nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

measuring the liquidity effect this paper measures the effect on the federal funds rate of an open market operation the paper deals with simultaneous equations bias by developing a proxy for the errors the federal reserve makes in forecasting the extent to which treasury operations will add or drain reserves available to private banks these errors induce fluctuations in bank reserves which have measurable consequences for the federal funds rate the paper estimates that a reduction in nonborrowed reserves of 30 million if sustained for an entire fourteen day reserve maintenance period will cause the federal funds rate to rise by ten basis points copyright 1997 by american economic association

the liquidity trap and u s interest rates in the 1930s most current literature assumes that a central bank loses the ability to influence interest rates through variations in reserve supply as soon as overnight rates have been driven to zero i argue that reserve supply can be directly related to longer term rates when overnight rates are zero because banks reserve demand is then defined by the role of cash as an asset free of interest rate risk i present evidence that reserve supply affected longerterm interest rates in the u s from 1934 through 1939 while overnight rates were at the zero floor even when the changes in reserve supply reflected factors unlikely to have affected expectations of future overnight rates

the principal agent relationship with an informed principal the case of private values we analyze the principal agent relationship when the principal has private information as a three stage noncooperative game contract proposal acceptance refusal and contract execution we assume that the information does not directly affect the agent s payoff private values equilibrium exists and is generically locally unique moreover it is pareto optimal for the different types of principal the principal generically does strictly better than when the agent knows her information equilibrium allocations are the walrasian equilibria of an economy where the traders are different types of principal and exchange the slack on the agent s individual rationality and incentive compatibility constraints

the second moments matter the impact of macroeconomic uncertainty on the allocation of loanable funds abstract this paper investigates how variations in macroeconomic uncertainty distort commercial banks allocation of loanable funds by analyzing the dispersion of banks total loan to asset ratios over a quarter century period

precautionary reserves and the interbank market large excess reserve balances are held by banks in the u s despite the ability of large banks to closely target end of day balances close to zero we show that the friction faced by small banks to participate in the fed funds market leads to all banks holding precautionary reserves the precautionary motive for reserves can explain that small banks hold relatively large amounts of excess reserves overnight while at the same time lending large amounts to large banks small banks are large net lenders despite their reluctance to lend as large of a percentage of available balances during the day as large banks we also explain an increase in the volatility of the fed funds rate late in the day

east west joint ventures and buyback contracts abstract contractual joint ventures cjvs and the buyback form of countertrade are popular methods that socialist countries use to attract foreign investment in this paper we explore some reasons why this is so and also explain two predominant characteristics of these contracts the existence of sharing rules and minimum standard requirements on inputs the model stresses the incentive problems involved when a socialist host country which does not allow foreign direct investment uses a cjv to obtain the fruits of some knowledge based production process from a multinational enterprise

to give or to forgive aid versus debt relief is generalized debt relief an effective development strategy or should assistance be tailored to countries characteristics to answer this question the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief since offering such a menu is costly it is preferred by donors only when the cost of assistance is low and the probability that an indebted country is creditworthy is high enough for lower probabilities and higher costs of assistance donors prefer a policy of only debt relief very limited aid is the preferred policy only for high costs of assistance and low probabilities that the government is creditworthy

multilateral and bilateral loans versus grants issues and evidence this paper examines a wide range of issues relating to the mix between loans and grants as well as the degree of concessionality of loans a number of empirical tests are carried out based on annual panel data over 1970 to 1999 for 22 donor countries and 72 recipient countries based on the tests we observe that for bilateral donors past grant loan mix and hence reflows from past transfers do not influence the volume of current resource transfers our tests also show that the rate of official borrowing by the recipients and by deduction the extent of their past debt burden is positively influenced by the extent of the concessionality of such loans irrespective of whether it is in the form of subsidised interest rates or longer grace periods the paper concludes with a review of the circumstances in which grants soft loans and non concessional loans might have their respective comparative advantage as well as a discussion of the need so as to overcome the negative incentive problems of soft loans for a typical concessional loan package to be separated into two constituent parts this would enable the recipient to be given the grant component and the option to take from the non concessional loan component as much as desired

counterpart funding requirements and the foreign aid procyclicality puzzle official development assistance is a key source of external finance in many developing countries a striking feature of these aid flows is their positive correlation with business cycles in recipient countries this pattern is puzzling in that it reinforces recipients already strong and costly macroeconomic fluctuations we propose a simple model of investment financing and aid provision under asymmetric information that rationalizes such a pattern we assume that donor agencies and recipient governments value projects differently and that donors know less than recipients do about project characteristics we show that donors can make a recipient government identify high return projects by requiring that the latter contribute some of its own funds to projects providing these matching grants or counterpart funds is less affordable for recipients during economic downturns which leads to aid procyclicality our model produces aid contracts consistent with those used by aid agencies rationalizes observed aid patterns and yields a rich set of testable empirical predictions

atheoretical macroeconometrics a critique abstract the spurious nature of the restrictions used to identify many macroeconometric models has led some researchers to advocate a style of econometric inquiry that is less dependent on prior theoretical restrictions of the sort that were central to the approach of the cowles commission this development which we call atheoretical macroeconometrics is summarized and evaluated in the current paper it is contrasted with an updated version of the cowles commission approach we conclude that while some of the exercises of atheoretical macroeconometrics are valid those that have attracted the most attention and appear the most innovative exogeneity testing impulse response analysis and policy analysis using estimated vector autoregressions are based on incorrect analysis

the federal funds market excess reserves and unconventional monetary policy abstract following the bankruptcy of lehman brothers interbank borrowing and lending dropped whereas reserve holdings of depository institutions skyrocketed as the fed injected liquidity into the u s banking sector this paper introduces bank liquidity risk and limited market participation into a real business cycle model with ex ante identical financial intermediaries and shows in an analytically tractable way how interbank trade and excess reserves emerge in general equilibrium investigating the role of the federal funds market and unconventional monetary policy for the propagation of aggregate real and financial shocks i find that federal funds market participation is irrelevant in response to standard supply and demand shocks whereas it matters for uncertainty shocks i e mean preserving spreads in the cross section of liquidity risk liquidity injections by the central bank can absorb the effects of financial shocks on the real economy although excess reserves might increase and federal funds might be crowded out as a side effect

a monetary business cycle model for india a new keynesian monetary business cycle model is constructed to study why monetary transmission in india is weak our models feature banking and financial sector frictions as well as an informal sector the predominant channel of monetary transmission is a credit channel our main finding is that base money shocks have a larger and more persistent effect on output than an interest rate shock as in the data the presence of an informal sector hinders monetary transmission contrary to the consensus view financial repression in the form of a statutory liquidity ratio and administered interest rates does not weaken monetary transmission

budget support versus project aid a theoretical appraisal should donors interested in the effectiveness of developmental programmes rely on conditional budget support or on project aid to answer this question we present a model in which only a subset of developmental expenditures can be subject to conditionality we show that budget support is preferable to project aid when the preferences of donors and recipients are aligned and when assistance is small relative to the recipients own resources furthermore when donors cannot observe the recipient s type they may impose higher levels of conditionality to separate committed governments from uncommitted ones

debt relief for poor countries conditionality and effectiveness this paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries we develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government and model conditionality as an imperfectly enforceable dynamic contract in contrast to the recent practice of fully cancelling debt optimal incentive compatible conditionality is accompanied by a concessionality level that implies a combination of subsidized loans and outright grants the optimal concessionality level depends on the recipient s access to international financial markets and on the strength of the conflict of interest incentive compatible transfers with optimal concessionality levels generate substantial welfare gains if the donor does not implement the optimal concessionality level and provides subsidized loans only then the effectiveness of transfers decreases in the long run with severe welfare implications in contrast transfers are less effective in the short run if the donor offers outright grants only

contract choice in modern agriculture cash rent versus cropshare e conomists have expended enormous effort examining the rationale for various contractual arrangements in agriculture particularly sharecropping while economists have made considerable theoretical efforts to understand agricultural contracts few empirical studies have been undertaken the dearth of empirical analyses of agricultural contracts is particularly striking for modern western agriculture this is an important omission not only because the existing empirical work tends to focus on the question of efficiency but also because the theoretical models tend to examine contracts that bear little resemblance to those found in the united states today

