nominal labor market rigidities are not crucial in explaining output collapse in ems understanding these regularities could and we believe does shed light on policies aimed at preventing crises and attenuating their effects

do institutional changes affect business cycles evidence from europe we study the effects that the maastricht treaty the creation of the ecb and the euro changeover had on the dynamics of european business cycles using a panel var and data from 10 european countries seven from the euro area and three outside of it there are changes in the features of european business cycles and in the transmission of shocks they precede the three events of interest and are more linked to a general process of european convergence and synchronization

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

procyclical leverage and value at risk the availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries empirically we find that intermediary leverage is negatively aligned with the banks value at risk var motivated by the evidence we explore a contracting model that captures the observed features under general conditions on the outcome distribution given by extreme value theory evt intermediaries maintain a constant probability of default to shifts in the outcome distribution implying substantial deleveraging during downturns for some parameter values we can solve the model explicitly thereby endogenizing the var threshold probability from the contracting problem

regionalism in the western hemisphere and its impact on u s agricultural exports a gravity model analysis the last fifteen years of the twentieth century were marked by important achievements in the area of agricultural trade liberalization in the western hemisphere in north america canada mexico and the united states forged the north american free trade agreement nafta this accord which took effect on 1 january 1994 is dismantling most tariff and non tariff barriers for trading between its members nafta also incorporates the canada u s free trade agreement cfta an accord similar to nafta that took effect

nafta and mexico s maize producers abstract the fall in the producer price of maize that will accompany implementation of trade liberalization and nafta has led to dire predictions of falling incomes and labor displacement in mexican agriculture we use a household survey of the ejido sector to show that a majority of maize producers are in fact not producing for the market and will consequently not be directly affected as producers by a drop in the price of maize while a significant share will benefit as consumers for the net sellers we explore the determinants of two solutions to a falling maize price diversification toward high value crops and modernization of maize production for both of these results show the fundamental importance of reconstructing supportive institutions for marketing credit and technical assistance in replacement of the services formerly offered by government and subsequently discontinued under state contraction

the relative pricing of u s treasury strips empirical evidence abstract we investigate pricing relations and the potential for arbitrage in the u s treasury strips market stressing the importance of reconciling quoted treasury data with actual market pricing conventions we document that stripping and reconstitution profits in the strips market are fleeting and rarely economically significant that matched maturity principal and coupon strips generally have different prices due at least in part to richness or cheapness in the underlying note or bond and that apparent negative forward rates in the strips market are concentrated in certain long maturity strips that do not actually exist at the time

migration and the sending economy a disaggregated rural economy wide analysis abstract most economic research on migration impacts focuses on the households that send the migrants and get the remittances ignoring linkages with others in the sending economies this paper offers an alternative disaggregated economy wide perspective on migration and its impacts data from the 2003 mexico national rural household survey are used to calibrate a series of interacting rural household models nested within a general equilibrium model of the whole rural economy simulations reveal that the impacts of international migration and remittances on sending areas depend critically on the ways in which local markets transmit influences among households

corporate debt structure and economic recoveries abstract this paper analyzes the business cycle behavior of the corporate debt structure and its interaction with economic recovery the debt structure is measured as the share of bonds in the total credit to non financial corporations for a quarterly panel of countries over the period 1989 2013 we first show that the substitution of loans for bonds in recoveries is a regular property of business cycles secondly we provide evidence that economies with high bond share and important bond loan substitution recover from the recessions faster this identified link between corporate debt structure and business cycles is robust to the inclusion of traditional factors which shape recessions and recovery such as the size and the quality of financial markets the occurrence of bank crisis the dynamics of credit and the distribution of firm size

