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

the finance growth nexus evidence from bank branch deregulation this paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the united states we find that the rates of real per capita growth in income and output increase significantly following intrastate branch reform we also argue that the observed changes in growth are the result of changes in the banking system improvements in the quality of bank lending not increased volume of bank lending appear to be responsible for faster growth

foreclosures house prices and the real economy from 2007 to 2009 states without a judicial requirement for foreclosures were twice as likely to foreclose on delinquent homeowners analysis of borders of states with differing foreclosure laws reveals a discrete jump in foreclosure propensity as one enters nonjudicial states using state judicial requirement as an instrument for foreclosures we show that foreclosures led to a large decline in house prices residential investment and consumer demand from 2007 to 2009 as foreclosures subsided from 2011 to 2013 the foreclosure rates in nonjudicial and judicial requirement states converged and we find some evidence of a stronger recovery in nonjudicial states

uncertainty and risk in financial markets this paper considers a general equilibrium model in which the distinction between uncertainty and risk is formalized by assuming agents have incomplete preferences over statecontingent consumption bundles as in bewley 1986 without completeness individual decision making depends on a set of probability distributions over the state space a bundle is preferred to another if and only if it has larger expected utility for all probabilities in this set when preferences are complete this set is a singleton and the model reduces to standard expected utility in this setting we characterize pareto optima and equilibria and show that the presence of uncertainty generates robust indeterminacies in equilibrium prices and allocations for any specification of initial endowments we derive comparative statics results linking the degree of uncertainty with changes in equilibria despite the presence of robust indeterminacies we show that equilibrium prices and allocations vary continuously with underlying fundamentals equilibria in a standard risk economy are thus robust to adding small degrees of uncertainty finally we give conditions under which some assets are not traded due to uncertainty aversion

finance and business cycles the credit driven household demand channel what is the role of the financial sector in explaining business cycles this question is as old as the field of macroeconomics and an extensive body of research conducted since the global financial crisis of 2008 has offered new answers the specific idea put forward in this article is that expansions in credit supply operating primarily through household demand have been an important driver of business cycles we call this the credit driven household demand channel while this channel helps explain the recent global recession it also describes economic cycles in many countries over the past 40 years

the swedish banking crisis roots and consequences the article analyses the swedish banking crisis in the early 1990s newly deregulated credit markets after 1985 stimulated a competitive process between financial institutions where expansion was given priority combined with an expansive macro policy this contributed to an asset price boom the subsequent crisis resulted from a highly leveraged private sector being simultaneously hit by three major exogenous events a shift in monetary policy with an increase in pre tax interest rates a tax reform that increased after tax interest rates and the erm crisis combined with some overinvestment in commercial property high real interest rates contributed to breaking the boom in real estate prices and triggering a downward price spiral resulting in bankruptcies and massive credit losses the government rescued the banking system by issuing a general guarantee of bank obligations the total direct cost to the taxpayer of the salvage has been estimated at around 2 per cent of gdp copyright 1999 by oxford university press

financial fragility in small open economies firm balance sheets and the sectoral structure episodes of large capital inflows in small open economies are often associated with a shift of resources from the tradable to the non tradable sector and sometimes lead to balance of payments crises this article builds a two sector dynamic model to study the evolution of the sectoral structure and its impact on financial fragility the model embeds a static mechanism of balance of payments crisis which produces multiple equilibria within a single time period when the non tradable sector is large enough compared to the tradable sector the article studies the dynamics induced by an increase in financial openness it shows that the relative size of the non tradable sector overshoots which makes the economy more likely to be financially fragile during the transitory dynamics using an extended version of the model the article conducts a quantitative analysis and shows that this mechanism accounts well for several episodes of large capital inflows that led to financial crises

interim efficient allocations under uncertainty abstract this paper considers an exchange economy under uncertainty with asymmetric information uncertainty is represented by multiple priors and posteriors of agents who have either bewley s incomplete preferences or gilboa schmeidler s maximin expected utility preferences the main results characterize interim efficient allocations under uncertainty that is they provide conditions on the sets of posteriors thus implicitly on the way how agents update the sets of priors for non existence of a trade which makes all agents better off at any realization of private information for agents with the incomplete preferences the condition is necessary and sufficient but for agents with the maximin expected utility preferences the condition is sufficient only a couple of necessary conditions for the latter case are provided

capital flows consumption booms and asset bubbles a behavioural alternative to the savings glut hypothesis bernanke 2005 hypothesized that a global savings glut was causing large trade imbalances however we show that the global savings rates did not show a robust upward trend during the relevant period moreover if there had been a global savings glut there should have been a large investment boom in the countries that imported capital instead those countries experienced consumption booms national asset bubbles explain the international imbalances the bubbles raised consumption resulting in large trade deficits in a sample of 18 oecd countries plus china movements in home prices alone explain half of the variation in trade deficits

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

diverse beliefs survival and the market price of risk we study prices and allocations in a complete markets pure exchange economy in which there are two types of agents with different priors over infinite sequences of the aggregate endowment aggregate consumption growth evolves exogenously according to a two state markov process the economy has two types of agents one that learns about transition probabilities and another that knows them we examine allocations the market price of risk and the rate at which asset prices converge to values that would be computed under the assumption that all agents know the transition probabilities cogley and sargent 2008 showed that market prices of risk would be high in an economy with a risk neutral bayesian representative agent who learns about the parameters of a transition matrix for aggregate consumption growth starting with a pessimistic prior in 1933 1 this article studies the robustness of that finding to a per turbation that adds a small fraction of agents who know the parameters of the trans ition matrix traders participate in a walrasian equilibrium in which they do not infer information from prices grossman 1981 23 under what we assume to be the true data generating mechanism the survival of the fittest force analysed by blume and easley 2006 causes the more knowledgeable agents influence on equilibrium prices to grow over time along with their wealth we study how quickly that dissipates the effects of the initial pessimism of the less informed agents on equilibrium prices 4 to give the survival mechanism a large scope to moderate the effects of initial pessim ism we assume complete markets that allow agents to make trades of claims to wealth that are motivated solely by the different subjective probabilities they put on future states that gives the agents many opportunities to place bets that over time stochastically increase the share of wealth of the traders who know transition probabilities we solve a pareto problem to compute competitive equilibrium prices and alloca tions thereby implicitly defining an initial allocation of wealth we study how the market price of risk evolves as a function of the relative pareto weight on the better informed agent among other things we want to know how large the pareto weight on

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

overnight borrowing interest rates and extreme value theory we examine the dynamics of extreme values of overnight borrowing rates in an inter bank money market before a financial crisis during which overnight borrowing rates rocketed up to simple annual 4000 percent it is shown that the generalized pareto distribution fits well to the extreme values of the interest rate distribution we also provide predictions of extreme overnight borrowing rates before the crisis the examination of tails extreme values provides answers to such issues as what are the extreme movements expected in financial markets have we already seen the largest moves is there a possibility for even larger movements and are there theoretical processes that can model the type of fat tails in the observed data the answers to such questions are essential for proper management of financial exposures and laying ground for regulations

interim efficiency with meu preferences abstract recently kajii and ui 2009 17 proposed to characterize interim efficient allocations in an exchange economy under asymmetric information when uncertainty is represented by multiple posteriors when agents have bewley s incomplete preferences kajii and ui 2009 17 proposed a necessary and sufficient condition on the set of posteriors however when agents have gilboa schmeidler s maxmin expected utility preferences they only propose a sufficient condition the objective of this paper is to complete kajii and ui s work by proposing a necessary and sufficient condition for interim efficiency for various models of ambiguity aversion and in particular maxmin expected utility our proof is based on a direct application of some results proposed by rigotti shannon and stralecki 2008 24

