the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

consensus consumer and intertemporal asset pricing with heterogeneous beliefs le fichier attache est egalement edite dans les cahier de la chaire les particuliers face aux risques de l institut de finance de dauphine cahier n 7 mars 2007

asymmetric information and rational expectations when is it right to be wrong abstract in this paper we examine the effects of private agents being less than fully rational in their expectations we examine this in the context of monetary policy where the central bank may have uncertain preferences either by choice or by necessity the new feature is that we allow the public to react in two different ways they either form rational expectations and internalize the uncertainty about the central bank s preferences in full or alternatively and if this process of internalization is costly it forms a best guess regarding those preferences this implies a certainty equivalence strategy applied to the preference parameters as those parameters enter the decisions non linearly a systematic error emerges we examine the magnitude of the resulting error in inflation and output following the assumption of certainty equivalence under all reasonable levels of uncertainty this error turns out to be small but involves trading a deflation bias against the cost of gathering the information needed for the full information rational expectations solution

optimal investment under ambiguous technology shocks abstract this paper analyzes the behavior of a firm facing an ambiguous technology shock and the effects of the attitude toward ambiguity on optimal capital investment using the smooth ambiguity model of klibanoff et al 2005 although it seems intuitive that an increase in ambiguity aversion always reduces the optimal capital investment this is not necessarily true because the shape of the production function plays a key role in determining the effect under some conditions we show that the optimal amount of capital investment increases decreases in ambiguity aversion if the production function is substitute complement and that this result is counterintuitive when the production function is substitute furthermore our main results hold if we assume the maxmin preferences in ghirardato et al 2004

a dynamic structural model for stock return volatility and trading volume an examination is made of an adaptive beliefs model that is able to roughly reproduce the following features seen in the data 1 the autocorrelation functions of the volatility of returns and trading volume are positive with slowly decaying tails 2 the cross correlation function of volatility is approximately zero for squared returns with past and future volumes and is positive for squared returns with current volumes 3 abrupt changes in prices and returns occur that are hard to attach to news the last feature is obtained because the law of large numbers can fail in the large economy limit

doubts or variability reinterpreting most of the market price of risk as a price of model uncertainty eradicates a link between asset prices and measures of the welfare costs of aggregate fluctuations that was proposed by hansen et al 1999 tallarini 2000 and alvarez and jermann 2004 prices of model uncertainty contain information about the benefits of removing model uncertainty not the consumption fluctuations that lucas 1987 2003 studied a max min expected utility theory lets us reinterpret tallarini s riskaversion parameter as measuring a representative consumer s doubts about the model specification we use model detection instead of risk aversion experiments to calibrate that parameter plausible values of detection error probabilities give prices of model uncertainty that approach the hansen and jagannathan 1991 bounds fixed detection error probabilities give rise to virtually identical asset prices as well as virtually identical costs of model uncertainty for tallarini s two models of consumption growth

a closed form solution for a model of precautionary saving this paper analyses life cycle consumption plans and distinguishes between temporal risk aversion and intertemporal substitution the results assume that felicity functions are quadratic and that income follows a linear model with normally distributed errors stochastic dynamic programming then yields closed loop linear decision rules certainty equivalence no longer holds but instead households play a min max strategy against nature one finds a rationale for precautionary saving and a larger sensitivity of changes in consumption to income innovations

discussion of robustness and pricing with uncertain growth hansen and sargent and a number of coauthors have recently initiated a research agenda that introduces the notion of robustness to model uncertainty or a concern with model misspecification into macroeconomics and finance methodologically they modify key techniques from the robust control literature in applied mathematics in order to allow for recursivity discounting and stochastic dynamics which are obvious ingredients of the conventional modeling paradigm in financial economics the fundamental idea behind robustness is that economic models are at best viewed as stylized approximations of reality rather than perfectly accurate descriptions thereof it is then natural to entertain the possibility that economic agents making decisions in these models share the concern for model misspecification that economists and econometricians routinely express when agents use a particular model as guidance in a dynamic decision problem and worry that this model might be misspecified one would expect them to insist on considering alternative models in order to obtain decision rules that not only work well when the particular baseline model is correct but that also perform reasonably well when the model is somewhat misspecified this is the sense in which the decision rule is designed to be robust the question of course is how agents go about considering alternative models and obtaining a robust decision rule given these alternative models in this article as in other work introducing robustness the agents are assumed to achieve robustness by considering a least favorable or worst case model that is similar to and statistically hard to distinguish from the baseline model worrying about a worst case distortion of the baseline model seems quite drastic first it should be emphasized that the least favorable model is endogenously selected from a set of models that are close to the baseline model where distance between models is measured by an entropy or likelihoodtype criterion and in accordance with a preference parameter that measures the strength of the preference for robustness 0 effectively the preference parameter 0 dictates how much confidence the decision maker has in the baseline model so that i indicates to what extent she is willing to consider 0