debt deflation theory and evidence abstract in the early 1990s the most severe recessions occurred in those countries which had experienced the largest increases in private debt burdens was this an accident of history or did it reflect deeper forces affecting market economies the paper comprises three parts first it presents three stylised facts about debt and its impact on consumption growth in the 1930s and the 1990s second it discusses the reception of irving fisher s work on debt deflation by his contemporaries and argues that it is helpful to think of debt deflation as a real business cycle phenomenon third there is a theoretical discussion of the reaction of debt and consumption to shocks in the context of a model of precautionary saving central to the model is the role of distributional shocks which implies that aggregate demand may be a nonmonotonic function of the price of assets in terms of the consumption good multiple equilibria may exist leading to the possibility of financial instability the analysis of debt deflation requires the construction of real business cycle models without a representative consumer

dissecting the cycle a methodological investigation following burns and mitchell we define the cycle as a pattern in the level of aggregate economic activity an algorithm to locate turning points is developed as is a new measure of pro cyclicality a link between turning points and the moments of the series is established thereby providing the statistical foundation that burns and mitchell s work lacked using these tools we are able to dissect cycles in terms of the contributions made by trend growth volatility serial correlation and non linear effects we dissect several models and find little evidence that certain non linear effects are important to the nature of business cycles

peasant household behaviour with missing markets some paradoxes explained a model of peasant household behavior under varying degrees of household specific food and labor market failures is constructed to show that these structural features can explain several well known patterns of peasant response which have often been attributed to peculiar motives presumed specific to peasants the model explains sluggish response to cash crops prices and high instability in perceived food and labor scarcities the key role of manufactured consumer goods prices in stimulating peasants effort in cash crops production the effectiveness of taxation as opposed to incentives in stimulating cash crops production and the key role of technological change in food production to enhance cash crop production results are obtained analytically in the case of one market failure and by numerical simulation with more than one

disaggregated rural economywide models for policy analysis summary this paper presents a disaggregated rural economywide modeling drem approach to explore how agricultural and trade policy reforms play out within rural economies of less developed countries ldcs drems combine the strengths of aggregate computable general equilibrium cge and microagricultural household models we calibrate our model with new microsurvey data from central mexico and we use the model to explore the impacts of policy changes on individual rural household groups as well as on the rural economy as a whole simulations highlight how rural market constraints and heterogeneous household responses shape the outcomes of policy reforms

transactions costs and agricultural household supply response we develop and estimate a model of supply response when transactions costs create a situation where some producers buy others sell and others do not participate in markets we present two rationales for why producing households may have different relationships to the market proportional and fixed transactions costs using data on mexican corn producers we estimate an empirical model that allows for separate tests of the significance of both types of transactions costs revealing that both fixed and proportional transactions costs matter for the estimation the results provide consistent estimates of supply elasticity and measures of the relative importance of factors determining both proportional and fixed transactions costs

cyclicality of credit supply firm level evidence abstract we quantify fluctuations in bank loan supply in the time series by studying firms substitution between loans and bonds using firm level data any firm that raises new debt must have a positive demand for external funds conditional on the issuance of new debt we interpret firms switching from loans to bonds as a contraction in bank credit supply we find strong evidence of this substitution at times that are characterized by tight lending standards depressed aggregate lending poor bank performance and tight monetary policy we show that this substitution behavior has strong predictive power for bank borrowing and investments by small firms

labor markets migration and welfare agriculture in the north american free trade agreement abstract mexico like many other countries provides its agricultural sector with substantial protection from international competition income distributional considerations and concerns about transitional problems once liberalization starts explain much of the persistence of such policies this paper argues four points i substantial efficiency gains can be expected from liberalization ii the income distributional effects of protection are in fact regressive iii well targeted adjustment programs that help rather than delay adjustment can be designed once a careful analysis of the precise distributional impact has been made and iv a comprehensive two sided liberalization by mexico and its main export market the u s would significantly reduce any adjustment problems the latter point is made in the context of an assessment of the potential impact of the free trade agreement fta on agriculture

the corn price surge impacts on rural mexico summary we use an agent based general equilibrium model to explore the impacts of world corn price increases on land use and income in rural mexico in the model interactions among heterogeneous agents within a local context shape both macro and microeconomic outcomes results suggest that subsistence activities allowed agriculture to absorb the shock limiting the benefits of higher prices for the population while keeping deforestation pressures in check an estimated 5 7 corn area expansion by 2008 and wide variation across regions corresponds well with ex post reports agricultural growth led to 0 02 and 3 9 increases in real income for rural households and absentee landholders respectively

