inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

an experimental approach to valuing new differentiated products abstract an experimental store was created to evaluate initial demand for locally produced and guaranteed tender steak products as a more realistic alternative to contingent valuation cv and dichotomous choice experimental methods strengths of the approach are incentive compatibility a realistic consumption set and a familiar choice environment consumers selected among usda choice premium quality lean guaranteed tender and locally produced strip steaks a double hurdle count data model indicated initial willingness to pay wtp for locally produced steak comparable to prior cv results but demand was highly elastic demand for premium quality steak crowded out demand for the guaranteed tender product contrasting with prior dichotomous choice experimental results

effects of financial innovations on market volatility when beliefs are heterogeneous abstract consider a model with two logarithmic utility maximizer agents that observe aggregate consumption but disagree about its expected rate of change markets are incomplete we first show that volatility of the interest rate in an economy with additional information is higher in a complete markets economy with no additional information there are two differences in volatility with the previous the first one due to the increase in volatility of the wealth share of the individuals is always positive the second difference is the change in covariance between the components of the interest rate volatility and can be positive or negative

belief disagreements and collateral constraints belief disagreements have been suggested as a major contributing factor to the recent subprime mortgage crisis this paper theoretically evaluates this hypothesis i assume that optimists have limited wealth and take on leverage so as to take positions in line with their beliefs to have a significant effect on asset prices they need to borrow from traders with pessimistic beliefs using loans collateralized by the asset itself since pessimists do not value the collateral as much as optimists do they are reluctant to lend which provides an endogenous constraint on optimists ability to borrow and to influence asset prices i demonstrate that the tightness of this constraint depends on the nature of belief disagreements optimism concerning the probability of downside states has no or little effect on asset prices because these types of optimism are disciplined by this constraint instead optimism concerning the relative probability of upside states could have significant effects on asset prices this asymmetric disciplining effect is robust to allowing for short selling because pessimists that borrow the asset face a similar endogenous constraint these results emphasize that what investors disagree about matters for asset prices to a greater extent than the level of disagreements when richer contracts are available relatively complex contracts that resemble some of the recent financial innovations in the mortgage market endogenously emerge to facilitate betting

extrapolation and bubbles abstract we present an extrapolative model of bubbles in the model many investors form their demand for a risky asset by weighing two signals an average of the asset s past price changes and the asset s degree of overvaluation and waver over time in the relative weight they put on them the model predicts that good news about fundamentals can trigger large price bubbles that bubbles will be accompanied by high trading volume and that volume increases with past asset returns we present empirical evidence that bears on some of the model s distinctive predictions

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

a welfare criterion for models with distorted beliefs this paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs instead of taking a stand on whose belief is correct our criterion asserts an allocation to be belief neutral ine cient if it is ine cient under any convex combination of agents beliefs while this criterion gives an incomplete ranking of social allocations it can identify negative sum speculation in a broad range of prominent models with distorted beliefs

news noise and fluctuations an empirical exploration a common view of the business cycle gives a central role to anticipations consumers and firms continuously receive information about the future which is sometimes news and sometimes just noise based on this information consumers and firms choose spending and because of nominal rigidities spending affects output in the short run if ex post the information turns out to be news the economy adjusts gradually to a new level of activity if it turns out to be just noise the economy returns to its initial state therefore the dynamics of news and noise generate both short run and long run changes in aggregate activity this view appears to capture many of the aspects often ascribed to fluctuations the role of animal spirits in affecting demand spirits coming here from a rational reaction to information about the future the role of demand in affecting output in the short run together with the notion that in the long run output follows a natural path determined by fundamentals in this paper we examine whether this view is consistent with the data we reach three main conclusions the first two methodological the third substantive structural vars typically cannot recover news and noise shocks the reason is straightforward if agents face a signal extraction problem and are unable to separate news from noise then the econometrician faced with either the same data as the agents or a subset of these data cannot do it either while structural estimation methods cannot recover the actual time series for news and noise shocks either they can recover underlying structural parameters and thus the relative role and dynamic effects of news and noise shocks estimation of both a simple model and then of a more elaborate dsge model suggest that agents indeed solve such a signal extraction problem and that noise shocks play an important role in determining short run dynamics recent efforts to estimate business cycle models in which expectations about the future play an important role include christiano et al 2010 and schmitt grohe and uribe 2012 those papers follow the approach of jaimovich and rebelo 2009 and model news as perfectly anticipated productivity changes that will occur at

a risk centric model of demand recessions and speculation we provide a continuous time risk centric representation of the new keynesian model which we use to analyze the interactions between asset prices financial speculation and macro economic outcomes when output is determined by aggregate demand in principle interest rate policy is highly effective in dealing with shocks to asset valuations however in practice monetary policy faces a wide range of constraints if these constraints are severe a decline in risky asset valuations generates a demand recession this reduces earnings and generates a negative feedback loop between asset prices and aggregate demand in the recession phase average beliefs matter not only because they affect asset valuations but also because they determine the strength of the amplification mechanism in the ex ante boom phase belief disagreements or heterogeneous asset valuations matter because they induce investors to speculate this speculation exacerbates the crash by reducing high valuation investors wealth when the economy transitions to recession which depresses wealth weighted average beliefs macroprudential policy that restricts speculation in the boom can pareto improve welfare by increasing asset prices and aggregate demand in the recession

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

disaster risk and preference shifts in a new keynesian model in rbc models disaster risk shocks reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall through their effects on agents preferences gourio 2012 this paper offers a solution to this puzzle by developing a new keynesian model with such a small but time varying probability of disaster we show that price stickiness combined with an eis smaller than unity restores procyclical consumption and wages while preserving countercyclical risk premia in response to disaster risk shocks the mechanism then provides a rationale for discount factor first and second moment uncertainty shocks

managing credit booms and busts a pigouvian taxation approach we study a dynamic model in which the interaction between debt ac cumulation and asset prices magni es credit booms and busts we nd that borrowers do not internalize these feedback eects and therefore suf fer from excessively large booms and busts in both credit ows and asset prices we show that a pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare we calibrate the model by reference to i the us small and medium sized enterprise sector and ii the household sector and nd the optimal tax to be countercycli cal in both cases dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms

risk premia and the real effects of money this paper proposes a flexible price theory of the role of money in an economy with incomplete idiosyncratic risk sharing when the risk premium goes up money provides a safe store of value that prevents interest rates from falling reducing investment investment is too high during booms when risk is low and too low during slumps when risk is high monetary policy cannot correct this money is superneutral and ricardian equivalence holds the optimal allocation requires the friedman rule and a tax subsidy on capital the real effects of money survive even in the cashless limit

speculation and risk sharing with new financial assets while the traditional view of nancial innovation emphasizes the risk sharing role of new nancial assets belief disagreements about these assets naturally lead to speculation which represents a powerful economic force in the opposite direction this paper investigates the eect of nancial innovation on portfolio risks in an economy when both the risk sharing and the speculation forces are present financial assets provide hedging services but they are also subject to speculation because traders do not necessarily agree about their payos i de ne the average variance of traders net worths as a measure of portfolio risks for this economy and i decompose it into two components the uninsurable variance de ned as the average variance that would obtain if there were no belief disagreements and the speculative variance de ned as the residual variance that results from speculative trades based on belief disagreements financial innovation always decreases the uninsurable variance because new assets increase the possibilities for risk sharing my main result shows that nancial innovation also always increases the speculative variance this is true even if traders completely agree about the payos of new assets the intuition behind this result is the hedge more bet more eect traders use new assets to hedge their bets on existing assets which in turn enables them to place larger bets and take on greater risks my second set of results concern endogenous nancial innovation when belief disagreements are su ciently large a pro t seeking market maker introduces assets that maximize the average variance among all possible choices completely disregarding the risk sharing motive for nancial innovation my third set of results concern a calibration of the model in the context of the gdp indexed assets proposed by athanasoulis and shiller 2001 when traders have reasonable amounts of belief disagreements these assets would have the unintended consequence of increasing their consumption risks

financial innovation and asset price volatility we compare asset prices in an overlapping generations model for incomplete and complete markets individuals within a generational cohort have heterogeneous beliefs about future states of the economy and thus would like to make bets against each other in the incomplete markets economy agents cannot make such bets asset price volatility is very small the situation changes dramatically when markets are completed through financial innovations as the set of available securities now allows agents with different beliefs to place bets against each other wealth shifts across agents and generations such changes in the wealth distribution lead to substantial asset price volatility

credit crises precautionary savings and the liquidity trap we use a model a la bewly huggett ayagari to explore the eects of a credit crunch on consumer spending households borrow and lend to smooth idiosyncratic income shocks facing an exogenous borrowing constraint we look at the economy response after an unexpected permananent tightening of this constraint the interest rate drops sharply in the short run and then adjusts to a lower steady state level this is due to the fact that after the shock a large fraction of agents is far below their target holdings of precautionary savings and this generates a large temporary positive shock to net lending we then look at the eects on output here two opposing forces are present as households can deleverage in two ways by consuming less and by working more we show that under a reasonable parametrization the eect on consumer spending dominates and precautionary behavior generates a recession if we add nominal rigidities two things happen i supply side responses are muted and ii there is a lower bound on the interest rate adjustment these two elements tend to amplify the recession caused by the credit tightening

intertemporal asset pricing with heterogeneous beliefs abstract we examine the behaviour of the interest rate asset prices and asset holdings in an economy with heterogeneous rationally updated beliefs about the expected rate of production growth the equilibrium interest rate is a weighted average of the interest rates that would prevail in economies populated by homogeneous agents with the beliefs of the respective agents in the heterogeneous model the weights are given by the fractions of total wealth held financial innovation affects the dynamics of allocations and prices but preserves the aggregate output process and the structure of equilibrium asset prices also display the wealth weighted average characterization journal of economic literature classification numbers c60 d52 d91 g12

pecuniary externalities in economies with financial frictions this article characterizes the efficiency properties of competitive economies with financial constraints in which phenomena such as fire sales and financial amplification may arise we show that financial constraints lead to two distinct types of pecuniary externalities distributive externalities that arise from incomplete insurance markets and collateral externalities that arise from price dependent financial constraints for both types of externalities we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations we also show that fire sales and financial amplification are neither necessary nor sufficient to generate inefficient pecuniary externalities we demonstrate how to employ our framework in a number of applications whereas collateral externalities generally lead to over borrowing the distortions from distributive externalities may easily flip sign leading to either under or over borrowing both types of externalities may lead to under or over investment

optimal time consistent macroprudential policy collateral constraints widely used in models of financial crises feature a pecuniary externality agents do not internalize how borrowing decisions made in good times affect collateral prices during a crisis we show that under commitment the optimal financial regulator s plans are time inconsistent and study time consistent policy quantitatively this policy reduces sharply the frequency and magnitude of crises removes fat tails from the distribution of asset returns and increases social welfare in contrast constant debt taxes are ineffective and can be welfare reducing while an optimized macroprudential taylor rule is effective but less so than the optimal time consistent policy

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

survival and long run dynamics with heterogeneous beliefs under recursive preferences i analytically characterize the long run behavior of an economy with two types of agents who differ in their beliefs and are endowed with homothetic recursive preferences agents with more incorrec

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

margin based asset pricing and deviations from the law of one price in a model with heterogeneous risk aversion agents facing margin constraints we show how securities required returns increase in both their betas and their margin requirements negative shocks to fundamentals make margin constraints bind lowering risk free rates and raising sharpe ratios of risky securities especially for high margin securities such a funding liquidity crisis gives rise to bases that is price gaps between securities with identical cash flows but different margins in the time series bases depend on the shadow cost of capital which can be captured through the interest rate spread between collateralized and uncollateralized loans and in the cross section they depend on relative margins we test the model empirically using the credit default swap bond bases and other deviations from the law of one price and use it to evaluate central banks lending facilities jel g01 g12 g13 e44 e50 the paramount role of funding constraints becomes particularly salient during liquidity crises with the one that started in 2007 being an excellent case in point banks unable to fund their operations closed down and the funding problems spread to other investors such as hedge funds that relied on bank funding therefore traditional liquidity providers became forced sellers interest rate spreads increased dramatically treasury rates dropped sharply and central banks stretched their balance sheets to facilitate funding these funding problems had significant asset pricing effects the most extreme example being the failure of the law of one price loop securities with nearly

wage inequalities a result of different levels and fields of tertiary education in this article we examine the impact of tertiary education on the amounts of wages in slovenia for 2011 we use micro data from the statistical survey structure of earnings statistics and micro data from the survey of graduates from tertiary education we found out that there are significant differences in the amounts of wages as regards the level and field of education region and activity of the company where the person is employed also plays an important role in wage determination also the effects of gender and public private sector are statistically significant using the average wage per hour as dependent variable gives similar results as the average annual wages

uncertainty shocks and balance sheet recessions this paper investigates the origin and propagation of balance sheet recessions i first show that in standard models driven by tfp shocks the balance sheet channel disappears when agents can write contracts on the aggregate state of the economy optimal contracts sever the link between leverage and aggregate risk sharing eliminating the concentration of aggregate risk that drives balance sheet recessions i then show that uncertainty shocks can help explain this concentration of aggregate risk and drive balance sheet recessions even with contracts on aggregate shocks the mechanism is quantitatively important and i explore implications for financial regulation

the macroeconomics of shadow banking we propose a dynamic macroeconomic model of nancial intermediation in an environment where households demand liquid assets in contrast to the literature intermediaries can issue equity without any friction in normal times intermediaries maximize liquidity creation by levering up the collateral value of their assets a process we call shadow banking a rise in uncertainty causes investors to demand liquidity in bad states intermediaries respond by simultaneously deleveraging and substituting toward safe liabilities shadow banking eectively shuts down prices fall and investment plummets the model generates amplication via endogenous collateral runs as well as ight to quality eects the model s macroeconomic eects are consistent with a slow economic recovery even when and especially when intermediary capital is high we analyze the impact of several policy interventions in the areas of unconventional monetary policy and regulatory reform

the rate of return on everything 1870 2015 what is the aggregate real rate of return in the economy is it higher than the growth rate of the economy and if so by how much is there a tendency for returns to fall in the long run which particular assets have the highest long run returns we answer these questions on the basis of a new and comprehensive data set for all major asset classes including housing the annual data on total returns for equity housing bonds and bills cover 16 advanced economies from 1870 to 2015 and our new evidence reveals many new findings and puzzles