understanding the accumulation of bank and thrift reserves during the u s financial crisis abstract the level of aggregate excess reserves held by u s depository institutions increased significantly at the peak of the 2007 2009 financial crisis although the amount of aggregate reserves is determined almost entirely by the policy initiatives of the central bank that act on the asset side of its balance sheet the motivations of individual banks in accumulating reserves differ and respond to the impact of changes in the economic environment on individual institutions we undertake a systematic analysis of this massive accumulation of excess reserves using bank level data for more than 7000 commercial banks and almost 1000 savings institutions during the u s financial crisis we propose a testable stochastic model of reserves determination when interest is paid on reserves which we estimate using bank level data and censored regression methods we find evidence primarily of a precautionary motive for reserves accumulation with some notable heterogeneity in the response of reserves accumulation to external and internal factors of the largest banks compared with smaller banks we combine propensity score matching and a difference in differences approach to determine whether the beneficiaries of the capital purchase program of the troubled asset relief program accumulated less cash including reserves than non beneficiaries contrary to anecdotal evidence we find that banks that participated in the program accumulated less cash including reserves than nonparticipants in the initial quarters after the capital injection

autonomy switching regimes and super exogeneity abstract in recent years the concept of switching regimes and super exogeneity has played a dominant part in the econometric debate the relevance of this discussion for the theories of economic policy is developed by lucas sargent and others in this article the very close parallel to the debate about autonomy in the 1940s is shown

the role of financial intermediaries in monetary policy transmission the recent financial crisis has stimulated theoretical and empirical research on the propagation mechanisms underlying business cycles in particular on the role of financial frictions many issues concerning the interactions between banking and monetary policy forced policy makers to redefine economic policies and motivated macroeconomists to focus on the implications of financial intermediation constraints for asset price fluctuations the behavior of non financial firms households governments and in turn for real macroeconomic performance this paper surveys research on the role of financial intermediaries and financial frictions in the transmission of monetary policy and discusses how to design both the new banking regulatory and supervisory structures and monetary policy in order to stabilize the economy it also serves as an introduction to this special issue

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

why commercial banks held excess reserves the japanese experience of the late 1990s we investigated empirically why japanese banks held excess reserves in the late 1990s specifically we pin down two factors explaining the demand for excess reserves a low short term interest rate or call rate and the fragile financial health of banks the virtually zero call rate increased the demand for excess reserves substantially and a high bad loans ratio largely contributed to the increase in excess reserve holdings we found that the holdings of excess reserves would fall by two thirds if the call rate were to be raised to its level prior to the adoption of the zero interest rate policy and the bad loans ratio were to fall by 50

the federal reserve s operating procedure nonborrowed reserves borrowed reserves and the liquidity effect abstract recently a number of researchers christiano and eichenbaum 1992 christiano et al 1996a b 1997 evans and marshall 1998 strongin 1995 pagan and robertson 1995 brunner 1994 claim to have found evidence of a statistically significant liquidity effect in a recursive structural var using nonborrowed reserves nbr it is claimed that innovations to nbr reflect the exogenous policy actions of the fed this paper argues that the opposite is true specifically i show that the fed has an incentive to offset bank initiated discount window borrowing when it implements the federal open market committee s policy directive and that it has done so since the late 1950s this practice has created a negative contemporaneous covariance between nbr and the funds rate that has been incorrectly attributed to the liquidity effect by showing that these models capture the endogenous response of the fed to bank borrowing on nbr rather than the effect of exogenous policy actions on the funds rate this paper also resolves the puzzle of the vanishing liquidity effect noted by pagan and robertson 1995 and christiano 1995

gradualism in aid and reforms abstract dynamic strategic interaction between an international donor and a recipient government is analyzed to review the efficacy of aid conditionality for governance reforms in ldcs it is shown that irrespective of whether the donor can fully commit to the aid program or not for maximal improvement in governance the aid should be disbursed in increments with each subsequent tranche being conditional on prior reforms demonstrating aid gradualism while the attraction of future aid incentivizes authorities to push through reforms these reforms in turn also make aid diversion less feasible further under full commitment the optimal aid package may involve offering scope for interim aid diversion to the elite for long term improvement in governance with such aid diversion being more likely to happen when the total aid budget is large with only partial commitment so that time consistency requires the donor to reconfigure aid in each round it is shown that a interim aid diversion is no longer viable and b both aid and reforms exhibit strong gradualism or what is known as the starting small and grow later principle in commitment models

aid conditionality and military expenditure reduction in developing countries models of asymmetric information this paper analyzes problems of implementing noneconomic conditionality such as military expenditure reduction in the granting of foreign aid given the presence of asymmetric information the authors present two conceptually separate principal agent models to capture the stylized facts of multilateral and bilateral aid negotiations respectively the first model is an application of the problem of adverse selection when there is more than one type of principal donor with varying objectives the second model extends moral hazard to double moral hazard where neither principal nor agent recipient can fully observe or verify each other s strategies copyright 1995 by royal economic society