targeting target shareholders we integrate heterogeneity and uncertainty in investor valuations into a model of takeovers investors have dispersed valuations holding shares in firms they value more highly and a successful offer must win approval from the median target shareholder we derive the consequences for an acquiring firm s takeover offer its size and cash equity structure and implications for takeover premia firm returns share price dynamics the probability that a takeover succeeds and shareholder welfare we characterize when the acquirer prefers cash offers and when equity offers are best our model collectively reconciles various empirical regularities that have proven elusive to explain in one unified framework and we derive new testable predictions this paper was accepted by neng wang finance

optimal monetary policy with uncertain fundamentals and dispersed information this paper studies optimal monetary policy in a model where aggregate fluctuations are driven by the private sector s uncertainty about the economy s fundamentals information on aggregate productivity is dispersed across agents and there are two aggregate shocks a standard productivity shock and a noise shock affecting public beliefs about aggregate productivity neither the central bank nor individual agents can distinguish the two shocks when they are realized despite the lack of superior information monetary policy can affect the economy s relative response to the two shocks as time passes better information on past fundamentals becomes available the central bank can then adopt a backward looking policy rule based on more precise information about past shocks by announcing its response to future information the central bank can influence the expected real interest rate faced by forward looking consumers with different beliefs and thus affect the equilibrium allocation if the announced future response is sufficiently aggressive the central bank can completely eliminate the effect of noise shocks however this policy is typically suboptimal as it leads to an excessively compressed distribution of relative prices the optimal monetary policy balances the benefits of aggregate stabilization with the costs in terms of cross sectional efficiency copyright wiley blackwell

credit supply and the housing boom an increase in credit supply driven by looser lending constraints in the mortgage market is the key force behind four empirical features of the housing boom before the great recession the unpreced

from malthusian stagnation to modern growth this paper investigates the historical evolution of the relationship among population growth technological change and standard of living the analysis focuses on two most important differences among the malthusian regime post malthusian regime and modern growth regime these were the behavior of income per capita and the relationship between the level of income per capita and the population growth rate the modern growth regime is characterized by steady growth in both income per capita and the level of technology in the malthusian regime technological progress and population growth was glacial by modern standards and income per capita was fairly constant in contrast to the modern growth regime the relationship between per capita income and population growth in the malthusian regime was positive post malthusian regime shared one characteristic with each of the two regimes in addition this paper developed and described an endogenous growth model consistent with the above mentioned transition process

price changes in the euro area and the united states some facts from individual consumer price data prices of goods and services do not adjust immediately in response to changing demand and supply conditions this paper characterizes the average frequency and size of price changes in the euro area and its member countries investigates the determinants of the probability of price changes and compares the evidence for the euro area with available u s results the facts documented in this paper are based on evidence from individual price data recorded at the store level in all euro area countries except ireland and greece that is in datasets covering austria belgium finland france germany italy luxembourg the netherlands portugal and spain which together account for around 97 percent of euro area gdp the data used are the monthly price records underlying the computation of national consumer price indices and harmonized consumer price indices these data cover a large number of products selected on the basis of extensive household budget surveys

crime rates and local labor market opportunities in the united states 1979 1997 the labor market prospects of young unskilled men fell dramatically in the 1980s and improved in the 1990s crime rates show a reverse pattern increasing during the 1980s and falling in the 1990s because young unskilled men commit most crime this paper seeks to establish a causal relationship between the two trends previous work on the relationship between labor markets and crime focused mainly on the relationship between the unemployment rate and crime and found inconclusive results in contrast this paper examines the impact of both wages and unemployment on crime and uses instrumental variables to establish causality we conclude that both wages and unemployment are significantly related to crime but that wages played a larger role in the crime trends over the last few decades these results are robust to the inclusion of deterrence variables controls for simultaneity and controlling for individual and family characteristics

inequality and violent crime abstract we investigate the robustness and causality of the link between income inequality and violent crime across countries first we study the correlation between the gini index and homicide and robbery rates within and between countries second we examine the partial correlation by considering other crime determinants third we control for the endogeneity of inequality by isolating its exogenous impact on these crime rates fourth we control for measurement error in crime rates by modeling it as both unobserved country effects and random noise finally we examine the robustness of this partial correlation to alternative measures of inequality the panel data consist of nonoverlapping 5 year averages for 39 countries during 1965 95 for homicides and 37 countries during 1970 94 for robberies crime rates and inequality are positively correlated within countries and particularly between countries and this correlation reflects causation from inequality to crime rates even after controlling for ot

securitized markets international capital flows and global welfare we study the effect of collateralized lending and securitization on the global supply of securitized assets welfare and international net and gross capital flows in a two country general equilibrium model with idiosyncratic investment risk the financial sectors in the two countries home and foreign differ by the collateral requirement for investment loans with home requiring lower margins in autarky home endogenously supplies more assets and enables more risk sharing upon financial integration capital flows from foreign to home leading to lower interest rates and an increase in the global supply of assets foreign enjoys substantial welfare gains through better risk sharing and portfolio reallocation while the welfare experience for home is ambiguous gross capital flows arise when agents face aggregate shocks to the expected payoff to investment projects but can collapse when shocks concern the variance of returns

monetary policy for rationally inattentive economies with staggered price setting the paper examines the optimal monetary policy when firms are constrained by information processing capability and infrequent price adjustments firms information processing limit gives rise to imperfect knowledge about macroeconomic aggregates and endogenous information learning contingent on the monetary policy staggered price setting introduces the observed price duration and additional policy tradeoffs resulting from the interactions between nominal rigidities and imperfect information processing the integrated model implies an optimal policy that commits to complete price stabilization in response to natural rate shocks but not in response to markup shocks in the presence of markup shocks it is optimal for the central bank to focus on price stabilization in the initial periods following markup shocks and shifts the emphasis to output gap stabilization later moreover larger information capacity stronger complementarities and more persistent shocks require more aggressive price stabilization in the short run

public and private expenditures on health in a growth model abstract this paper introduces endogenous longevity into an otherwise standard overlapping generations model with capital in the model a young agent may increase the length of her old age by incurring investments in health such private health investments are assumed to be more productive if accompanied by complementary tax financed public health programs the presence of the public input in private longevity is shown to expose the economy to aggregate endogenous fluctuations and even chaos and such volatility is impossible in its absence the model is capable of generating dramatic reversals in life expectancy as has been observed in many countries

cops and crime abstract the violent crime control and law enforcement act of 1994 established the community oriented policing services cops program that provided grants to states and localities to pay up to 75 of the cost for new police hires for 3 years to date the cops program has awarded almost 5 billion in hiring grants paying for 64 000 new police officers we use annual data from 1990 through 2001 from 2074 cities with populations in excess of 10 000 to show that for each officer paid for by grant funds the size of the force expands by 0 70 officers the size of cops grants are correlated with population and crime rates but not the pre cops time trends in crime rates or the size of the police force this allows us to use the size of cops grants as an instrument for the size of the police force in regressions where crime is the outcome of interest these models indicate that police added to the force by cops generated statistically significant reductions in auto thefts burglaries robberies and aggravated assaults

a dynamic model of differential human capital and criminal activity this paper presents a dynamic model of criminal activity individuals are endowed with legal and criminal human capital potential incomes in legal and criminal sectors depend on the level of the relevant human capital the rate of return and random shocks human capital can be enhanced by participating in both sectors legal human capital can also be enhanced through investment human capital is subject to depreciation individuals maximize expected discounted lifetime utility which depends on consumption the model allows analyses of the effects of recessions imprisonment rehabilitation scenarios sanctions and returns to human capital new insights such as hysteresis in criminal behaviour are obtained

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

imperfect information multiple shocks and policy s signaling role abstract in multiple shock models when agents have imperfect information they attempt to infer a shock s type in addition to its size in this environment monetary policy plays an important signaling role this paper highlights this signaling role by showing that conclusions from imperfect information monetary models are sensitive to the number of shocks included with multiple shocks contractionary monetary policy can initially increase inflation and delay the eventual disinflation moreover multiple shocks can result in destabilizing price flexibility while optimal policy s response to one shock will depend on the existence of other shocks contrary to a typical linear quadratic framework

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

man bites dog business cycles the newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact signals that are more likely to be observed after unusual events may increase both uncertainty and disagreement among agents in a simple business cycle model such signals can explain why we observe i occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals ii persistent periods of high macroeconomic volatility and iii a positive correlation between absolute changes in macro variables and the cross sectional dispersion of survey expectations

arrested development theory and evidence of supply side speculation in the housing market this paper incorporates speculation into the standard supply and demand framework used to analyze housing booms and busts speculation reverses the common intuition that elastic housing supply attenuates housing booms housing market frictions make land a more attractive speculative investment than housing as a result undeveloped land both facilitates construction and intensies

asset pledgeability and endogenously leveraged bubbles abstract we develop a simple model of defaultable debt and rational bubbles in the price of an asset which can be pledged as collateral in a competitive credit pool when the asset pledgeability is low the down payment is high and bubble investment is unleveraged as in a standard rational bubble model when the pledgeability is high the down payment is low making it easier for leveraged borrowers to invest in the bubbly asset as loans are packaged together into a competitive pool the pricing of individual default risk may facilitate risk taking in equilibrium credit constrained borrowers may optimally choose a risky leveraged investment strategy borrow to invest in the bubbly asset and default if the bubble bursts the model predicts joint boom bust cycles in asset prices and securitized credit

the demographic transition and the sexual division of labor this paper presents a theory in which increases in female labor force participation and reductions in the gender wage gap are generated as part of a single process of demographic transition initially characterized by reductions in mortality and fertility the paper suggests a relationship between gains in life expectancy and changes in the role of women in society that has not been identified before in the literature mortality reductions affect the incentives of individuals to invest in human capital and to have children with implications for female labor force participation and the wage differential between men and women the paper also presents some empirical evidence to support the predictions of the theory

returns to scale market power and the nature of price rigidity in new keynesian models with self fulfilling expectations increasing returns to scale and firms market power are two potential sources of sunspot expectations in neoclassical models we show that in new keynesian models returns to scale and market power can have fundamentally different implications for broad macroeconomic issues including self fulfilling expectations depending on the nature of price rigidity our findings suggest that the design of stabilization monetary policy can depend on precise knowledge about the economy s real and nominal features therefore a clear understanding of the specific economic environment and its relevance to monetary policymaking for ensuring macroeconomic stability can be an integrated part of monetary policy practice

economic growth population theory and physiology the bearing of long term processes on the this lecture sketches a theory of the secular decline in morbidity and mortality that takes account of changes induced in physiological functioning since 1700 the synergism between technological and physiological improvements has produced a form of human evolution biological though not genetic rapid culturally transmitted and not necessarily stable which is still ongoing in both oecd and developing countries thermodynamic and physiological aspects of economic growth are defined and their impact on growth rates is assessed implications of this theory for population forecasting measurement of national income demand for leisure pension policies and demand for health care are considered excerpt

what accounts for the decline in crime in this article we analyze recent trends in aggregate property crime rates in the united states we propose a dynamic equilibrium model that guides our quantitative investigation of the major determinants of observed patterns of crime our main findings can be summarized as follows first the model is capable of reproducing the drop in crime between 1980 and 1996 second the most important factors that account for the observed decline in property crime are the higher apprehension probability the stronger economy and the aging of the population third the effect of unemployment on crime is negligible fourth the increased inequality prevented an even larger decline in crime overall our analysis can account for the behavior of the time series of property crime rates over the past quarter century

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

corruption fertility and human capital abstract we build an overlapping generations model in which reproductive households face a child quantity child quality trade off and bureaucrats are delegated with the task of delivering public services that support the accumulation of human capital by integrating the theoretical analyses of endogenous growth corruption and fertility choices we show that the negative relation between fertility and economic development may also be affected by differences in the magnitude of bureaucratic corruption

synthetic or real the equilibrium effects of credit default swaps on bond markets we provide a model of nonredundant credit default swaps cdss building on the observation that cdss have lower trading costs than bonds cds introduction involves a trade off it crowds out existing demand for the bond but improves the bond allocation by allowing long term investors to become levered basis traders and absorb more of the bond supply we characterize conditions under which cds introduction raises bond prices the model predicts a negative cds bond basis as well as turnover and price impact patterns that are consistent with empirical evidence we also show that a ban on naked cdss can raise borrowing costs

animal spirits heterogeneous expectations and the amplification and duration of crises we introduce a simple equilibrium model of a market for loans households lend to firms and form expectations about their loan default probability under heterogeneous expectations with switching between forecasting strategies driven by reinforcement learning even a small fraction of pessimistic traders has a large aggregate effect causing a heterogeneous expectations risk premium i e significantly higher contract rates for loans and significantly lower output our stylized model illustrates how animal spirits and heterogeneous expectations may lead to aconfidence loss and to financial instability amplifying the magnitude of economic crises and slowing down recovery

collateral requirements and asset prices many assets derive their value not only from future cash flows but also from their ability to serve as collateral in this article we investigate this collateral premium and its impact on asset returns in an infinite horizon general equilibrium model with heterogeneous agents we document that borrowing against collateral substantially increases the return volatility of long lived assets moreover otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time this premium can be positive even for assets that never pay dividends

the determinants of mortality mortality rates have fallen dramatically over time starting in a few countries in the 18th century and continuing to fall today in just the past century life expectancy has increased by over 30 years at the same time mortality rates remain much higher in poor countries with a difference in life expectancy between rich and poor countries of also about 30 years this difference persists despite the remarkable progress in health improvement in the last half century at least until the hiv aids pandemic in both the time series and the cross section data there is a strong correlation between income per capita and mortality rates a correlation that also exists within countries where richer better educated people live longer we review the determinants of these patterns over history over countries and across groups within countries while there is no consensus about the causal mechanisms we tentatively identify the application of scientific advance and technical progress some of which is induced by income and facilitated by education as the ultimate determinant of health such an explanation allows a consistent interpretation of the historical cross country and within country evidence we downplay direct causal mechanisms running from income to health

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

adverse effects of leverage and short selling constraints in a financial market model with heterogeneous agents this paper investigates the impact of leverage and short selling constraints on financial market stability investors demand is modelled in a well known asset pricing model with heterogeneous beliefs in particular i generalise the heterogeneous agents model of brock and hommes 1998 and anufriev and tuinstra 2013 to allow for leverage constraints as well as a short selling tax i consider two examples of adaptive belief systems describing the coevolution of prices and investors beliefs first if the market is inhabited by fundamentalist and chartist traders demand constraints have potential adverse effects and may restrict the stabilising fundamentalist strategy such that mispricing and price volatility increase second if the market is inhabited by fundamentalists optimists and pessimists with fixed beliefs demand constraints drive down price volatility but mispricing remains the results suggest the stabilising effects of demand constraints in financial markets are limited only if asset prices are too high compared to fundamentals policy makers should consider constraining leverage ratios in order to deflate financial bubbles

information frictions and real exchange rate dynamics abstract real exchange rates are highly volatile and persistent i provide a novel structural explanation for these facts using a model with dispersed information among firms when producers face strategic complementarities in price setting uncertainty about competitors beliefs results in sluggish price adjustment that can generate large and long lived real exchange rate movements i estimate the model using data from the us and euro area and show that it successfully explains the unconditional volatility and persistence of the real exchange rate the model also accounts for the persistent and hump shaped real exchange rate behavior conditional on nominal disturbances documented by a structural var about 50 of this persistence is due to the inertial dynamics of higher order beliefs

securitization bubbles structured finance with disagreement about default risk abstract an additional reason for the structured finance boom of the 2000s may have been disagreement about default risk of collateral assets when risk neutral investors disagree about average default probabilities structuring collateral cash flow raises prices by concentrating optimists demand on risky tranches with disagreement about default correlation low correlation investors believe in diversification and pay high prices for senior tranches they deem riskless high correlation investors value junior tranches they expect to pay whenever aggregate conditions are good risk aversion and short selling through credit default swaps reduce the prices of both pass through and structured securitizations but may increase the return to tranching

crime fertility and economic growth theory and evidence abstract this paper studies the link between crime and fertility and the way by which they jointly impact on economic growth in a three period overlapping generations model where health status in adulthood depends on health in childhood adult agents allocate their time to work leisure child rearing and criminal activities an autonomous increase in the probability offenders face in escaping apprehension increases both crime and fertility non monotonically giving rise to an ambiguous effect on growth a cross country empirical examination based on data that span four decades supports the non linear effects on both crime and fertility at the same time it reveals a negative effect on output growth

crime and social interactions the high variance of crime rates across time and space is one of the oldest puzzles in the social sciences this variance appears too high to be explained by changes in the exogenous costs and benefits of crime we present a model where social interactions create enough covariance across individuals to explain the high cross city variance of crime rates this model provides an index of social interactions which suggests that the amount of social interactions is highest in petty crimes moderate in more serious crimes and almost negligible in murder and rape

trading in derivatives when the underlying is scarce abstract regulatory restrictions and market frictions can constrain the aggregate quantity of long and short positions in a security when these constraints bind we refer to the security as scarce and its price becomes distorted relative to its value in a frictionless market we show that an otherwise redundant derivative can reduce the price distortion of the underlying security by relaxing its scarcity we also show that it is especially important to analyze the underlying and derivative markets jointly when evaluating the impact of regulation such as short sales bans and position limits in derivatives that restricts trade

paralyzed by fear rigid and discrete pricing under demand uncertainty we propose a new theory of price rigidity based on firms knightian uncertainty about their competitive environment this uncertainty has two key implications first firms learn about the shape of their demand function from past observations of quantities sold this learning gives rise to kinks in the expected profit function at previously observed prices making those prices both sticky and more likely to reoccur second uncertainty about the relationship between aggregate and industry level inflation generates nominal rigidity we prove the main insights analytically and quantify the effects of our mechanism our estimated quantitative model is consistent with a wide range of micro level pricing facts that are typically challenging to match jointly it also implies significantly more persistent monetary non neutrality than in standard models allowing it to generate large real effects from nominal shocks

abortion legalization and child living circumstances who is the marginal child weexaminethe impact ofincreased abortion availabilityon the averageliving standards of children through a selection effect would the marginal child whowas not born have grown up in different circumstances than the average child we use variation in the timing of abortion legalization across states to answer this question cohorts born after legalized abortion experienced a signiecant reduction in a number of adverse outcomes we end that the marginal child would have been 40 60 percent more likely to live in a single parent family to live in poverty to receive welfare and to die as an infant access to abortion is one of the most contentious public policy issues facing the united states today the period since the legalization of abortion under the roe v wade decision of 1973 has been marked by incessant debate over the appropriate government enancing and legal status of abortions meanwhile pregnancy resolution through abortion is a very common outcome in the united states roughly 25 percent of all pregnancies are aborted ventura et al 1995 as a result major changes in abortion access could have substantial effects on the birthrate indeed levine staiger kane and zimmerman end that the legalization of abortion in the early 1970s led to an 8 percent reduction in the birthrate 1

the dynamics of financially constrained arbitrage we develop a model of financially constrained arbitrage and use it to study the dynamics of arbitrage capital liquidity and asset prices arbitrageurs exploit price discrepancies between assets traded in segmented markets and in doing so provide liquidity to investors a collateral constraint limits their positions as a function of capital we show that the dynamics of arbitrage activity are self correcting following a shock that depletes arbitrage capital profitability increases and this allows capital to be gradually replenished spreads increase more and recover faster for more volatile trades although arbitrageurs cut their positions in these trades the least when arbitrage capital is more mobile across markets liquidity in each market generally becomes less volatile but the reverse may hold for aggregate liquidity because of mobility induced contagion

the real effects of sustainable responsible investing abstract sustainable and responsible investing sri may have a mixed effect on firms incentives to remove negative externalities whereas sri screening incentivizes the removal of externalities sri trading can disincentivize it when traders disagree on the externality removal s cash flow effects

information heterogeneity and market incompleteness information is market consistent if agents only use market prices to infer the underlying states of the economy this paper applies this concept to a stochastic growth model with incomplete markets and heterogeneous agents the economy with market consistent information can never replicate the full information equilibrium and there are substantial differences in impulse responses to aggregate productivity shocks these results are robust to the introduction of a noisy public signal and aggregate financial markets we argue that the principle of market consistent information should be applied to any model with incomplete markets

inflation expectations disagreement and monetary policy survey data on inflation expectations show that i private sector forecasts and central bank forecasts are not fully aligned and ii private sector forecasters disagree about inflation expectations to reconcile these two facts we introduce dispersed information in a new keynesian model where as a result inflation expectations differ between the private sector and the central bank we show that output and inflation responses change markedly when the central bank responds to private sector inflation expectations rather than to their own

firms price cost and activity expectations evidence from micro data firms expectations play a central role in modern macroeconomic models but little is known empirically about how these are formed or whether they matter for economic outcomes using a novel panel data set of manufacturing firms expectations about prices and wage rates new orders employment and unit costs for the united kingdom we document a range of stylized facts about the properties of firms expectations and their relationship with recent experience there is wide dispersion of expectations across firms expected future price and wage growth are influenced by firm specific factors but macroeconomic factors also matter expectations of employment and new orders are influenced by firm specific measures of past orders while expected unit costs seem to be influenced more by firm specific cost pressures and aggregate import prices after controlling for a wide range of variables we find a significant connection between past expected price and wage increases and their out turns but there is also strong evidence that firms expectations are clearly not rational

collateral constraints and the law of one price an experiment we test the asset pricing implications of collateralized borrowing that is of using assets as collateral to borrow money in the laboratory to this purpose we develop a general equilibrium model with collateral constraints amenable to laboratory implementation and gather experimental data in the laboratory assets that can be leveraged fetch higher prices than assets that cannot even though assets payoffs are identical in all states of the world collateral value therefore creates deviations from the law of one price the spread between collateralizeable and noncollateralizeable assets is significant and quantitatively close to theoretical predictions

optimal monetary policy with imperfect common knowledge we study optimal nominal demand policy in a flexible price economy with monopolistic competition where firms have imperfect common knowledge about the shocks hitting the economy information imperfections emerge endogenously because firms are assumed to have finite shannon capacity to process information we then ask how policy that minimizes a quadratic objective in output and prices depends on firms processing capacity when price setting decisions of firms are strategic complements we find that policy should nominally accommodate white noise mark up shocks for a large range of capacity values this fi nding is robust to the policy maker observing shocks imperfectly or being uncertain about firms processing capacity when mark up shocks are persistent accommodation may even have to increase in the medium term but has to decrease in the long run thereby generating a hump shaped price response and a slow reduction in output instead when prices are strategic substitutes policy tends to react with nominal demand contractions to mark up shocks in addition there might exist discontinuities between common knowledge equilibria and equilibria with small amounts of imperfect common knowledge

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

incomplete information higher order beliefs and price inertia the question that motivates this paper is how incomplete information impacts the response of prices to nominal shocks our baseline model is a variant of the calvo model in which firms observe the underlying nominal shocks with noise in this model the response of prices is pinned down by three parameters the precision of available information about the nominal shock the frequency of price adjustment and the degree of strategic complementarity in pricing decisions this result synthesizes the broader lessons of the pertinent literature however this synthesis provides only a partial view of the role of incomplete information once one allows for more general information structures than those used in previous work one cannot quantify the degree of price inertia without data on the dynamics of higher order beliefs or of the agents forecasts of inflation we highlight this with three extensions of our baseline model all of which break the tight connection between the precision of information and higher order beliefs featured in previous work

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

sticky prices in the euro area a summary of new micro evidence this paper summarises the vast evidence on micro price setting recently obtained for euro area countries we consider studies with micro data on consumer and producer prices as well as survey information the main findings are 1 prices in the euro area are sticky and stickier than in the us 2 downward price rigidity is only slightly more marked than upward price rigidity 3 heterogeneity and asymmetries are observed in price setting and 4 the relevance of theories that explain price stickiness such as implicit or explicit contracts marginal costs and coordination failure is confirmed whereas menu costs pricing thresholds and costly information explanations are judged much less relevant by firms jel c25 d40 e31

the imperfect common knowledge phillips curve calvo vs rotemberg i derive the imperfect common knowledge phillips curve under the assumption of rotemberg pricing the curve differs from the calvo version in one important aspect expectations of future relative prices impact inflation

actively learning by pricing a model of an experimenting seller this article presents a model of a rational seller who is actively learning the slope of his demand curve via his pricing strategy consequently this seller optimally experiments with his price resulting price patterns show a tendency for discreteness as observed in the data which has proved to be a major challenge to most price setting models the experimentation motive can also replicate the observation that prices are more volatile than costs as well as the presence of many idiosyncratic price changes in the data it can do so without a need to assume the existence of large idiosyncratic shocks

collateral constraints and asset prices abstract we study the effects of collateral constraints in an economy populated by investors with nonpledgeable labor incomes and heterogeneous preferences and beliefs we show that these constraints inflate stock prices and generate spikes and crashes in price dividend ratios and volatilities clustering of volatilities and leverage cycles they also lead to substantial decreases in interest rates and increases in sharpe ratios when investors are anxious about hitting constraints due to production crises in the economy furthermore stock prices have large collateral premiums over nonpledgeable incomes we derive asset prices and stationary distributions of the investors consumption shares in closed form

leverage and beliefs personal experience and risk taking in margin lending what determines risk bearing capacity and the amount of leverage in financial markets using unique archival data on collateralized lending we show that personal experience can affect individual risk taking and aggregate leverage when an investor syndicate speculating in amsterdam in 1772 went bankrupt many lenders were exposed in the end none of them actually lost money nonetheless only those at risk of losing money changed their behavior markedly they lent with much higher haircuts the rest continued as before the differential change is remarkable since the distress was public knowledge overall leverage in the amsterdam stock market declined as a result

leverage and default in binomial economies a complete characterization our paper provides a complete characterization of leverage and default in binomial economies with financial assets serving as collateral our binomial no default theorem states that any equilibrium is equivalent in real allocations and prices to another equilibrium in which there is no default thus actual default is irrelevant though the potential for default drives the equilibrium and limits borrowing this result is valid with arbitrary preferences and endowments contingent or noncontingent promises many assets and consumption goods production and multiple periods we also show that only no default equilibria would be selected if there were the slightest cost of using collateral or handling default our binomial leverage theorem shows that equilibrium loan to value ltv for noncontingent debt contracts is the ratio of the worst case return of the asset to the riskless gross rate of interest in binomial economies leverage is determined by down risk and not by volatility

signalling effects of monetary policy we develop a dynamic general equilibrium model in which the policy rate signals the central bank s view about macroeconomic developments to price setters the model is estimated with likelihood methods on a u s data set that includes the survey of professional forecasters as a measure of price setters inflation expectations this model improves upon existing perfect information models in explaining why in the data inflation expectations respond with delays to monetary impulses and remain disanchored for years in the 1970s u s monetary policy is found to signal persistent inflationary shocks explaining why inflation and inflation expectations were so persistently heightened the signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

inflation at the household level abstract we use scanner data to estimate inflation rates at the household level households inflation rates have an annual interquartile range of 6 2 9 0 percentage points most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods lower income households experience higher inflation but most cross sectional variation is uncorrelated with observables households deviations from aggregate inflation exhibit only slightly negative serial correlation almost all variability in a household s inflation rate comes from variability in household level prices relative to average prices not from variability in aggregate inflation

optimal price setting with observation and menu costs we study the price setting problem of a firm in the presence of both observation and menu costs in this problem the firm optimally decides when to collect costly information on the adequacy of its price an activity which we refer to as a price review upon each review the firm chooses whether to adjust its price subject to a menu cost and when to conduct the next price review this behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment the goal of the paper is to study how the firm s choices map into several observable statistics depending on the level and relative magnitude of the observation vs the menu cost the observable statistics are the frequency of price reviews the frequency of price adjustments the size distribution of price adjustments and the shape of the hazard rate of price adjustments we provide an analytical characterization of the firm s decisions and a mapping from the structural parameters to the observable statistics we compare these statistics with the ones obtained for the models with only one type of cost the predictions of the model can with suitable data be used to quantify the importance of the menu cost vs the information cost we also consider a version of the model where several price adjustment are allowed between observations a form of price plans or indexation we find that no indexation is optimal for small inflation rates

crime and the labor market a search model with optimal contracts abstract this paper extends the pissarides pissarides christopher a equilibrium unemployment theory cambridge mit 2000 model of the labor market to include crime and punishment a la becker becker gary s crime and punishment an economic approach journal of political economy 76 1968 169 217 all workers irrespective of their labor force status can commit crimes and the employment contract is determined optimally the model is used to study analytically and quantitatively the effects of various labor market and crime policies for instance a more generous unemployment insurance system reduces the crime rate of the unemployed but its effect on the crime rate of the employed depends on job duration and jail sentences when the model is calibrated to u s data the overall effect is to decrease crime but is quantitatively small small wage subsidies reduce unemployment and crime rates of employed and unemployed workers and raise society s welfare hiring subsidies reduce unemployment but they can raise the crime rate of employed workers crime policies police technology and jail sentences affect crime rates significantly but have only negligible effects on the labor market

panic on the streets of london police crime and the july 2005 terror attacks in this paper we study the causal impact of police on crime by looking at what happened to crime before and after the terror attacks that hit central london in july 2005 the attacks resulted in a large redeployment of police officers to central london boroughs as compared to outer london in fact police deployment in central london increased by over 30 percent in the six weeks following the july 7 bombings during this time crime fell significantly in central relative to outer london study of the timing of the crime reductions and their magnitude the types of crime which were more likely to be affected and a series of robustness tests looking at possible biases all make us confident that our research approach identifies a causal impact of police on crime implementing an instrumental variable approach shows an elasticity of crime with respect to police of approximately 0 3 so that a 10 percent increase in police activity reduces crime by around 3 percent

the optimal public expenditure financing policy does the level of economic development matter i introduction does the growth effect of public expenditures depend on the way these expenditures are financed over the years a substantial volume of theoretical and empirical research has been directed toward identifying the elements of public expenditure at its aggregated and disaggregated level that bear significant association with economic growth in contrast only a handful of studies have paid particular attention to examine the extent to which the growth effect of public expenditures depends on the method of financing such expenditures e g de gregorio 1993 miller and russek 1997 palivos and yip 1995 the consensus appears to be that the two primary modes of financing income taxation and seigniorage are distortionary opinions however are divided as to their relative merits for example according to palivos and yip 1995 income tax financing is more detrimental to growth than seigniorage financing at the same time de gregorio 1993 suggests that as long as the rate of return on indexed bonds is substantially responsive to changes in the rate of inflation seigniorage financing of public expenditure is more growth reducing pecorino 1997 on the other hand prescribes a mix of both modes of financing despite these differences the above mentioned studies share a common characteristic the optimal mode of financing public expenditure in these studies is viewed as being not contingent on the stages of economic development accordingly there remains little understanding of the process by which public expenditure financing policies shape the prospect of economic growth for developing vis a vis developed countries the primary objective of this paper is to bridge this gap in the existing literature it is a long standing belief among development experts that outcomes of public expenditures and revenue policies are conditional on the state of an economy recent evidence supports such belief for example miller and russek 1997 suggest that for developing countries a deficit financed increase in public expenditure retards economic growth and a tax financed increase leads to higher growth for developed countries a deficit financed increase in government expenditure does not affect economic growth and a tax financed increase leads to a lower growth in light of these findings and in light of the theoretical controversy about the relative merits of seigniorage versus tax finance it is meaningful to ask the following question does the relative merit of seigniorage vis a vis tax financing of public expenditure depend on the stage of economic development this paper seeks an answer to this question using both theoretical and empirical analyses the theoretical framework developed in this paper shares many of the characteristics of the models proposed by espinosa vega and yip 1999 2000 and schreft and smith 1997 in particular we consider a two period overlapping generations model where agents are subjected to stochastic relocations shocks which act like shocks to their portfolio preferences these shocks have the same consequence as liquidity preference shocks as in diamond and dybvig 1983 and create a role for financial intermediaries who take deposits and make a portfolio decision on behalf of the households in addition there is a government that relies on two alternative sources of revenue seigniorage and tax revenue to finance its exogenously given expenditure sequence the results that we derive are shaped by the portfolio decision of the financial intermediaries in particular at each point in time financial intermediaries are required to allocate their portfolios between a nonproductive liquid asset money and a productive illiquid asset the illiquid asset takes the form of financing risky investment projects which in turn generate productive capital stock for the economy the financial intermediaries optimal portfolio allocation rules depend on the relative rate of return of the two available assets

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

dynamic pricing and imperfect common knowledge abstract introducing private information into the dynamic pricing decision of firms by adding an idiosyncratic component to marginal cost can help explain two stylised facts about price changes aggregate inflation responds gradually and with inertia to shocks at the same time as individual price changes can be large the inertial behaviour of inflation is driven by privately informed firms strategically herding on the public information contained in the observations of lagged aggregate variables the model also matches the average duration between price changes found in the data and it nests the standard new keynesian phillips curve as a special case to solve the model the paper derives an algorithm for solving a class of dynamic models with higher order expectations

finite bubbles with short sale constraints and asymmetric information abstract we present a finite period general equilibrium model of an exchange economy with asymmetric information we say that a rational expectations equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one we show that necessary conditions for a strong bubble to occur are that 1 each agent must have private information in the period and state in which the bubble occurs 2 each agent must be short sale constrained at some period in the future with positive probability and 3 agents trades are not common knowledge we present examples of bubbles when the necessary conditions are satisfied journal of economic literature classification numbers c72 d52 d82 d84 g12 g14

managing beliefs about monetary policy under discretion in models of monetary policy discretionary policymaking is typically constrained in its ability to manage public beliefs however when a policymaker possesses private information policy actions serve as signals to the public about unobserved economic conditions and belief management becomes an integral part of optimal discretion policies this article derives the optimal time consistent policy for a general linear quadratic setting the optimal policy is illustrated in a simple new keynesian model where analytical solutions can be derived as well in this model imperfect information about the policymaker s output target leads to lower policy losses

collateral motivated financial innovation collateral frictions have a profound effect on our economic landscape ranging from the design of financial securities laws and institutions to various rules and regulations we analyze a model with disagreement where securities and collateral requirements are endogenous it shows that the security that isolates the variable with disagreement is optimal in the sense that alternative securities cannot generate any trading in an economy with n states investors may introduce more than n securities and markets are still incomplete the model has several novel predictions on the behavior of basis the spread between the prices of an asset and its replicating portfolio

dynamic coordination and the optimal stimulus policies this article studies stimulus policies in a simple macroeconomic model featuring a dynamic coordination problem that arises from demand externalities and fixed costs of investment in times of low economic activity firms face low demand and hence have lower incentives for investing which reinforces their low demand expectations in a benchmark case with no shocks the economy might get trapped in a low output regime and a social planner would be particularly keen to incentivise investment at times of low economic activity however this result vanishes once shocks are considered

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

using elasticities to derive optimal bankruptcy exemptions this article studies the optimal determination of bankruptcy exemptions for risk averse borrowers who use unsecured contracts but have the possibility of defaulting in a large class of economies knowledge of four variables is sufficient to determine whether a bankruptcy exemption level is optimal or should be increased or decreased these variables are 1 the composition of households liabilities 2 the sensitivity of the credit supply schedule to exemption changes 3 the probability of filing for bankruptcy with non exempt assets and 4 the value given by households to a marginal dollar in different states which can be mapped to changes in households consumption i recover empirical estimates of the sufficient statistics using u s data over the period 2008 16 and find that increasing exemption levels improves overall welfare although there is substantial variation in estimated welfare gains across u s states and income quintiles

information acquisition and learning from prices over the business cycle abstract we study firms incentives to acquire costly information in booms and recessions to investigate the role of endogenous information in accounting for business cycles our model predicts that for a wide range of parameter values firms have a stronger incentive to acquire information when the economy has been in a recession and a pessimistic belief about the state of the economy prevails than after a boom when firms share an optimistic belief the equilibrium price system which features endogenous information transmission dampens aggregate fluctuations by discouraging information acquisition our welfare analysis reveals that information acquisition in the decentralized economy is not efficient this is due to inefficient employment dispersion arising from information heterogeneity in equilibrium time series data for the u s economy support the model s prediction of wages being more informative about total factor productivity after recessions than following booms

house price beliefs and mortgage leverage choice we study the relationship between homebuyers beliefs about future house price changes and their mortgage leverage choices whether more pessimistic homebuyers choose higher or lower leverage depends on their willingness and ability to reduce the size of their housing market investments when households primarily maximize the levered return of their property investments more pessimistic homebuyers reduce their leverage to purchase smaller houses on the other hand when considerations such as family size pin down the desired property size pessimistic homebuyers reduce their financial exposure to the housing market by making smaller downpayments to buy similarly sized homes to determine which scenario better describes the data we investigate the cross sectional relationship between house price beliefs and mortgage leverage choices in the u s housing market we use plausibly exogenous variation in house price beliefs to show that more pessimistic homebuyers make smaller downpayments and choose higher leverage in particular in states where default costs are relatively low as well as during periods when house prices are expected to fall on average our results highlight the important role of heterogeneous beliefs in explaining households financial decisions

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

debt financing in asset markets short term debt such as overnight repurchase agreements and commercial paper was heavily used by financial institutions to fund their investment positions during the asset market boom preceding the financial crisis of 2007 2008 and later played a major role in leading to the distress of these institutions during the crisis what explains the popularity of short term debt in financing asset market investments geanakoplos 2010 presents a dynamic model of the joint equilibrium of asset markets and credit markets in which optimistic buyers of a risky asset use the asset as collateral to raise debt financing from less optimistic creditors the asset s collateral value depends on the marginal creditor s asset valuation and determines the buyers purchasing capacity to bid up the asset price geanakoplos posits that short term debt allows the asset buyers to maximize riskless leverage 1 short term debt however exposes the asset buyers to rollover risk e g acharya gale and yorulmaker 2011 and he and xiong 2012 forthcoming which is reflected in the fact that the asset buyers in geanakoplos model may not be able to obtain refinancing after a negative fundamental shock as a result they are forced to transfer their asset holdings to the

disagreement about inflation expectations and monetary policy transmission abstract time variation in disagreement about future inflation is a stylized fact in survey data but little is known on how disagreement interacts with the efficacy of monetary policy we show that a contractionary 100 bps u s monetary policy shock leads to a statistically significant increase in inflation and inflation expectations of up to 0 7 percentage points in times of high disagreement whereas in times of low disagreement it leads to a significant decline in these variables of around 0 8 percentage points we reconcile these state dependent effects with a regime switching dispersed information new keynesian model where we calibrate the information structure to match disagreement about inflation expectations in u s data