the employment effects of credit market disruptions firm level evidence from the 2008 9 financial crisis this article investigates the effect of bank lending frictions on employment outcomes i construct a new data set that combines information on banking relationships and employment at 2 000 nonfinancial firms during the 2008 9 crisis the article first verifies empirically the importance of banking relationships which imply a cost to borrowers who switch lenders i then use the dispersion in lender health following the lehman crisis as a source of exogenous variation in the availability of credit to borrowers i find that credit matters firms that had precrisis relationships with less healthy lenders had a lower likelihood of obtaining a loan following the lehman bankruptcy paid a higher interest rate if they did borrow and reduced employment by more compared to precrisis clients of healthier lenders consistent with frictions deriving from asymmetric information the effects vary by firm type lender health has an economically and statistically significant effect on employment at small and medium firms but the data cannot reject the hypothesis of no effect at the largest or most transparent firms abstracting from general equilibrium effects i find that the withdrawal of credit accounts for between one third and one half of the employment decline at small and medium firms in the sample in the year

risk aversion in the theory of expected utility with rank dependent probabilities expected utility with rank dependent probability theory is a model of decision making under risk where the preference relations on the set of probability distributions is represented by the mathematical expectation of a utility function with respect to a transformation of the probability distributions on the set of outcomes this paper defines based on g teaux differentiability measures of risk aversion for such preferences which characterize the relation more risk averse and applies these measures to the analysis of unconditional and conditional portfolio choice problems

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

on the continuum approach of spatial and some local public goods or product differentiation models some problems abstract models with a continuum of consumers and locations such that each consumer can purchase goods in only one location are examined such models are common in the literature of the new urban economics an approximation by economies with a finite number of consumers is shown to fail in the first two examples the continuum economy equilibrium exists and is unique but the finite economy has many equilibria example 1 or none at all example 2 in example 3 the continuum economy has no equilibrium but the finite economy has one these three examples employ location dependent utilities the fourth example illustrates the conceptual difficulties that arise in approximation when transportation cost is introduced even with location independent utilities the results are related to the literatures concerning product differentiation and spatial economies

interest rate pass through mortgage rates household consumption and voluntary deleveraging abstract exploiting variation in the timing of resets of adjustable rate mortgages arms we find that a sizable decline in mortgage payments up to 50 percent induces a significant increase in c

risk sharing in the small and in the large abstract this paper analyzes risk sharing in economies with no aggregate uncertainty when agents have non convex preferences in particular agents need not be globally risk averse or uncertainty averse in the sense of schmeidler 1989 we identify a behavioral condition under which betting is inefficient i e every pareto efficient allocation provides full insurance and conversely if and only if agents supporting probabilities defined as in rigotti et al 2008 have a non empty intersection our condition is consistent with empirical and experimental evidence documenting violations of convexity in either outcomes or utilities our results show that the connection between speculative betting and inconsistent beliefs does not depend upon global notions of risk or ambiguity aversion

subjective beliefs and ex ante trade we study a definition of subjective beliefs applicable to preferences that allow for the perception of ambiguity and provide a characterization of such beliefs in terms of market behavior using this definition we derive necessary and sufficient conditions for the efficiency of ex ante trade and show that these conditions follow from the fundamental welfare theorems when aggregate uncertainty is absent our results show that full insurance is efficient if and only if agents share some common subjective beliefs our results hold for a general class of convex preferences which contains many functional forms used in applications involving ambiguity and ambiguity aversion we show how our results can be articulated in the language of these functional forms confirming results existing in the literature generating new results and providing a useful tool for applications

ambiguity made precise a comparative foundation the theory of subjective expected utility has been recently extended to allow ambiguity to matter for choice we propose a notion of absolute ambiguity aversion by building on a notion of comparative ambiguity aversion we characterize it for a preference model which encompasses some of the most popular models in the literature we next build on these ideas to provide a definition of unambiguous act and event and show the characterization of the latter as an illustration we consider the classical ellsberg 3 color urn problem and find that the notions developed in the paper provide intuitive answers journal of economic literature classification number d81

efficient allocations under ambiguity abstract important implications of the expected utility hypothesis and risk aversion are that if agents have the same probability belief then consumption plans in every efficient allocation of resources under uncertainty are comonotone with the aggregate endowment and if their beliefs are concordant then the consumption plans are measurable with respect to the aggregate endowment we study these two properties of efficient allocations for models of preferences that exhibit ambiguity aversion using the concept of conditional beliefs which we introduce in this paper we provide characterizations of such conditional beliefs for the standard models of preferences used in applications