a dynamic model of union membership and employment a comment this paper re examines the dynamic features and the long run effects of raising interest rates on union membership and employment in the jones mckenna 1994 model two major findings emerge from the analysis first the dynamic system of jones and mckenna s model exhibits saddlepoint stability rather than global stability second when the economy experiences a rise in interest rate union membership will eventually converge to a higher level

risk ambiguity and the exercise of employee stock options abstract we investigate the importance of ambiguity or knightian uncertainty in executives stock option exercise decisions we develop an empirical estimate of ambiguity and include it in regression models alongside the traditional measure of risk equity volatility we show that each variable has a significant effect on the timing of option exercises with volatility causing executives to hold options longer to preserve option value and ambiguity increasing the tendency for executives to exercise early

robust control of forward looking models abstract this paper shows how to formulate and compute robust ramsey aka stackelberg plans for linear models with forward looking private agents the leader and the followers share a common approximating model and both have preferences for robust decision rules because both doubt the model since their preferences differ the leader s and followers decision rules are fragile to different misspecifications of the approximating model we define a stackelberg equilibrium with robust decision makers in which the leader and follower have different worst case models despite sharing a common approximating model to compute a stackelberg equilibrium we formulate a bellman equation that is associated with an artificial single agent robust control problem the artificial bellman equation contains a description of implementability constraints that include euler equations that describe the worst case analysis of the followers as an example the paper analyzes a model of a monopoly facing a competitive fringe

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

a dynamic model of trade union behaviour this paper constructs a dynamic model of trade union behavior in which union membership is endogenous unemployed workers are assumed to leave their union as they seem to in reality and the union must therefore solve an intertemporal optim ization problem the results imply that conventional static models ov erstate the distortions caused by monopoly unionism and that the rece nt empirical mod els of union behavior may be misspecified the paper s analysis can be seen as an attempt to construct a model of the pos t entry closed shop copyright 1987 by the review of economic studies limited

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

model misspecification and underdiversification in this paper we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification we develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks we find that when the overall ambiguity about the joint distribution of returns is high then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean variance portfolio

continuous time smooth ambiguity preferences abstract this study extends the smooth ambiguity preferences model proposed by klibanoff et al 2005 to a continuous time dynamic setting it is known that the original smooth ambiguity preferences converge to the subjective expected utility as the time interval shortens so that decision makers do not exhibit any ambiguity sensitive behavior in the continuous time limit accordingly this study proposes an alternative model of these preferences that interchanges the role of the second order utility function with that of the second order probability to prevent the smooth ambiguity attitude of decision maker from evaporating in the continuous time limit by utilizing the utility convergence results established by kraft and seifried 2014 our model is eventually represented by the stochastic differential utility with distorted beliefs so that most existing techniques in economics and financial studies can be made applicable together with these distorted beliefs we give an asset pricing example to demonstrate the applicability of our model

the economic crisis from a neoclassical perspective abstract this paper assesses the 2007 2009 recession using neoclassical business cycle theory i find that the 2007 2009 u s recession differs substantially from other postwar u s recessions and also from the 2008 recession in other countries in that lower labor input accounts for virtually all of the decline in income and output in the united states while lower productivity accounts for much of other u s recessions and the 2007 2009 recession in other countries i also find that existing classes of models including financial market imperfections models do not explain the u s recession this is because the 2007 2009 recession is almost exclusively related to what appear to be labor market distortions that drive a wedge between the marginal product of labor and the marginal rate of substitution between consumption and leisure a topic about which current classes of financial imperfection models are largely silent i discuss future avenues for developing this class of models and i consider alterna

recovery rates uncertainty certainly matters abstract previous studies identify default rate as the main systematic determinant of bond recovery rates we revisit this paradigm by investigating the impact of another factor economic uncertainty based on a wide sample of american default issues and relying on beta regression models well suited for the bounded heteroskedastic and skewed sample of recovery rates we analyze the determinants of recovery rate distributions we find economic uncertainty to be of paramount importance as it proves to be the most important systematic determinant of recovery rate distributions significant for both their mean and dispersion by contrast default rate remains a key determinant of the dispersion of these distributions but not for their means considering this evidence is critical to the sound implementation of stochastic recovery rate models used by financial institutions for the computation of regulatory capital

