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

industrial policy and firm heterogeneity our concern in this paper is with firm specific industrial policy when r d subsidies or taxes are differentiated among firms the question arises as to which firms in an industry should receive such support we analyze a situation where firms differ in their r d technologies in two distinct ways in the costs of performing r d activities and in the output obtained from such activities we find that the optimal firm specific industrial policy is affected differently by the two sources of firm heterogeneity furthermore a change in a firm s r d productivity has an ambiguous effect on the optimal policy towards the firm jel classification o31 l52 f13

interbank market liquidity and central bank intervention we develop a simple model of the interbank market where banks trade a long term safe asset when there is a lack of opportunities for banks to hedge idiosyncratic and aggregate liquidity shocks the interbank market is characterized by excessive price volatility in such a situation a central bank can implement the constrained efficient allocation by using open market operations to fix the short term interest rate it can be constrained efficient for banks to hoard liquidity and stop trading with each other if there is sufficient uncertainty about aggregate liquidity demand compared to idiosyncratic liquidity demand

financial collapse a lesson from the great depression abstract we analyze financial collapses such as the one that occurred during the u s great depression from the perspective of a monetary model with multiple equilibria the multiplicity arises from the presence of a strategic complementarity due to increasing returns to scale in the intermediation process intermediaries provide the link between savers and firms who require working capital for production fluctuations in the intermediation process are driven by variations in the confidence agents place in the financial system from a positive perspective our model matches quite closely the qualitative changes in important financial and real variables the currency deposit ratio ex post real interest rates deflation and production over the great depression period an experience often attributed to financial collapse further we assess whether the policy prescription advocated by friedman and schwartz adding liquidity to the banking system through increases in the money supply would have overcome strategic uncertainty and thus avoided a financial collapse

a further look at flexibilities and elasticities relationships between price elasticities and price flexibilities are examined with emphasis on comparing sizes of difference between a directly estimated demand matrix and an inverted demand matrix results show that by using inverted elasticities to represent flexibilities or vice versa sizable measurement errors may be committed in agricultural policy and program analysis a directly estimated demand matrix should be used

price and quantity endogeneity in demand analysis evidence from directed acyclic graphs we propose to use the emerging method of directed graphs to study price quantity endogeneity issues in empirical demand analysis the approach is illustrated through the examination of u s meat consumption we find that for two major meat products beef and poultry retail prices contemporaneously caused quantities consumed thus were predetermined in contrast the quantity consumed of pork appeared to be predetermined relative to its price

an inverse demand system for u s composite foods a comment in a recent article in this journal huang summarized the theoretical basis of inverse demand systems and estimated a set of price flexibilities for u s aggregate food groups following anderson attention focused on the theoretical constraints on compensated and uncompensated flexibilities these constraints are analogous to the familiar general restrictions of standard demand theory homogeneity cournot aggregation engel aggregation and slutsky relations however huang neglected to record another aspect of the dual nature of inverse and quantity dependent demand systems the property demonstrated by a number of authors including anderson and houck that the matrix of price elasticities can be derived by inverting the matrix of flexibilities this duality is important to note because it provides a link between inverse and direct demand systems and so allows all the elasticities and flexibilities to be computed given the values of budget shares once either set of parameter values has been estimated moreover the derivation of elasticities provides an additional check on whether estimates obtained from an inverse de

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

strategic r d with spillovers collusion and welfare the author considers a two stage r d then output or price duopoly game in which r d spills over so reducing the marginal cost of both the investing firm and its rival the author compares the noncooperative regime to three collusive regimes joint venture collusion on r d price fixing collusion at the price or output stage and merger collusion at both stages and evaluates under what circumstances a collusive regime improves welfare if spillovers are sufficiently large all three regimes are beneficial although mergers are more likely and price fixing less likely to produce specific benefits than are joint ventures copyright 1994 by blackwell publishing ltd

