incentive effects of benevolent intervention the case of government loan guarantees abstract there has been a substantial recent growth in government loan guarantees to ailing firms in the united states this paper investigates the potential incentive effects of this practice using the simplest available two period model it is shown that when firms know that loan guarantees may be forthcoming they may be induced to adopt riskier investments and take on more leverage these perverse incentive effects imply that the actual loan guarantees related contingent liability of the government could be much larger than suspected our policy recommendation is that the government either abandon the practice altogether or set up a federal agency that sells loan guarantees to all firms at prices that depend on the riskiness of the firm s assets and its leverage

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

collateral in credit rationing in markets with imperfect information note in their 1981 article joseph stiglitz and andrew weiss analyze adverse selection and incentive effects in the loan market the models considered are based on two crucial assumptions borrowers are subject to limited liability and lenders cannot distinguish borrowers projects of different risk stiglitz and weiss show that a bank that raises its interest rate may suffer adverse selection because only risky borrowers will be willing to borrow at the higher rate thus lenders may choose not to raise the interest rate to eliminate excess demand resulting in the possibility of a credit rationing equilibrium stiglitz and weiss also consider briefly the role of collateral in such credit rationing models they conclude that lenders may choose not to use collateral requirements as a rationing device an increase in collateral requirements like an increase in the interest rate potentially leads to a decrease in the lender s expected return on loans because of resulting adverse incentive and selection effects the purpose of this note is to further investigate the role of collateral in these models stiglitz and weiss discussion in section iii establishes that adverse selection effects can result from increases in collateral when borrowers are risk averse i will show by returning to a model they discussed earlier in section i that the adverse selection effects can also occur when borrowers are risk neutral stiglitz and weiss outline a model to consider the use of collateral as a rationing device section iii in that model all potential borrowers face the same array of risky projects each potential borrower chooses at most one of those projects to undertake the individuals are by assumption risk averse with decreasing absolute risk aversion and possess different amounts of initial wealth thus choice of project if any to undertake and the method of finance selffinance from initial wealth or loan finance will differ from one individual to the next stiglitz and weiss show that among those who undertake risky projects and who choose borrowing as the method of finance wealthier individuals undertake riskier projects an increase in collateral has two effects on the market for loans those individuals who remain in the market will choose to undertake less risky projects and those individuals who drop out of the market are less wealthy low risk borrowers if the second effect is sufficiently strong then increased collateral requirements will mean decreased expected returns for the lender thus a credit rationing equilibrium may occur since lenders may not choose to use collateral requirements or the interest rate to eliminate excess demand the adverse selection effect just described does not occur in this model if the individuals are risk neutral consequently the potential for a credit rationing equilibrium is limited to cases where borrowers are risk averse to see that increases in collateral requirements can also result in adverse selection if borrowers are risk neutral consider the model stiglitz and weiss used to analyze the adverse selection effects of increases in the interest rate section i pp 395 99 it differs from the section iii model discussed above in three ways first borrowers are risk neutral second all projects ar loan financed the analogy to the section iii model is that no individuals have sufficient wealth to self finance projects third in the section

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

on the risk spillover across the oil market stock market and the oil related cds sectors a volatility impulse response approach abstract compared to credit default swap cds literature this study focuses on the magnitude of volatility transmission and the risk spillover mechanism across the oil market financial market risks and the oil related cds sectors our dataset includes futures prices of west texas intermediate wti and seven different measures of markets and credit risks four of the vast risk measures are the oil related cdss for auto chemicals natural gas and utility sectors in addition three measures of the financial market risk the one month expected equity volatility measured by vix move and smove are included the daily dataset covers the period from 6 january 2004 to 2 february 2016 the volatility transmission mechanism across the oil and financial markets and cds sectors is examined using the volatility impulse response model we evaluate the risk transmission due to several recent crisis shocks around the world and the results show complicated transmission mechanisms that spread over long periods among these events the lehman brothers bankruptcy has destabilizing effects on all oil related sectors findings also show that all oil market related shocks have significant risk transmission effects

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

pricing default swaps empirical evidence in this paper we compare market prices of credit default swaps with model prices we show that a simple reduced form model outperforms directly comparing bonds credit spreads to default swap premiums we find that the model yields unbiased premium estimates for default swaps on investment grade issuers but only if we use swap or repo rates as proxy for default free interest rates this indicates that the government curve is no longer seen as the reference default free curve we also show that the model is relatively insensitive to the value of the assumed recovery rate