identifying the global transmission of the 2007 2009 financial crisis in a gvar model abstract the paper analyses and compares the role that the tightening in liquidity conditions and the collapse in risk appetite played for the global transmission of the financial crisis dealing with identification and the large dimensionality of the empirical exercise with a global var approach the findings highlight the diversity of the transmission process while liquidity shocks have had a more severe impact on advanced economies it was mainly the decline in risk appetite that affected emerging market economies the tightening of financial conditions was a key transmission channel for advanced economies whereas for emerging markets it was mainly the real side of the economy that suffered moreover there are some striking differences also within types of economies with europe being more adversely affected by the fall in risk appetite than other advanced economies

precautionary savings and the permanent income hypothesis this paper derives the explicit solution of a dynamic stochastic optimal consumption problem for infinitely lived agents whose preferences exhibit in the presence of non diversifiable labour income uncertainty a constant elasticity of intertemporal substitution and constant absolute risk aversion the constancy of the elasticity of intertemporal substitution which implies that marginal utility at zero consumption is infinite guarantees that the non negativity constraint on consumption is never binding along the optimal path the assumption of constant absolute risk aversion allows an explicit computation of human wealth and provides a simple representation of the precautionary savings motive

robustly strategic consumption portfolio rules with informational frictions this paper provides a tractable continuous time constant absolute risk aversion gaussian framework to explore how the interactions of fundamental uncertainty model uncertainty due to a preference for robustness and state uncertainty due to information processing constraints rational inattention affect strategic consumption portfolio rules and precautionary savings in the presence of uninsurable labor income specifically after solving the model explicitly i compute and compare the elasticities of strategic asset allocation and precautionary savings to risk aversion robustness and inattention furthermore for plausibly estimated and calibrated model parameters i quantitatively analyze how the interactions of model uncertainty and state uncertainty affect the optimal share invested in the risky asset and show that they can provide a potential explanation for the observed stockholding behavior of households with different education and income levels this paper was accepted by neng wang finance

a dynamic model of union membership and employment that it recognizes some link between present wage and employment levels and future membership and that it has an interest in the level of membership attained we model membership decisions with stochastic demand and a differential layoff rate for union and non union workers membership dynamics are behavioural in that membership increases when the utility of being a member exceeds the utility of not being a member the model permits a variety of possible relationships between employment and membership in the adjustment to steady state

sudden stops and financial frictions evidence from industry level data the nature of the microeconomic frictions that transform sudden stops in output collapses is not only of academic interest but also crucial for the correct design of policy responses to prevent and address these episodes and the lack of evidence on this regard is an important shortcoming this paper uses industry level data in a sample of 45 developed and emerging countries and a differences in differences methodology to provide evidence of the role of financial frictions for the consequences of sudden stops the results show that consistently with financial frictions being important industries that are more dependent on external finance decline significantly more during a sudden stop especially in less financially developed countries the results are robust to controlling for other possible mechanisms including labor market frictions the paper also provides results on the role of comparative advantage during sudden stops and on the usefulness of various policy responses to attenuate the consequences of these shocks

global banks and crisis transmission abstract we study the effect of financial integration through banks on the transmission of international business cycles in a sample of 18 20 developed countries between 1978 and 2009 we find that in periods without financial crises increases in bilateral banking linkages are associated with more divergent output cycles this relation is significantly weaker during financial turmoil periods suggesting that financial crises induce co movement among more financially integrated countries we also show that countries with stronger direct and indirect financial ties to the u s experienced more synchronized cycles with the u s during the recent 2007 2009 crisis we then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity the model suggests that the relation between integration and synchronization depends on the type of shocks hitting the world economy and that shocks to global banks played an important role in triggering and spreading the 2007 2009 crisis

union membership and employment dynamics abstract this note examines the behavior of a monopoly union that cares about its future membership and recognizes the dynamic dependence of membership on employment a characterization is given both of the steady state and of the interdependent employment and membership dynamics out of that steady state

the free rider problem and a social custom model of trade union membership the literature on public good provision by groups has traditionally emphasized the free rider problem if it is assumed that a group forms to provide or to lobby for the provision of a good that is collective to potential members then the major conceptual problem to the formation of such a group is that individuals can enjoy the benefits of group action without incurring the costs by doing this they free ride in small groups the free rider problem is not generally considered insurmountable however the larger the number of potential beneficiaries the more difficult it is to overcome the free rider problem due to exclusion and surveillance difficulties and the less likely is optimal collective good provision or any collective good provision in the extreme the free rider hypothesis has a long history in economic thought as early as 1848 the free rider potential of any group of workers was perceived by j s mill however it appears that it was not until 1965 that an attempt was made to explain why large groups providing collective goods manage to exist despite the free rider problem olson 1965 proposed the following explanation if a large group exists it must have formed either because membership is compulsory or because the group provides private goods and services accessible only to its members with ancillary provision of the collective good as a byproduct the literature that developed from olson s work has focused primarily on the suboptimal provision of the collective good the difficulties of getting members to contribute in proportion to the benefits received and preference revelation incentives see for example groves and ledyard 1977 however there are problems with both of the solutions proposed by olson to overcome the free rider problem facing large groups first if coercion is looked at as a solution to the free rider problem the question arises as to how the coercion itself is financed guttman 1978 this is unlikely to be costless the second problem concerns the byproduct solution private good pro