optimal financial crises empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of sunspots panics occur when depositors perceive that the returns on bank assets are going to be unusually low we develop a simple model of this in this setting bank runs can be first best efficient they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios however if costly runs or markets for risky assets are introduced central bank intervention of the right kind can lead to a pareto improvement in welfare from the earliest times banks have been plagued by the problem of bank runs in which many or all of the bank s depositors attempt to withdraw their funds simultaneously because banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets in the form of loans they are vulnerable to runs that can lead to closure and liquidation a financial crisis or banking panic occurs when depositors at many or all of the banks in a region or a country attempt to withdraw their funds simultaneously prior to the twentieth century banking panics occurred frequently in europe and the united states panics were generally regarded as a bad thing and the development of central banks to eliminate panics and ensure financial stability has been an important feature of the history of financial systems it has been a long and involved process the first cerntral bank the bank of sweden was established more than 300 years ago the bank of england played an especially important role in the development of effective stabilization policies in the eighteenth and nineteenth centuries by the end of the nineteenth century banking panics had been eliminated in europe the last true panic in england was the overend gurney company crisis of 1866

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

money financial stability and efficiency most analyses of banking crises assume that banks use real contracts however in practice contracts are nominal and this is what is assumed here we consider a standard banking model with aggregate return risk aggregate liquidity risk and idiosyncratic liquidity shocks we show that with non contingent nominal deposit contracts the first best efficient allocation can be achieved in a decentralized banking system what is required is that the central bank accommodates the demands of the private sector for fiat money variations in the price level allow full sharing of aggregate risks an interbank market allows the sharing of idiosyncratic liquidity risk in contrast idiosyncratic bank specific return risks cannot be shared using monetary policy alone real transfers are needed

the inverse almost ideal demand system abstract a new demand system related to the almost ideal demand system aids of deaton and muellbauer is developed and illustrated this inverse aids iaids retains all of the desirable theoretical properties of the aids model with the exception of consistent aggregation an empirical issue is whether a linear approximation will work as well for the iaids as it has for the aids model since quantities are not as highly correlated as prices an application to u s meat demand demonstrates that the linear approximation of the iaids is excellent which enhanced the ease and range of application

why do we have nominal government debt abstract we study the choice between nominal and indexed debt in a stochastic macroeconomic model with discretionary monetary and fiscal policy with distortionary taxes nominal debt provides valuable insurance against the budgetary effects of economic fluctuations we show that a welfare maximizing government always issues some nominal debt even though nominal debt increases inflation along the time consistent path of the economy the result is fairly robust with respect to changes in assumptions about policy constraints and about the macroeconomic setting

monetary policy banking crises and the friedman rule banking crises are frequent events gerard caprio and daniela klingebiel 1997 catalog over 80 banking crises during the last 25 years interestingly some banking crises are associated with no output losses whatsoever while others involve massive recessions finally it is known that the probability of a banking crisis rises as the rate of inflation rises see asli demirguc kunt and enrica detragiache 1997 john boyd et al 2001a b while received wisdom exists about the conduct of monetary policy while a crisis is underway there is no formal treatment of how the conduct of monetary policy during normal times affects the potential for banking crises to occur to fill that gap i consider economies where spatial separation and limited communication create a transactions role for money and random shocks to agents liquidity preferences create a role for banks in addition banks confront randomness in withdrawal demand when withdrawal demand is sufficiently high banks exhaust their cash reserves there are good reasons to associate this with a banking panic the output lost during a banking panic depends on how great withdrawal demand is some banking crises generate no output losses while others generate large reductions in resource availability in addition the conduct of monetary policy during normal times affects the probability of a banking crisis the higher the nominal interest rate the inflation rate the higher is the probability of a panic driving the nominal interest rate to zero following the friedman rule eliminates bank panics this constitutes a new rationale for the friedman rule nonetheless conventional methods of implementing the friedman rule never produce an optimal resource allocation in particular low nominal interest rates induce banks to hold large cash reserves thereby forgoing socially more productive investments in effect the friedman rule induces banks to become narrow banks voluntarily the banking system is very safe but it undertakes a suboptimal level of investment less conventional methods for implementing the friedman rule such as allowing unrestricted access to the discount window at a zero nominal interest rate lead either to the nonexistence of equilibrium or to massive indeterminacies none of the equilibria will be consistent with full optimality