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

oil market conditions and sovereign risk in mena oil exporters and importers abstract we analyze for the first time how various levels of oil returns and oil volatility changes affect sovereign risk in static and time varying settings empirical analyses involve daily data from february 14 2011 to november 23 2018 covering a sample of mena oil exporters and importers the results from a quantile based approach show that the sovereign risk of mena oil exporters and importers is directionally predicted by shocks in oil prices and oil volatility especially during the oil crash of 2014 2016 overall the impact of oil returns and volatility changes occur in a very short time span that is within one day lag and the quantile specific reactions of sovereign risk spreads are time varying the impact of oil returns is asymmetric across quantiles the results hold when we control for stock market returns the findings have implications for investors in terms of portfolio and risk management importantly the findings are useful to policymakers for sovereign risk management decisions the cost of sovereign borrowing and the market timing of debt issuance finally the findings matter to bankers given that central and domestic banks hold large amounts of sovereign debt which makes banking systems particularly exposed to their own sovereign stress

finite lifetimes and the effects of budget deficits on national saving abstract even though realistic deficit policies shift sizable tax burdens to future generations the assumption of an infinite horizon is a good approximation for analyzing a deficit s short run saving effect on individuals who are neither liquidity constrained nor myopic recent u s experience casts significant doubt on these assumptions however and appears difficult to reconcile with the ricardian equivalence proposition that the timing of taxes does not affect national saving recent deficits have coincided with reduced national saving and a substantial increase in the share of gnp devoted to consumption

state intervention and the microcredit market the role of business development services we analyze in this paper how various forms of state intervention can impact microfinance institutions lending behavior using a simple model where entrepreneurs receive individual uncollateralized loans we show that not surprisingly state intervention through the loan guarantee increases the number of entrepreneurs receiving a loan however after modeling business development services bds provided by the microfinance institution we show that the loan guarantee can have a counterproductive effect by reducing the number of entrepreneurs benefiting from such services we therefore analyze an alternative policy bds subsidization we show that if bds are efficient enough and are targeted toward less performing borrowers then for fixed government expenditures such subsidies do better in terms of financial inclusion than the loan guarantee moreover we argue that under similar conditions bds subsidization alone does better in terms of financial inclusion than a mix of policies

the global credit boom challenges for macroeconomics and policy the recent financial crisis has put the spotlight on the rapid rise in credit which preceded it in this paper we provide an empirical and theoretical analysis of the credit boom and the macroeconomic context in which it developed we find that the boom was unusually long and associated with neither particularly strong growth nor rising inflation in the economies in which it took place we show that this type of credit and financial cycle is hard to reconcile with existing economic theory and argue that while the global savings glut may account for the cycle s initial phase other factors such as the conduct of monetary policy and perceptions of declining macroeconomic risk were more important from the mid 2000s onwards we conclude by identifying some of the challenges now facing macroeconomics and policy

money credit and banking in monetary models where agents are subject to trading shocks there is typically an ex post inefficiency since some agents are holding idle balances while others are cash constrained this problem creates a role for financial intermediaries such as banks who accept nominal deposits and make nominal loans in general financial intermediation improves the allocation the gains in welfare come from the payment of interest on deposits and not from relaxing borrowers liquidity constraints we also demonstrate that when credit rationing occurs increasing the rate of inflation can be welfare improving

are adjustments in the default risk premium asymmetric this article employs threshold cointegration and error correction models to the default risk premium the approach allows asymmetry in the dynamic process that has not been captured in previous studies of corporate credit spreads the results indicate that the adjustment process is asymmetric and would be beneficial to investors and macroeconomic forecasters as the default risk premium may signal future business cycles

macroeconomic fundamentals price discovery and volatility dynamics in emerging bond markets abstract this study characterizes volatility dynamics in external emerging bond markets and examines how prices and volatility respond to macroeconomic news as in mature bond markets surprises about macroeconomic conditions in emerging markets are found to affect both conditional returns and volatility of external bonds with the effects on volatility being more pronounced and longer lasting than those on prices yet the process of information absorption tends to be more drawn out than in mature bond markets global and regional macroeconomic news is at least as important as local news for both price and volatility dynamics

yield spreads as predictors of industrial production expectations on short rates or term premia this paper reconsiders information in the us t bill term structure for predicting movements in real monthly industrial production it is shown that although t bill spreads contain little or no predictive content increases in term premia estimated from a garch m model of the term structure do since these estimated premia are linear functions of the conditional variance of excess returns the implication is that increases in interest rate variability are associated with reductions in industrial production this evidence is robust to the inclusion of the spread between the 10 year tbond yield and one month t bill yields the t bill term structure therefore contains information which is independent of the long end of the term structure

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

the information in the high yield bond spread for the business cycle evidence and some implications the market for high yield below investment grade corporate bonds developed in the middle 1980s we show that since this time the high yield spread has had significant explanatory power for the business cycle we interpret this finding as possibly symptomatic of financial factors at work in the business cycle along the lines suggested by the financial accelerator we also show that over this period the high yield spread outperforms other leading financial indicators including the term spread the paper bill spread and the federal funds rate we conjecture that changes in the conduct of monetary policy over time may account for the reduced informativeness of these alternative indicators all of which are tied closely to monetary policy copyright 1999 by oxford university press

economic growth and energy consumption causal nexus viewed through a bootstrap rolling window one puzzling results in the literature on energy consumption economic growth causality is the variability of results particularly across sample periods sample sizes and model specification in order overcome these issues this paper analyzes the causal links between energy consumption and economic growth for g 7 countries using bootstrap granger non causality tests with fixed size rolling subsamples the data used includes annual total energy consumption and real gross domestic product gdp series from 1960 to 2006 for g 7 countries excluding germany for which the sample period starts from 1971 using the full sample bootstrap granger causality test we find that there is predictive power from energy consumption to economic growth only for canada however parameter instability tests show that none of the estimated models have constant parameters and hence the full sample results are not reliable analogous to the full sample results the results obtained from the bootstrap rolling window estimation indicate no consistent causal links between energy consumption and economic growth we however find that causal links are present between the series in various subsamples furthermore these subsample periods correspond to significant economic events indicating that the findings are not statistical artefacts but correspond to real economic changes our results encompass previous findings and offer an explanation to varying findings

the slope of the yield curve and real economic activity tracing the transmission mechanism abstract the slope of the yield curve in the us and the uk is strongly associated with the temporary rather than the permanent components of real economic activity suggesting that the yield curve affects economic activity primarily through the demand side

cointegration and threshold adjustment this article proposes an extension to the engle granger testing strategy by permitting asymmetry in the adjustment toward equilibrium in two different ways we demonstrate that our test has good power and size properties over the engle granger test when there are asymmetric departures from equilibrium we consider an application namely whether there exists cointegration among interest rates for instruments with different maturities this issue has been widely tested with mixed results we argue that either cautious policy or possibly opportunistic behavior on the part of the federal reserve implies that an equilibrium relationship between short and long term interest rates exists but that adjustments from disequilibrium are asymmetric in nature empirical tests using u s yields confirm the asymmetric nature of error correction among interest rates of different maturities

the distribution of money balances and the nonneutrality of money recent monetary models with explicit microfoundations are made tractable by assuming that agents have access to centralized markets after one round of decentralized trade given quasi linear preferences this makes the distribution of money degenerate which keeps the models simple but precludes the discussion of distributional effects of monetary policy we generalize these models by assuming two rounds of trade before agents can readjust their money holdings to study a range of new distributional effects analytically we show that unexpected symmetric lump sum money injections may increase short run output and welfare whereas asymmetric injections may increase long run output and welfare

oil shocks and financial systemic stress international evidence abstract by conducting a structural var analysis on the financial systemic stress in 20 countries this paper provides international evidence that oil structural shocks impact not only stress in individual financial markets but also their connectedness the oil structural shocks explain a large fraction of the variation in the connectedness among various financial markets the effect of oil structural shocks on financial systemic stress is largely dependent on the origins of oil price changes and a country s net oil export position in most oil importing economies financial systemic stress is negatively impacted by supply and aggregate demand shocks and positively impacted by oil market specific demand shocks opposite patterns are detected in oil exporting economies the effects of the spillovers are asymmetrically related with market conditions during normal periods more risks are spilled over from the oil market to financial systems but during financial crises the opposite occurs in periods of financial crises and oil price collapses there is noticeable contagion between the oil market and financial systems

liquidity constrained markets versus debt constrained markets this paper compares two different models in a common environment the first model has liquidity constraints in that consumers save a single asset that they cannot sell short the second model has debt constraints in that consumers cannot borrow so much that they would want to default but is otherwise a standard complete markets model both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates in a stochastic environment the two models have quite different dynamic properties with the debt constrained model exhibiting simple stochastic steady states while the liquidity constrained model has greater persistence of shocks

directional predictability from oil market uncertainty to sovereign credit spreads of oil exporting countries evidence from rolling windows and crossquantilogram analysis abstract given the recent collapse of oil prices this study investigates the directional predictability from the oil market uncertainty to the sovereign credit default swap cds spreads of four oil exporting gcc countries bahrain qatar saudi arabia and united arab emirates and five other oil exporting countries brazil mexico norway russia and venezuela using the modified bootstrap rolling window approach the empirical results reveal a significant directional predictability from oil uncertainty to the cds spreads of most of those oil exporting countries during the subperiods 2010 2011 and 2014 2015 that is during the periods when oil volatility follows a rising trend the most significant directional predictability is found for qatar bahrain saudi arabia and norway particularly during the 2014 2015 oil price collapse subperiod whereas there is no directional predictability found in the case of brazil for mexico the oil market uncertainty predicts cds spreads mostly during 2014 and for venezuela the directional predictability flows are highly impactful and concentrated during 2011 13 to check the robustness of our estimations we use a novel quantile dependence measure called the cross quantilogram that was developed by han et al 2016 the estimation results of this approach confirm our main findings and indicate that the surge in oil volatility predicts the cds spreads in different quantiles overall the findings highlight that the sovereign credit risk of the gcc and the other oil exporting countries is at least partially driven or directionally predicted by the oil volatility shocks this has important implications for investment and policy decisions

asset prices and liquidity in an exchange economy i develop an asset pricing model in which financial assets are valued for their liquidity the extent to which they are useful in facilitating exchange as well as for being claims to streams of consumption goods the implications for average asset returns the equity premium puzzle and the risk free rate puzzle are explored in a version of the model that nests the work of mehra and prescott 1985

inflation and welfare a search approach this paper extends recent findings in the search theoretic literature on monetary exchange regarding the welfare costs of inflation we present first estimates of the welfare cost of inflation using the welfare triangle methodology of bailey 1958 and lucas 2000 we then derive a money demand function from the search theoretic model of lagos and wright 2005 and we estimate it from u s data over the period 1900 2000 we show that the welfare cost of inflation predicted by the model accords with the welfare triangle measure when pricing mechanisms are such that buyers appropriate the social marginal benefit of their real balances for other mechanisms welfare triangles underestimate the true welfare cost of inflation because of a rent sharing externality we also point out other inefficiencies associated with noncompetitive pricing which matter for estimating the cost of inflation we then illustrate how endogenous participation decisions can mitigate or exacerbate the cost of inflaion and we provide calibrated examples in which a deviation from the friedman rule is optimal finally we discuss distributional effects of inflation

rebates as a mechanism to induce the entry of commercial banks into new markets abstract for several reasons governments may want to encourage commercial banks to offer credit to some specific groups this paper analyzes a contract scheme that may help achieve this objective without inducing financial disintermediation or other adverse behavior two sources of information asymmetry are considered between the government and the bank credit might be diverted to borrowers not belonging to the targeted group and between the bank and the borrower the latter may divert credit to purposes other than stated compared to other policies the scheme analyzed here is superior since it brings about lower interest rates and higher cooperation from banks to achieve the government s objective

a joint analysis of market indexes in credit default swap volatility and stock markets abstractthis paper analyses the joint dynamics of the cds volatility and stock markets using both var and markov regime switching var models with market index data it shows that the joint behaviour of the three markets is better characterized by the markov model with two regimes corresponding to low and high volatile market conditions the relationship between changes in the market indexes under a regime is consistent with theory and persistent the information transmission process of shocks to the markets is similar for the two regimes with a more important role for cds shock and the volatility in the money market is an important determinant of regime switching the findings have practical implications particularly for hedging strategies with market indexes under different market conditions

economic policy uncertainty shocks and stock bond correlations evidence from the us market abstract this paper examines the effects of economic policy uncertainty shocks on stock bond correlations for the us market we devise a general framework which distinguishes a positive shock from a negative one and nests either as its special case the results show that innovations in the policy uncertainty index impact negatively and asymmetrically on the subsequent stock bond correlations which are characterized by a structural break and positive type asymmetry