a seasoning process in the u s treasury bond market the curious case of newly issued ten year notes the pricing behavior of new treasury notes and bonds issued during the treasury s regular refunding operations suggest the existence of a seasoning process prices of new issues are generally higher than prices of equivalent seasoned issues although overpricing for issues with original maturities of 3 5 and 30 years persists for approximately two to three months after issuance the seasoning process for treasury notes with original maturity of 10 years is more pronounced and lengthier on average the prices of these notes take approximately 20 months to adjust and become comparable to the prices of seasoned issues to a lesser extent this overpricing is present in the prices of the principal strips derived from the newly issued ten year notes

applying cointegration and error correction to measure trade linkages maize prices in the united states and mexico the impact of u s grown maize on mexican markets is a subject of heated debate and is complicated by limited substitution between white and yellow maize as well as regional price differences within mexico this article improves on previous analyses using a detailed data set of white maize prices reported weekly in 11 states across mexico from 1998 through 2005 using cointegration analysis and the error correction model we find that prices between the united states and mexico do not share a common long run relationship within mexico prices in michoacan and oaxaca are only weakly related with prices in neighboring states whereas prices in sinaloa and jalisco exert considerable influence on prices elsewhere in mexico we conclude that despite north american free trade agreement nafta white maize prices in mexico are determined by local conditions including particularly the degree of integration to other regions within mexico

agricultural price policy employment and migration in a diversified rural economy a village town cge analysis from mexico using the village town computable general equilibrium cge model this paper explores the implications of resource mobility across farm and non farm activities and alternative model closure rules in shaping agricultural policy impacts two sets of agricultural policy experiments on three alternative model closure scenarios were conducted using data from a 1993 survey of 196 households in michoacan mexico including 53 in a town or county seat and 143 in the surrounding villages experiment 1 simulates the village town economy wide impact of a 10 decrease in the support price for staples experiment 2 combines this support price decrease with a compensating lump sum income transfer to staple producers similar to what actually occurred under mexicos procampo program results show that the prediction made by the aggregate cge model that mexicos agricultural price liberalization reduces rural employment and incomes and stimulates migration was not materialized the decline in staple production has been relatively small and it has concentrated on large commercial farms rather than in small farm sector in which most producers are found and from which most migrants originate however with the use of village town model and microsurvey data the authors demonstrated that under plausible market closure conditions mexicos staple price liberalization has a minimal effect on rural wagers and migration this is contrary to the predictions of the aggregated cge model

what s driving mexico u s migration a theoretical empirical and policy analysis using data gathered in 25 mexican communities the authors link individual acts of migration to 41 theoretically defined individual household community and macroeconomic level predictors the indicators vary through time to yield a discrete time event history analysis over the past 25 years probabilities of first repeat and return migration have been linked more to the forces identified by social capital theory and the new economics of migration than to the cost benefit calculations assumed by the neoclassical model the authors find that mexico u s migration stems from three mutually reinforcing processes social capital formation human capital formation and market consolidation

special repo rates an empirical analysis duffie 1996 examines the theoretical impact of repo specials on the prices of treasury securities and concludes that all else the same an issue on special will carry a higher price than an otherwise identical issue we examine this hypothesis and find strong evidence in support of it we also examine whether the liquidity premium associated with on the run issues is due to repo specialness and find evidence of a distinct effect finally we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables are generally significant underlying the cash market for u s treasury securities is the financing or repo market at any given time the repo rate for most treasury issues the general collateral rate is the same but a few issues are typically on special an issue on special has associated with it a repo rate that is less than the prevailing general collateral rate as a result the owner of a security that is on special is able to obtain below market financing rates via a repurchase agreement duffie 1996 examines the theoretical causes of repo specials and their impact on the prices of treasury securities in the context of a general equilibrium model his primary conclusion is that specialness will be priced in the cash market meaning that all else the same an issue on special or likely to go on special will carry a higher price than an otherwise identical issue we investigate this hypothesis using data on repo specials and find clear evidence in support of it we conclude that specialness is priced and that the magnitude of the cash market premium reflects both the future duration and magnitude of repo specialness we also examine whether the liquidity premium associated with on therun issues is due to repo specialness and find evidence of a distinct effect finally as a test of duffie s model we investigate whether auction tightness and percentage awarded to nonbank primary dealers are related to subsequent specialness the evidence is consistent with predictions with both variables generally significant

have economic fluctuations been dampened a look at evidence outside the united states abstract until recently economists of all beliefs took it for granted that the severity of economic fluctuations had decreased sharply following world war ii recent work has challenged this view this study attempts to shed light on whether there was a true reduction in the severity of economic fluctuations by examining the experience of six european countries with one exception these countries did not experience a substantial reduction in the severity of the business cycle

bank finance versus bond finance we present a model with agency costs where heterogeneous firms raise finance through either bank loans or corporate bonds and where banks are more efficient than the market in resolving informational problems we document some major long run differences in corporate finance between the united states and the euro area and show that our model can explain those differences based on information availability the model fits the data best when the euro area is characterized by lower availability of public information about corporate credit risk relative to the united states and when european firms value more than united states firms banks flexibility and information acquisition role

climate change and labour allocation in rural mexico evidence from annual fluctuations in weather this paper evaluates the effects of annual fluctuations in weather on employment in rural mexico to gain insight into the potential labour market implications of climate change using a 28 year panel on individual employment we find that years with a high occurrence of heat lead to a reduction in local employment particularly for wage work and non farm labour extreme heat also increases migration domestically from rural to urban areas and internationally to the u s a medium emissions scenario implies that increases in extreme heat may decrease local employment by up to 1 4 and climate change may increase migration by 1 4 this article is protected by copyright all rights reserved

spanish treasury bond market liquidity and volatility pre and post european monetary union abstract spain enacted a number of important debt management initiatives in 1997 to prepare its treasury bond market for european monetary union we interpret the impacts of these changes through shifts in a bond liquidity life cycle function furthermore we highlight the importance of expected average future liquidity in explaining spanish bond liquidity premiums we also uncover pricing biases that support the spanish treasury s tactical decision to target high coupon premium bonds in its pre emu debt exchanges finally we show that emu has been associated with both a decrease in bond yield volatility and an increase in pricing efficiency

macroeconomic effects of corporate default crisis a long term perspective abstract using an extensive data set on corporate bond defaults in the us from 1866 to 2010 we study the macroeconomic effects of bond market crises and contrast them with those resulting from banking crises during the past 150 years the us has experienced many severe corporate default crises in which 20 50 of all corporate bonds defaulted although the total par amount of corporate bonds has at times rivaled the amount of bank loans outstanding we find that corporate default crises have far fewer real effects than do banking crises these results provide empirical support for current theories that emphasize the unique role that banks and the credit and collateral channels play in amplifying macroeconomic shocks

corporate debt structure and the financial crisis we present a dsge model where rms optimally choose among alternative instruments of external nance the model is used to explain the evolving composition of corporate debt during the nancial crisis of 2007 09 namely the observed shift from bank nance to bond nance despite the increasing cost of debt securities relative to bank loans we show that substitutability among instruments of external nance is important to shield the

undocumented mexico u s migration and the returns to households in rural mexico this paper presents estimates of net income gains to a sample of households in rural mexico from sending migrants illegally to the united states correcting for sample selectivity bias and it examines the role of expected income gains in driving illegal mexico u s migration there is no evidence that people who migrate illegally to the united states are above average contributors to household income either as workers in mexico or as mexico u s migrants however other things being equal villagers who are in the best position to contribute to household income as workers in mexico are positively selected not to migrate to the united states