leaning against the wind during financial disruptions market makers provide liquidity by absorbing external selling pressure they buy when the pressure is large accumulate inventories and sell when the pressure alleviates this paper studies optimal dynamic liquidity provision in a theoretical market setting with large and temporary selling pressure and order execution delays i show that competitive market makers offer the socially optimal amount of liquidity provided they have access to sufficient capital if raising capital is costly this suggests a policy role for lenient central bank lending during financial disruptions

robust permanent income and pricing i suppose there exists an extremely powerful and if i may so speak malignant being whose whole endeavours are directed toward deceiving me rene descartes meditations ii 1

dynamics and asymmetric adjustment in insider outsider models this paper analyzes the time consistent and efficient solution for wages and employment in intertemporal insider outsider models of bargaining with endogenous membership when the reservation wage is made endogenous in a general equilibrium context insider outsider models can generate a fundamental asymmetry in the adjustment of employment to the steady state while upturns are gradual severe downturns are characterized by a sharp drop in employment obtained by laying off workers further reductions in employment are achieved solely through quits copyright 1992 by royal economic society

demand collapse or credit crunch to firms evidence from the world bank s financial crisis survey in eastern europe abstract this paper assesses whether the primary effect of the global crisis on eastern european firms took the form of an adverse demand shock or a credit crunch using a unique firm survey conducted by the world bank in six eastern european countries during the 2008 2009 financial crisis the paper shows that the drop in demand for firms products and services was overwhelmingly reported as the most damaging adverse effect of the crisis other usual suspects such as rising debt or reduced access to credit were reported as minor the paper also finds that the changes in firms sales and installed capacity are significantly and robustly correlated with different demand sensitivity measures of the sector in which the firms operate however they are not robustly correlated with various proxies for firms credit needs

cagan s model of hyperinflation under rational expectations this paper studies p cagan s model of the german hyperinflation under the hypothesis that adaptive expectations are rational it shows that inference about the key money demand elasticity parameter a is very senstitive to the specification of the dynamic interaction of the unobserved money demand shock with prices and money in particular if t j sargent s 1977 specification is modified then his basic conclusions are overturned identification of a does not require prior knowledge about the covariance of unobserved shock terms and d ata on the german hyperinflation imply a sharp not loose estimate of a which is of plausible magnitude finally informal tests indicate that modifying sargent s specification gives rise to improved model fit copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the sensitivity of tests of the intertemporal allocation of consumption to near rational alternatives suppose a consumer sets consumption equal to income each period rather than following the optimal permanent income decision rule how much utility does he lose this paper finds that the answer is typically less than 10 cents 1 per quarter in environments specified by popular tests on aggregate data it includes calculations of the costs of excess sensitivity and excess smoothness to income and interest rate changes and the costs of ignoring information it concludes that the theory does not make predictions for aggregate tests that are robust to small costs such as information or transactions copyright 1989 by american economic association

portfolio choices and asset prices the comparative statics of ambiguity aversion we investigate the comparative statics of more ambiguity aversion as defined by klibanoff marinacci and mukerji 2005 in the context of the static two asset portfolio problem it is not true in general that more ambiguity aversion reduces the demand for the uncertain asset we exhibit some sufficient conditions to guarantee that ceteris paribus an increase in ambiguity aversion reduces the demand for the ambiguous asset and raises the equity premium for example this is the case when the set of plausible distributions of returns can be ranked according to the monotone likelihood ratio order we also show how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims

disasterization a simple way to fix the asset pricing properties of macroeconomic models a central difficulty in economics is to create a model with both good business cycle properties and asset pricing properties i show how to solve this difficulty by a simple portable modeling device the disasterization of models take an economy with good business cycle properties and create a new disasterized economy which is essentially identical to the original one except that disasters can destroy part of the capital stock and productivity in such a disasterized economy asset prices exhibit high and volatile risk premia but macro variables remain unchanged perturbations of this benchmark allow for feedback from finance to macro

aggregation over time and the inverse optimal predictor problem for adaptive expectations in continuous time this paper describes the continuous time stochastic process for money and inflation under which cagan s adaptive expectations model is optimal it then analyzes how data formed by sampling money and prices at discrete points in time would behave this abstract was borrowed from another version of this item