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

dynamic r d with spillovers a comment cellini and lambertini 2009 dynamic r d with spillovers competition vs cooperation j econ dyn control 33 568 582 study a dynamic r d game with spillovers this comment demonstrates that contrary to what is claimed in their paper the game is not state redundant and the open loop nash equilibrium is not subgame perfect

japanese microelectronics creating competitive advantage by vertical interaction abstract japanese microelectronic firms have managed their integrated businesses strategically in the sense that some activities in the vertical chain are undertaken principally as drivers for other activities at first glance the sizeable discounts in factor prices relative to market prices that routinely occur when these firms use internal sources of factor supply would seem only to lead to accounting transfers of profits with misallocation effects however it is shown that there are rather modest conditions under which market share and corporate profits are increased by such discounts unfortunately a prisoner s dilemma develops when all japanese firms act in this strategic way but each nonetheless is at an advantage relative to those foreign firms which do not

monetary stability and liquidity crises the role of the lender of last resort we study an economy where agents are subject to liquidity demand shocks and banks arise endogenously to insure consumers against these shocks in this environment we evaluate the desirability of a lender of last resort who can provide liquidity loans to banks in distress in the absence of a lender of last resort the economy has a unique stationary equilibrium the introduction of unlimited and costless lender of last resort services allows the economy to achieve a steady state allocation that is pareto optimal however this economy also displays a continuum of hyperin ationary equilibria we then explore restrictions on the provision of lender of last resort services that rule out such monetary instability while preserving some of the e ciency obtained by unrestricted lender of last resort services when the lender of last resort charges an interest rate on liquidity loans the economy has a unique steady state equilibrium and when the interest rate charged is high enough no hyperin ationary equilibria arise finally when the lender of last resort faces an upper bound on loanable funds there is again a unique long run equilibrium and when the upper bound on loanable funds is small enough hyperin ationary equilibria are ruled out

market structure and innovation a survey economics we all recite deals with allocation of limited resources towards satisfaction of unlimited wants resources are typically identified as land labor and capital plus a technology that determines their transformation into consumer goods disparity between the available goods and services and the desired gives rise to scarcity and the question of what how and for whom to produce the focus then shifts to description and evaluation of alternative resource allocation mechanisms for making the choices the pareto criterion by which an allocation of resources is deemed efficient if any reallocation improving the position of some individual worsens the position of others is a commonly employed gauge of a mechanism s performance in the absence of externalities increasing returns to scale and uncertainty a perfectly competitive market system yields a pareto optimal allocation of resources this underlies the view that individual self interest is compatible with society s interest the further conclusion that pareto optimality may not be achieved via the market system in the presence of monopoly elements provides an economic rationale for antitrust laws the objective of a resource allocation mechanism appears to be according to the analysis described above to make the best of available resources the alternative objective of relaxing constraints through expanding the resource base or developing new technology seems to be beyond its scope thus until rather recently technical advance had been regarded in the mainstream of economic theory as unmotivated by the quest for profits and substantially unaffected by resource allocation instead as j schmookler observed technology had been viewed as a parameter like the weather affecting the outcome of resource allocations but itself unaffected by them 84 1965 evidence that technological progress has significantly contributed to growth in productivity together with a substantial increase in research and development activity largely financed by government and carried out by industry see f machlup 51 1962 may have spurred reconsideration of this view once technical advance is regarded as an economic variable it is natural to in

strategic commitment with r d the case of bertrand competition abstract when there is multiplicatively separable demand and firms compete in the price dimension there is no room for strategic use of r d by firms under a different demand situation strategic use of r d by firms competing in the price dimension reduces r d spending reduces output increases price and increases profits of each firm

bank liquidity interbank markets and monetary policy a major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs this paper studies the efficiency of the interbank lending market in allocating funds we consider two different types of liquidity shocks leading to di erent implications for optimal policy by the central bank we show that when confronted with a distribu tional liquidity shock crisis that causes a large disparity in the liquidity held among banks the central bank should lower the interbank rate this view implies that the traditional tenet prescribing the separation between prudential regulation and mon etary policy should be abandoned in addition we show that during an aggregate liquidity crisis central banks should manage the aggregate volume of liquidity two di erent instruments interest rates and liquidity injection are therefore required to cope with the two di erent types of liquidity shocks finally we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs