interaction between the seasonal and business cycles in this paper shows that in several u s manufacturing industries the seasonal variability of production and inventories varied with the state of the business cycle the authors present a simple model which implies that if firms reduce the seasonal variability of their production as the economy strengthens and they either hold constant or increase the stock of inventories they bring into the high production seasons of the year then they must be facing upward sloping and convex marginal cost curves the authors conclude that firms in a number of industries face upward sloping and convex marginal production cost curves copyright 1997 by american economic association

credit rationing in an open economy this paper claims that credit market imperfections matter significantly to open economies and can alter basic macroeconomic results this is demonstrated in the paper by use of an open economy model with individual credit rationing due to asymmetric information and moral hazard the paper concentrates on the effect of fiscal policy and shows that when credit is rationed the standard result does not hold and a fiscal expansion may create a surplus instead of a deficit in the current account furthermore the paper shows that whether credit is rationed or not depends on the tax burden copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

routes of money endogeneity a heuristic comparison the paper sets up an analytical framework that is based on simplified balance sheets of the banking the non banking private and the government sectors in order to identify four primary routes through which money can be generated endogenously and to discuss their characteristics these routes approximate if not precisely correspond to the post keynesian accommodationist and structuralist views the new keynesian credit view bank lending channel and a hybrid one respectively copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

the limits of central bank policy economic crisis and the challenge of effective solutions the paper examines the development of central bank policy prior to and during the recent financial crisis the argument is made that it contained multiple failures that not only generated constraints on adequately identifying and addressing the crisis but also contributed to that crisis those failures derived from a combination of theory and institutional practice specifically the use of forms of inflationary targeting based on broad adherence to the taylor rule framework and the use of versions of a conventional theoretical macro model ctmm were both problematic this was particularly so in the way policy was focused through issues of the primacy of price stability the institutional arrangements of the central banks were also problematic the division of labour between the central banks and other regulatory bodies and the limited information available within a liberalised finance system hampered efforts to fully appreciate the gravity of the situation partly due to the constraints imposed by the thinking and strategies that had been developed the central banks never got to grips with the fundamental problems of the crisis interest rate policy and liquidity provision were undertaken in ways that steadily radicalised the approaches of the banks but always in a way that was event led and always in ways that could not resolve those fundamental problems the nature of the crisis highlights the importance of transforming the approach and institutional framework of the central banks relatedly it highlights the need for a more keynesian and heterodox approach to economics within decision making bodies at central banks

federal lending and the market for credit abstract federal lending is an important but unrecognized feature of modern credit markets this paper analyzes the effects of credit interventions on credit allocation and economic efficiency the underlying model posits asymmetric information between borrowers and lenders and allows for market clearing rationed or redlined equilibria principal results include unsubsidized credit interventions are neutral the relative effectiveness of alternative lending instruments depends on whether rationing occurs interactions among programs can have perverse effects and even without an informational advantage the government may enact welfare improving credit policies under certain conditions

adverse selection lemons shocks and business cycles abstract asymmetric information is crucial for understanding disruptions in the supply of credit this paper studies a dynamic economy featuring asymmetric information and resulting adverse selection in credit markets entrepreneurs seek loans from banks for projects but asymmetric information about entrepreneurs riskiness causes a lemons problem relatively safe entrepreneurs do not get funded an increase in the riskiness of some entrepreneurs raises interest rate spreads aggravates adverse selection and shrinks the supply of bank credit the model calibrated to the u s economy generates significant business fluctuations including severe recessions comparable to the great recession of 2007 09

the allocation of credit and financial collapse this paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders it illustrates that 1 the allocation of credit is inefficient and at times can be improved by government intervention and 2 small changes in the exogenous risk free interest rate can cause large discontinuous changes in the allocation of credit and the efficiency of the market equilibrium these conclusions suggests a role for government as the lender of last resort

models of banking instability a partial review of the literature abstract this paper critically examines the theoretical literature on banking instability that has followed diamond and dybvig 1983 it explores the extent to which it a explains banking instability within a theoretical context in which financial intermediaries improve on unintermediated markets and b justifies government involvement in the financial intermediation industry it suggests that the literature has yet to provide a satisfactory theoretical basis for banking instability as such since the intermediaries which arise from it are peculiar mutual funds that bear little resemblance to real world banks in addition the paper challenges the widespread belief that this literature provides a sound foundation for government involvement in the industry it suggests that arguments for government intervention are open to objection on various grounds the most important one being that they are inconsistent with the existence of properly motivated financial intermediation in these models

horizontalism a critique this article offers a critique of the horizontalist view of money that banks are passive in the face of credit demand it is argued that banks liquidity preference influences their responsiveness to the demand for credit their liquidity preference is expressed in risk assessment understood in terms of john maynard keynes s theory of uncertainty it is argued that rationing in the sense of adverse changes in risk assessment occurs systematically in the downturn of the business cycle systematic rationing also occurs with respect to particular classes of borrowers the focus here is on the case of small firms c 1996 academic press limited copyright 1996 by oxford university press

measuring the convexity of the cost function abstract in this paper i argue that as might be expected the initial assumption made about the cost function will influence the empirical results obtained regarding the convexity i show that this expectation is supported empirically by estimating the parameters of two quadratic cost functions the first is that function which has been traditionally used in the literature the second is a simplified version of the quadratic cost function where the cost of changing the level of output is dropped since the evidence in the literature suggest that this variable has no significant effect on cost using physical product monthly data for 24 industries we find that the conclusion reached regarding the convexity of the cost function depends on the assumption we make regarding the cost function i further find that the simplified function is consistent with the observed behavior of production and sales while the traditional cost function is inconsistent with that behavior

competition and geographical integration in commercial bank lending abstract this paper tests the hypothesis that interest rates on bank commercial loans in the regions of the united states are generated in an integrated national market the tests of a joint hypothesis compounded of integration behavioral models and the absence of systematic errors in the data are applied to 60 series of data short term and long term loans in five size classes in six regions the joint hypothesis is not rejected for five of the six regions and four of the five size classes the exceptional region is the southeast the exceptional loan size class is 1 000 to 9 000 the smallest in the sample

understanding the shift from micro to macro prudential thinking a discursive network analysis macro prudential thinking and its emphasis on endogenously created systemic risks marginal in the banking regulation discourse until the mid 2000s has become central post crisis this paper analyzes this intellectual shift by using discourse and citation network analysis of the most cited scholarly works on banking regulation and systemic risk from 1985 to 2014 and six in depth interviews with central scholars it demonstrates that the predominance of formalism particularly partial equilibrium analysis in studies on banking regulation pre crisis impeded economists engagement with the endogenous sources of systemic risks discussed in the systemic risk sample these studies excluded observed phenomena that could not be accommodated in mathematical models largely ignoring contributions based on historical and practitioners styles of reasoning post crisis while informal analyses gain prominence in studies on banking regulation attempts to conceptualize systemic risk as a negative externality indicate the persistence of formalism and equilibrium thinking and its concomitant epistemological limitations that stymie theoretical progress

anchoring inflation expectations in the face of oil shocks in the proximity of zlb a tale of two targeters this paper applies a n ardl framework to two longstanding inflation targeting policy regimes in order to assess the relation between oil prices dynamics and inflation expectations and the further consequences created by a proximal zlb situation the application is based on data from january 1994 to june 2018 for new zealand and the uk we focus on oil price shocks as a variable of interest and this was found to have an asymmetric effect on inflation expectations one further key finding is that the real effective exchange rate has significant impacts on inflation expectations and this is indicative of an exchange rate pass through to inflation via an inflation expectations channel in general we find that inflation exchange rate money supply output growth unemployment and fiscal deficit surplus have significant implications for inflation expectations inflation expectations are also influenced by their past behaviour indicating adaptive inflation expectations this study contributes to the debate on the inflation targeting at zlb

bank commercial loan markets and the role of market structure evidence from surveys of commercial lending abstract this paper seeks to test two tenets that underlie the current practice of antitrust analysis in banking the first is the view that bank commercial loan markets are local in nature and the second is the view that banks in more concentrated markets are more likely to engage in some form of noncompetitive behavior tests of both of these tenets are conducted using an extensive set of loan specific survey information not previously employed to address these issues results consistent with the existence of local banking markets and the dominance of competitive differences as an explanation for observed differences in loan rates are found

personal bankruptcy and credit supply and demand this paper examines how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit while generous state level bankruptcy exemptions are probably viewed by most policy makers as benefiting less well off borrowers our results using data from the 1983 survey of consumer finances suggest that they increase the amount of credit held by high asset households and reduce the availability and amount of credit to low asset households conditioning on observable characteristics thus bankruptcy exemptions redistribute credit toward borrowers with high assets interest rates on automobile loans for low asset households also appear to be higher in high exemption states

on measuring the effects of fiscal policy in recessions we do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies almost entirely ignore the state of the economy and estimate the government multiplier which is presumably a weighted average of the one we care about the multiplier in a recession and one we care less about the multiplier in an expansion notable exceptions to this general claim sug gest this difference is potentially large our lack of knowledge stems significantly from the focus on linear dynamics vector autoregressions and linearized or close to linear dynamic stochastic general equilibrium dsge models our lack of knowledge also reflects a lack of data deep recessions are few and nonlinearities hard to measure the lack of statistical power in the estimation of nonlinear models using aggregate data can be addressed by exploiting estimates of partial equilibrium responses in disaggregated data microeconomic estimates of the partial equilibrium causal effects of a policy can discipline the causal channels inherent in any dsge model of the general equilibrium effects of policy microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents which is a key component of the dependence of the general equilibrium effects of fiscal policy on the state of the

the cost of servicing demand deposits the cost of the demand deposit service interests bankers because it affects their profits it interests students of banking and industrial organization because it figures in scale economies it interests monetary analysts because it may affect the supply or demand for money the former through deposit service charges which may affect the public s currency deposit ratio and the latter through the implicit yield on deposits 2 6 7 10 but the cost is difficult to analyze because the complete cost function of the banking firm is subadditive meaning that the cost of jointly providing several services is less than the sum of the costs of providing those services separately economies of scope 3 in terms of the recently published research by panzar and willig see 9 for instance the demand deposit service corresponds to a particular boundary ray in the output space and this part of the associated cost surface is unobservable for in practice the demand deposit service never varies by itself here we obtain the demand deposit cost function by process analysis that is we decompose the service into its constituent activities and ascertain the minimum labor time capital equipment and space required for each activity in this way we

full reserve banking more cranks than brave heretics this paper analyses the main features and policy implications of full reserve banking frb proposals it argues that whilst frb advocates recognize the essential endogeneity of the money creation process they have failed to understand the post keynesian and monetary circuitist analyses of endogenous money which leads them to analytical errors including lending activity creates seigniorage privilege for commercial banks inflation is always and everywhere a monetary phenomenon the inability of distinguishing the actual from the planned supply of bank loans and money to be spent from money hoarded and the debt free money proposition the paper also argues that an frb system is likely to exacerbate financial instability for several reasons including the obsessive focus on commercial banks while ignoring non bank financial intermediaries and shadow banking a blind fascination for the safety and security of the payment system with little consideration for the financing needs of capitalist economies and an inherent deflationary bias furthermore frb arrangements would soon be undermined by the development of alternative near moneys finally frb will nullify the automatic stabilisers of fiscal policy and lead to a de facto dominance of monetary policy and unelected central bankers over fiscal policy and democratic decision making

interest rates and inflation a consensus has emerged among practitioners that the instrument of monetary policy ought to be the short term interest rate that policy should be focused on the control of inflation and that inflation can be reduced by increasing short term interest rates at the center of this consensus is a rejection of the quantity theory such a rejection is a difficult step to take given the mass of evidence linking money growth inflation and interest rates increases in average rates of money growth are associated with equal increases in average inflation rates and interest rates these observations need not rule out a constructive role for the use of short term interest rates as a monetary instrument one possibility is that increasing short term rates in the face of increases in inflation is just an indirect way of reducing money growth sell bonds and take money out of the system another possibility is that while control of monetary aggregates is the key to low long run average inflation rates an interest rate policy can improve the short run behavior of interest rates and prices the shortrun connections among money growth inflation and interest rates are very unreliable so there is much room for improvement these possibilities are surely worth exploring but doing so requires new theory the analysis needed to reconcile interest rate policies with the evidence on which the quantity theory of money is grounded cannot be found in old textbook diagrams

is financial globalization beneficial this lecture examines whether financial globalization is beneficial to developing countries by first examining the evidence on financial development and economic growth and concludes that financial development is indeed a key element in promoting economic growth it then asks why if financial development is so beneficial it often does not occur it then goes on to examine whether globalization particularly of the financial kind can help encourage financial and economic development and argues that it can however financial globalization does not always work to encourage economic development because it often leads to devastating financial crises the issue is thus not whether financial globalization is inherently good or bad but whether it can be done right

scale economies in banking a restructuring and reassessment the issue of scale economies in banking has a rich history most earlier studies report modest operating cost scale economies for small institutions those with less than about 50 million of deposits in 1968 dollars but are unclear where these economies might end if at all unfortunately these studies are limited in four important respects first those that were well specified did not measure the total cost of banking operations but concentrated on estimating scale economies for individual banking functions e g demand deposits separately from commercial loans second an average cost curve that could take a u shape over the full range of banks was not fitted either because larger banks were not included or because of the functional form used cobb douglas consequently the optimum or minimum cost size of a bank or office could not be determined third the variables measuring the costs of branching were misspecified fourth the branch

managing markets for toxic assets abstract a model in which banks trade toxic assets to raise funds for investment is analyzed toxic assets generate an adverse selection problem and consequently the interbank asset market provides insufficient liquidity investment is inefficiently low because acquiring funding requires banks to sell high quality assets for less than their fair value equity injections reduce liquidity and may be counterproductive as a policy for increasing investment paradoxically if it is directed to firms with the greatest liquidity needs an equity injection will reduce investment further asset purchase programs like the public private investment program often have favorable impacts on liquidity investment and welfare

adverse selection and the financial accelerator many economists believe that credit market distortions create a financial accelerator which destabilizes the economy this paper shows that when credit market distortions arise from adverse selection they sometimes stabilize the economy rather than destabilize it the stabilizing forces are closely related to forces that cause overinvestment in static models when investment projects are equity financed or when contracts are written optimally the distortions always stabilize the economy thus stabilizing equilibria are a robust feature of the model the empirical distinction between accelerator and stabilizer equilibria is subtle many empirical tests are unable to distinguish between accelerator and stabilizer equilibria

interest rates and credit risk this paper explores the effects of shifts in interest rates on corporate leverage and default we develop a dynamic model in which the relationship between firms and their outside financiers is affected by a moral hazard problem and entrepreneurs initial wealth is scarce the link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee firm survival the need to finance new investment with outside funding pushes firms leverage ratio above some state contingent target towards which they gradually adjust through earnings retention the dynamic response of leverage and default to interest rate rises and cuts is both asymmetric and heterogeneously distributed across firms both rises and cuts increase the aggregate default rate in the short run however a higher interest rate reduces firms target leverage and hence produces lower default rates in the longer run this helps rationalize some evidence regarding the risk taking channel of monetary policy

structural change under new labour the paper examines specific features of structural change in the uk since 1997 contrasting the decline in industrial jobs with the rise in a variety of service jobs it examines the proximate causes of structural change in particular whether the chronically slow growth of manufacturing output in the 1980s has persisted the implications of this structural change are considered particularly the effects on the balance of payments and regional employment patterns the paper suggests that the main impact of government policies on regional employment may have been through the direct and multiplier effects of public expenditure

a survey of recent developments in the literature of finance and growth this paper provides a survey of the recent progress in the literature of financial development and economic growth the survey highlights that most empirical studies focus on either testing the role of financial development in stimulating economic growth or examining the direction of causality between these two variables although the positive role of finance on growth has become a stylized fact there are some methodological reservations about the results from these empirical studies several key issues unresolved in the literature are highlighted the paper also points to several directions for future research

information asymmetry in small and medium enterprise credit guarantee schemes evidence from japan in this article we investigate whether there is adverse selection and or moral hazard in credit guarantee schemes for small and medium enterprises smes in japan as credit guarantee corporations

monetary policy in the uk the authors argue that the institutional dimension of the bank of england monetary policy and the role the uk hm treasury assumes in this framework are both firmly based on the new consensus in macroeconomics ncm this is also the theoretical framework upon which the inflation targeting element of monetary policy is firmly based this paper discusses these aspects of uk monetary policy and then assesses the policy that has been pursued since 1997 with some reference made to the period between 1992 and 1997 when a version of the framework was introduced the strategy has been successful in terms of keeping uk inflation rates within the targets set by hm treasury however a number of problematic issues are highlighted and discussed

irreversible investment and strategic interaction this paper introduces an aggregate demand externality into a model of irreversible invest ment the central result of the paper establishes the mechanism in which increases in uncer tainty can lead to suboptimal recessions these inefficient outcomes occur even if agents are allowed to coordinate to the best possible equilibria the result is driven by the external effects of firms investment decisions how can a small increase in uncertainty cause a large suboptimal drop in output this paper studies this question through a simple model of investment coupled with aggregate demand externalities the idea that economic uncer tainty is high in times preceding and during recessions is very intuitive how ever a study of its causal role for suboptimal business cycles is hampered by the absence of any rigorous transmission mechanism we are proposing one such mechanism and while our model is too stylized to allow for any direct empirical test we hope that it is the first step towards the creation of robust models with testable implications our analysis takes place in an uncertain environment where firms must choose a level of irreversible investment the literature on this problem is well developed with the fairly robust result that either an increase in uncertainty or an increase in the quality of information to arrive in the future will cause

production smoothing in the japanese vehicle industry abstract physical data from the japanese vehicle industry covering monthly observations from 1985 1 to 1994 12 are investigated across nine goods ranging from bicycles to large buses smaller variance of production is found relative to sales across all goods for unadjusted data and in 17 out of 18 cases for seasonally adjusted data such evidence in favor of the production smoothing model psm is confirmed by full information maximum likelihood employed jointly on inventories and sales equations the estimates suggest the industry operates in the range of increasing marginal costs in six out of nine goods positive costs of being away from targeted inventory are also present in six out of these nine goods which make the psm a good description of this industry

thirty five years of model building for monetary policy evaluation breakthroughs dark ages and a renaissance ion from wage rigidities there are important exceptions including work at the federal reserve board by erceg henderson and levin 2000 but the approach of the more recent golosov lucas paper with perfectly flexible wages is more common in my view wage determination is still a source of inflation dynamics though not in the same rigid ways as the models in the econometrics of price determination conference while the s s model makes sense for prices it does not seem accurate for the timing of most wage changes i think that the study of wage determination needs to be put on the front research burner again a very important task for future research is an exploration of microeconomic wage data in the bls s employment cost index comparable to what klenow and kryvtsov 2005 are doing with the cpi my guess is that the characteristics of the micro wage data will look much different this content downloaded from 207 46 13 183 on thu 21 apr 2016 05 12 45 utc all use subject to http about jstor org terms john b taylor 199 from the price data moreover the micro wage data will permit one to discriminate between different staggered wage setting models as levin et al 2005 show the shape of the distribution of wage contracts in staggered wage setting models matters significantly for monetary policy econometric policy evaluation models are still too rarely used for forecasting in my view one of the best tests of a model is its ability to forecast but most forecasting models are still of the reduced form variety and only loosely connected with structural models as the stock and watson paper at this conference illustrates efforts to use the models for forecasting this will probably require more details for the simple three equation models would be very worthwhile 5 impact on actual policy what has been the impact on policy of the development of policy evaluation models described here one might ask if it was influential in building the consensus that led to the end of the great inflation perhaps the finding that inflation could be reduced with less disruption than traditional models suggested helped reduce some policymakers reluctance to take the steps to end inflation but it seems to me that people supported paul volcker s disinflation efforts mainly because they were fed up with inflation perhaps more relevant have been the simulations of alternative monetary policy rules clearly it would not have been possible to even consider such rules systematically if it were not for these models but the impact of the policy rule research itself is more difficult to prove policy rule research has of course been useful in comparing policy in different countries and in different time periods or to characterize good policy versus bad policy it has enabled central bank staff to work with interest rates as an instrument and to do so with an analytical framework it has shown that certain monetary policy principles are important such as reacting in a preemptive fashion to forecasted increases in inflation it has shown that targeting asset prices can lead to poor results and it has been helpful anytime forward looking expectations are important as in formulating a communication policy during the recent considerable period or measured pace phases it is hard to imagine these types of policy issues being analyzed rigorously without the models with rational expectations and sticky prices and wages 6 future policy issues there are many important policy issues that these types of models or their successors can be called on to analyze in the future understanding the reason for the recent reduction in pass through coefficients for exchange rates and energy prices is important for monetary policy the models that incorporate sticky prices market power and rational expectations such as golosov and lucas 2005 can be helpful this content downloaded from 207 46 13 183 on thu 21 apr 2016 05 12 45 utc all use subject to http about jstor org terms 200 money credit and banking here determining when appropriate deviations from policy rules should start and when they should end is another important practical topic finding better ways to incorporate asset prices into policy formulation is yet another nailing down the key reasons among the many conjectures for the recent improvements in output volatility is also important for future policy in my homer jones lecture taylor 1998 i argued that it was improvements in monetary policy but many other explanations have been raised but whether the future policy issues are on this list of policy examples or not it is important to keep future monetary research focused on policy issues i think this brief history of econometric policy model development clearly illustrates that economic research is most exciting and productive when it is policy driven

production planning horizon production smoothing and convexity of the cost functions abstract one of the productions planning models economists have used for the past four decades is the production smoothing model the model s conclusion is simple if cost functions are convex under certain conditions firm s production plans may show smaller variability than the firm s sales this is a result of the first order condition for cost minimization over the production planning horizon in a 1986 paper blinder raised doubts regarding the ability of the production smoothing model to explain the observed data some researchers e g ramey journal of political economy 99 2 1991 306 explained the inconsistency between the theory and the data by providing evidence that the cost functions are non convex in this paper i point out that the shapes of the cost functions depend on the length of the time horizon under consideration it is possible that while short run cost functions are upward sloping long run cost functions may be downward sloping because the planning horizon for firms facing seasonal demand has been shown to be one seasonal cycle the short run cost function whose shape determines the firm s production plan over the horizon need to be estimated using single planning horizon data i e a single seasonal cycle researchers who use long time series data are in effect estimating long run cost functions the slopes of which may be non positive i show further that convexity of the production cost function is neither necessary nor sufficient condition for production smoothing to be an optimal plan

the bullwhip effect progress trends and directions the bullwhip effect refers to the phenomenon where order variability increases as the orders move upstream in the supply chain this paper provides a review of the bullwhip literature which adopts empirical experimental and analytical methodologies early econometric evidence of bullwhip is highlighted findings from empirical and experimental research are compared with analytical and simulation results assumptions and approximations for modelling the bullwhip effect in terms of demand forecast delay replenishment policy and coordination strategy are considered we identify recent research trends and future research directions concerned with supply chain structure product type price competition and sustainability

note and comment the supply of credit money and the demand for deposits a reply in his paper in this journal marc lavoie 1999 sets out to establish that our mechanism for reconciling the demand for deposits with the credit led supply is not in conflict with the reflux principle and also to establish the reflux mechanism as the primary mechanism we accept the former without hesitation but the latter argument seems to us to hinge critically on the meaning of terms like primary and automatic and fallacy as well as drawing strength from an institutional framework which diverges in some respects from that of the uk in recent years we explain both of these responses in the two sections that follow before drawing a brief conclusion

valuation adverse selection and market collapses we study a market for funding real investment where valuation meaning investors devoting resources to acquiring information about future payoffs creates an adverse selection problem unlike previous models more valuation is associated with lower market prices and so greater returns to valuation this strategic complementarity in the capacity to do valuation generates multiple equilibria with multiple equilibria the equilibrium without valuation is most efficient despite funding some unprofitable investments switches to valuation equilibria valuation runs look like credit crunches a large investor can ensure the efficient equilibrium only if it can precommit to a price and potentially only if subsidized

observing unobservables identifying information asymmetries with a consumer credit field experiment information asymmetries are important in theory but difficult to identify in practice we estimate the presence and importance of hidden information and hidden action problems in a consumer credit market using a new field experiment methodology we randomized 58 000 direct mail offers to former clients of a major south african lender along three dimensions i an initial offer interest rate featured on a direct mail solicitation ii a contract interest rate that was revealed only after a borrower agreed to the initial offer rate and ii a dynamic repayment incentive that was also a surprise and extended preferential pricing on future loans to borrowers who remained in good standing these three randomizations combined with complete knowledge of the lender s information set permit identification of specific types of private information problems our setup distinguishes hidden information effects from selection on the offer rate via unobservable risk and anticipated effort from hidden action effects via moral hazard in effort induced by actual contract terms we find strong evidence of moral hazard and weaker evidence of hidden information problems a rough estimate suggests that perhaps 13 to 21 of default is due to moral hazard asymmetric information thus may help explain the prevalence of credit constraints even in a market that specializes in financing high risk borrowers

nonconvex costs and the behavior of inventories this paper explores one possible explanation for the apparent excess volatility of production relative to sales nonconvexities in the technology facing firms it is shown that if firms operate in a region of declining marginal costs then small shifts in demand can cause production to jump substantially estimates for six production to stock industries as well as the automobile industry suggest that all these industries behave as if they were operating in the region of nonconvex costs the results have important implications not only for inventory investment but also for the cyclical behavior of productivity and prices

booms and banking crises banking crises are rare events that break out in the midst of credit intensive booms and bring about deep and long lasting recessions this paper presents a textbook dynamic stochastic general equilibrium model to explain these phenomena the model features a nontrivial banking sector where bank heterogeneity gives rise to an interbank market moral hazard and asymmetric information in this market may lead to sudden market freezes banking crises credit crunches and severe financial recessions those recessions follow credit booms and are not necessarily triggered by large exogenous adverse shocks

a model of financial structure and financial fragility this paper presents an asymmetric information model of financial structure the model has two types of financial institutions banks and securities markets both of which can hold loans made to firms to finance investment projects the securities markets have lower costs but they have a lemons problem because the banks have better information the result is an equilibrium that can exhibit fragility in the sense that small parameter changes such as changes in the cost advantage of the securities market or the risk structure of loans can lead to discontinuous changes in interest rates asset prices and market structure

the nature and role of monetary policy when money is endogenous this paper considers the nature and role of monetary policy when money is modelled as credit money endogenously created within the private sector there are currently two schools of thought that view money as endogenous one has been labelled the new consensus in macroeconomics and the other is the keynesian endogenous bank money approach the paper first explores the analysis of monetary policy in the new consensus macroeconomic model followed by an examination of the effectiveness of monetary policy in that analysis the keynesian view of endogenous money is discussed and the role for monetary policy in a keynesian endogenous monetary policy analysis is considered including discussion of the objectives and instruments of monetary policy copyright 2006 oxford university press

the extent of the market examines the classical theory of the market in this paper authors consider the role of price market determination price movement in competitive and monopolistic markets extension of commodity markets

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

inflation targeting a new framework for monetary policy he world s central bankers and their staffs meet regularly in venues from basle to washington to share ideas and discuss common problems perhaps these frequent meetings help explain why changes in the tactics and strategy of monetary policymaking such as the adoption of money growth targets in the 1970s the intensification of efforts to reduce inflation in the 1980s and the recent push for increased institutional independence for central banks tend to occur in many countries more or less simultaneously whatever their source major changes in the theory and practice of central banking are of great importance for both individual countries and the international economy in this article we discuss a new strategy for monetary policy known as inflation targeting which has sparked much interest and debate among central bankers and monetary economists in recent years this approach is characterized as the name suggests by the announcement of official target ranges for the inflation rate at one or more horizons and by explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers and in many cases increased accountability of the central bank

production smoothing evidence from physical product data we reconsider the paradox that the variance of production often exceeds the variance of shipments a result that casts doubt on the production smoothing model of inventory behavior most studies of production smoothing have analyzed two digit sic dollar value data from commerce department surveys in contrast this paper examines disaggregated physical product data and finds that production is smoother than shipments in about two thirds of the 38 industry or product groupings considered however doubts about the model persist most notably euler equation estimates of the model s cost parameters are usually imprecise and often do not have the signs postulated by production smoothing models

asymmetric information and imperfect competition in lending markets we study the effects of asymmetric information and imperfect competition in the market for small business lines of credit we estimate a structural model of credit demand loan use pricing and firm default using matched firm bank data from italy we find evidence of adverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average reducing credit supply banks market power can mitigate these negative effects

the characteristics of a monetary economy a keynes schumpeter approach mainstream monetary theory considers money only as an instrument meant to facilitate trading without having any effect on income or on the evolution of the economic system the aim of this paper is to elaborate a monetary theory capable of supporting the thesis of money non neutrality based on the arguments developed by keynes and schumpeter the synthesis of the theories of these two great economists will be formulated starting from the two points which are common in the views of keynes and schumpeter first in contrast with mainstream theory keynes and schumpeter state that the diffusion of a fiat money induces a radical modification into the way in which the economic system works second when keynes and schumpeter describe the reasons why money and financial aggregates are not neutral they highlight the fundamental role of the credit market and of banks in contrast with the mainstream theory they do not consider the credit market as the mirror image of the goods market

is more information always better a case in credit markets this paper studies the impact of behavioral and non behavioral information contained in consumer credit reports on the credit market a repeated game of incomplete information between a borrower and a sequence of lenders is considered lenders beliefs regarding the borrower s type depend on the borrower s historical loan performance and other informative signals it is established that for low beliefs strategic defaults occur in equilibrium as the borrower defaults on his loans despite having the ability to repay them further as the ancillary signals become increasingly informative of the borrower s type the range of beliefs over which strategic defaults occur expands this increase in strategic defaults highlights an unintended negative effect of allowing informative signals to influence beliefs on the upside the informative signals allow lenders to learn the borrower s type more quickly

international capital flows and credit market imperfections a tale of two frictions the nancial crisis of 2007 08 has underscored the importance of adverse selection in nancial markets this friction has been mostly neglected by macroeconomic models of nancial imperfections however which have focused almost exclusively on the eects of limited pledgeability in this paper we ll this gap by developing a standard growth model with adverse selection our main results are that by fostering unproductive investment adverse selection i leads to an increase in the economy s equilibrium interest rate and ii it generates a negative wedge between the marginal return to investment and the equilibrium interest rate under nancial integration we show how this translates into excessive capital inows and endogenous cycles we also extend our model to the more general case in which adverse selection and limited pledgeability coexist we conclude that both frictions complement one another and show that limited pledgeability exacerbates the eects of adverse selection

keynes s theory of liquidity preference and his debt management and monetary policies this paper seeks to bolster the view that keynes was a monetary economist concerned primarily with monetary and not fiscal policy his most fundamental policy conclusion for national economies was that the authorities could control the long term rate of interest and should do so to promote investment growth and employment keynes s theory of liquidity preference is presented as a theory of money as a store of value that leads to this fundamental policy conclusion the theory is then applied to explain the debt management monetary and international financial policies that were adopted in world war ii copyright 2006 oxford university press

theoretical reflections on endogenous money the problem with convenience lending this paper questions the practice of representing the endogenous money supply by means of a horizontal money supply curve implicitly contrasted with the conventional vertical stock supply curve what is drawn as a horizontal curve is strictly a locus between a continually shifting stock curve and a shifting demand curve consequently demand for money considerations have been suppressed in the horizontal presentation one response is that the resulting deposits are automatically held through some process such as convenience lending however the argument behind convenience lending points to the conclusion that it is changes in relative interest rates that reconcile the demand for additional loans with the demand for additional deposits c 1996 academic press limited copyright 1996 by oxford university press

emission permit banking pollution abatement and production inventory control of the firm abstract in this paper we present a dynamic model modified with emission permit banking and pollution abatement and investigate the effect of emission permit banking and pollution abatement on the production inventory strategy of the firm after introducing emission permit banking and pollution abatement the cost function consists of the inventory holding and production costs the cost of investment in abatement capital goods and the emission procurement selling cost furthermore the inventory holding costs are linear production costs are non decreasing and convex functions of the production level and the costs of investment in abatement capital goods are increasing and convex functions of the investment level we compare the optimal production inventory strategy before emission permit banking and pollution abatement and thereafter the mathematical investigation is based on the arrow karlin model

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

accounting quality and the transmission of monetary policy abstract we examine how firms accounting quality affects their reaction to monetary policy the balance sheet channel of monetary policy predicts that the quality of firms accounting reports plays a role in transmitting monetary policy by affecting information asymmetries between firms and capital providers consistent with this prediction we find that accounting quality moderates firms equity market response and future investment sensitivity to unexpected changes in monetary policy moreover the former relation is amplified for firms with more growth opportunities and more financial constraints further consistent with accounting quality moderating the transmission of monetary policy

analytical issues in external financing alternatives for sbes as the amount of information about an enterprise is generally not neutral with respect to firm size financiers have problems to identify the default risk associated with a borrower or to have control over a borrower s investments this review paper analyses how various control mechanisms are fit to reduce this information problem and how various types of capital suppliers are endowed to finance small business enterprises

frictional asset reallocation under adverse selection abstract this paper studies asset reallocation in over the counter markets subject to search bargaining and information frictions and discusses their implications for optimal monetary policy the results show that inefficiencies arise from trade under private information resulting in reduced trading volume and consumption conditional on search frictions in the over the counter market information frictions can be both welfare decreasing and welfare increasing addressing the pecuniary externality arising from the portfolio choice of liquid and illiquid assets optimality is guaranteed under the friedman rule away from the friedman rule efficiency can be restored through open market operations exchanging information sensitive assets for risk free bonds as conducted by the federal reserve in response to the global financial crisis

the effect of emission permit trading with banking on firm s production inventory strategies abstract we investigate the effect of tradable emission permits with banking on the production inventory strategy of a firm in this paper the basis of the work is the well known arrow karlin dynamic production inventory model in which the inventory holding costs are linear and production costs are non decreasing and convex functions of the production level the cost of environmental protection is taken into account in the model we assume there is an emission trading program with which firms are able to purchase their emission rights or sell them and the rights are allowed to be deposited in intertemporal trading we compare the optimal production inventory strategies of this paper with those without emission permits

investment and government intervention in credit markets when there is asymmetric information abstract this paper models private firm investment choices and government credit policy in an entrepreneurial firm financial market wherein firm owners have better information about the quality of their return distributions than do external financiers the analysis shows that despite the absence of an informational advantage the government can often increase social welfare by offering subsidized debt contracts however the paper also finds that some common credit subsidy policies including loan guarantees and government backing of targeted lending institutions yield constrained inefficient outcomes in general

hicks on monetary theory and history money as endogenous money hicks was never tired of saying that monetary theory is in history what he meant was that monetary theory is intrinsically related to real events and more importantly that monetary issues need to be analysed in a dynamic sequential context in which time plays an essential part he went on developing a particular sequential analysis the study of what happens within a single period single period theory and the study of the linkages between a succession of those periods continuation theory it is suggested that this distinction provides a useful lesson for modern endogenous money theorists

banks capital markets and the monetary transmission mechanism this paper reviews the recent literature on bank behavior and the transmission process of monetary policy it examines the implications of asymmetric information for the credit market and the capital market and discusses the macroeconomic significance of these results in models with imperfect information net worth is found to play a key role in generating macroeconomic fluctuations and in the monetary transmission process the special characteristics of banks are discussed and also the conditions required for the presence of a distinct credit channel for monetary policy empirical evidence on the importance of the new theories is briefly reviewed including an evaluation of the role of capital market imperfections in investment and consumption and the differential impact of monetary policy on small and large firms the lessons to be drawn from these theoretical and empirical results for the conduct of monetary policy are briefly outlined

asymmetric information option to wait to invest and the optimal level of investment abstract this paper analyzes equilibrium rationing on credit markets in the case of gains from waiting to acquire information about the future profitability of investment we compare the competitive outcome with the socially optimal level of investment we show that the opportunity to postpone investment changes the nature of the inefficiencies of the competitive outcome fundamentally without the option to wait high risk firms tend to invest and the outcome is characterized by a situation of underinvestment if firms can wait high risk firms benefit the most from waiting in this case low risk firms tend to invest immediately and a situation of overinvestment will result since from the banks point of view firms do not delay enough

the production smoothing model is alive and well abstract monthly data in physical units for seven industries are used to examine the production smoothing hypothesis the results strongly support this hypothesis significant effects of expected future sales on current production are found for four industries and the estimated decision equations for all seven industries imply production smoothing behavior the previous negative results appear to be due to the use of data biased against the hypothesis the shipments and inventory data of the department of commerce the paper also shows that sensible results can be obtained from estimating approximations to decision equations as opposed to estimating euler equations

entrepreneurial talent occupational choice and trickle up policies we study market inefficiencies and policy remedies when agents choose their occupations and entrepreneurial talent is subject to private information untalented entrepreneurs depress the returns to entrepreneurship because of adverse selection the severity of this problem depends on the outside option of entrepreneurs which is working for wages this links credit product and labor markets a rise in wages reduces the adverse selection problem these multimarket interactions amplify productivity shocks and may generate multiple equilibria if it is impossible to screen entrepreneurs then all agents unanimously support a tax on entrepreneurs that drives out the less talented ones however if screening is possible e g if wealthy entrepreneurs can provide collateral for their loans then wealthy entrepreneurs do not support surplus enhancing taxes

banking strategy and credit expansion a post keynesian approach this paper aims to clarify the relationship between individual banks and banking industry behaviour in credit expansion the authors argue that the balance sheet structure of an individual bank is only partially determined by its management s decision about how aggressively to expand credit it is also determined by the balance sheet positions of other banks this relationship is shown explicitly by a simple disaggregation of the variables that enter into the economy wide money multiplier the approach taken here revives the multi bank approach to banking analysis pioneered by wallace and karmel in the 1960s which is particularly wellsuited to integrating micro and macro levels in keynesian banking analysis

tradable permits and production inventory strategies of the firm abstract the paper deals with the effect of introduction of tradable permits on the production inventory strategy of a firm the basic model of arrow and karlin 1958 production over time with increasing marginal costs in arrow k j karlin s scarf h eds studies in the mathematical theory of inventory and production stanford university press stanford pp 61 69 assumes that the firm minimizes the sum of linear holding and convex production costs these costs depend explicitly on time after introducing emission trading the cost function will contain linear emission procurement selling cost we compare two optimal production inventory strategies of a firm to examine changes of optimal strategies the first strategy is the optimal solution of the arrow karlin model then we analyze this model extended with costs of tradable permits

the welfare implications of costly monitoring in the credit market rationing is a pervasive feature of credit markets it has been suggested that credit rationing represents a suboptimal allocation of resources in a general equilibrium model of credit rationing with hidden information and costly monitoring we show that if credit is rationed it is suboptimal but that credit should be rationed more tightly in equilibrium loan applicants bear average monitoring costs whereas for efficiency they should bear marginal monitoring costs which are larger because average monitoring costs increase with quantity as extra loans are accompanied by a rise in the interest rate which increases the number of defaults copyright 1994 by royal economic society

international capital crunches the time varying role of informational asymmetries we examine the determinants of capital flows to four developing countries during the 1990s using an explicitly disequilibrium econometric framework in which the supply and demand for capital are not necessarily equal and the actual amount of the flow is determined by the short side of the market we are thus able to detect instances of international capital crunch where capital flows are curtailed because of supply side rationing and to relate these instances to movements in the underlying fundamentals the analysis highlights the role of asymmetric information as distinct from the traditional concern with default risk in conditioning capital flows

can the production smoothing model of inventory behavior be saved the production smoothing model of inventory behavior has a long and venerable history and theoretical foundations that seem very strong yet certain overwhelming facts seem not only to defy explanation within the production smoothing framework but actually to argue that the basic idea of production smoothing is all wrong most prominent among these is the fact that the variance of detrended production exceeds the variance of detrended sales this paper first documents the stylized facts then it derives the production smoothing model rigorously and explains how the model can be amended to make it consistent with the facts finally it reviews the theoretical and empirical evidence and tries to draw some tentative conclusions

financial liberalization financial sector development and growth evidence from malaysia abstract the objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of malaysia using time series data from 1960 to 2001 we conduct cointegration and causality tests to assess the finance growth link by taking the real interest rate and financial repression into account the empirical evidence suggests that financial liberalization through removing the repressionist policies has a favorable effect in stimulating financial sector development financial depth and economic development are positively related but contrary to the conventional findings our results support robinson s view that output growth leads to higher financial depth in the long run

federal lending and aggregate economic activity attention to federal activity in credit markets is typically focused on the government s role as a borrower in contrast scant attention is paid to its equally large and dominant role as a lender this paper evaluates the aggregate impact of federal lending activity within the framework of a vector autoregressive representation of the us macroeconomy the empirical regularities uncovered suggest that aggregate federal lending activity does not have a net positive impact on output

technology investment under flexible capacity strategy with demand uncertainty abstract this paper investigates technology investment under flexible capacity strategy with demand uncertainty technology investment enables a firm to reduce its total production cost while flexible capacity strategy aims to reduce a firm s production waste by postponing production until demand is known adopting a general technology investment cost we examine how technology investment cost structure affects a firm s technology investment decisions we derive the conditions under which the firm will benefit from technology investment we show that the firm can increase its expected profit through technology investment only when the unit technology investment cost that varies inversely with the basic technology level is below a threshold however even though the technology investment cost is zero the benefit from the increase in technology level is limited furthermore we analytically determine the optimal technology levels and establish their relationships under different technology investment cost structures our findings will help firms evaluate various technology investment options and choose the most proper one