money bargaining and risk sharing we investigate the dual role of money as a self insurance device and a means of payment when perfect risk sharing is not possible and when the two roles of money are disentangled we use a variant of lagos wright 2005 where agents face a risk in the centralized market cm in the decentralized market dm money s main role is as a means of payment while in the cm it is as a self insurance device we show that state contingent inflation rates can improve agents ability to self insure in the cm thereby improving the terms of trade in the dm we then characterize the optimal monetary policy

dynamic co movements of stock market returns implied volatility and policy uncertainty we examine time varying correlations among stock market returns implied volatility and policy uncertainty our findings suggest that correlations are indeed time varying and sensitive to oil demand shocks and us recessions

a guide to public sector debt and deficits government deficits reinterpreted willem h buiter public sector debt and deficits are a matter of concern to governments throughout the world after presenting data on the public debt and deficits in the uk and abroad this paper considers four key issues first does an increase in the budget deficit today make an increase in inflation in the future more likely in economies like the uk the answer is no because the scope for raising revenue by money creation is limited compared to raising taxes second how does one evaluate the consistency of a given spending and tax programme a number of measures are presented which indicate the adjustment that must be made to spending and tax plans if the government is to remain solvent third it is often argued that an increase in budget deficits will merely crowd out private spending the paper shows that the truth of this proposition depends critically on the state of the economy the time horizon and whether the increased deficit is temporary or permanent finally the question of deriving a suitable measure of fiscal stance is considered developing an index of fiscal impact requires a suitable economic model and a number of different measures are considered and criticized conventional deficit measures whether actual cyclically corrected or inflation corrected are a poor indicator of the government s true fiscal stance

consumption insurance an evaluation of risk bearing systems in low income economies the hypothesis of full risk sharing can be taken to data from low income countries and evaluate formal and informal financial systems in many contexts idiosyncratic risks are high so credit insurance arrangements could be beneficial statistical tests reveal that households in southern india take advantage of these possibilities villages in cote d ivoire and countries in thailand do not do as well the paper includes an empirical description of the devices used to smooth consumption and a theoretical discussion of private information and incentives on ideal operating systems the full information and mechanism design frameworks provide benchmarks for policy analysis

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

financial sophistication and the distribution of the welfare cost of inflation abstract the welfare cost of anticipated inflation is quantified in a calibrated model of the u s economy that exhibits tractable equilibrium dispersion in wealth and earnings inflation does not generate large losses in societal welfare yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy if money is the only asset then inflation mostly hurts the wealthier and more productive agents while those poorer and less productive may even benefit from inflation the converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money

credit market efficiency and tax policy in the presence of screening costs after establishing the existence of capital market equilibrium in the presence of asymmetric information and screening costs this paper examines tax policies designed to correct the attendant externalities when projects differ in expected returns it is shown to be ambiguous whether costly private screening weakens or strengthens the case for an interest income tax however when projects differ only in riskiness as in the model of stiglitz and weiss screening opportunities cause the efficiency case for tax intervention to disappear

explaining credit default swap spreads by means of realized jumps and volatilities in the energy market abstract this paper studies the relationship between credit default swap cds spreads for the energy sector and oil futures dynamics using data on light sweet crude oil futures from 2004 to 2013 which contains a crisis period we examine the importance of volatility and jumps extracted from the futures in explaining cds spread changes the analysis is performed at an index level and by rating group as well as for the pre crisis crisis and post crisis periods our findings are consistent with merton s theoretical framework at an index level futures jumps are important when explaining cds spread changes with negative jumps having higher impact during the crisis the continuous volatility part is significant and positive indicating that futures volatility conveys relevant information for the cds market as for the analysis per rating group negative jumps have an increasing importance as the credit rating deteriorates and during the crisis period while the results for positive jumps and futures volatility are mixed overall the relation between the cds market and the futures market is stronger during volatile periods and strengthened after the global financial crisis

too much investment a problem of asymmetric information this paper shows that under plausible assumptions the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level raising the rate of interest above the free market level will restore optimality this conflicts with generally held views and is contrasted with the stiglitz weiss model it is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance however under the stiglitz weiss assumptions used to derive an underinvestment result equity is shown to be the equilibrium method of finance

money and dynamic credit arrangements with private information abstract we construct a model with private information in which consumers write dynamic contracts with financial intermediaries a role for money arises due to random limited participation of consumers in the financial market without defection constraints a friedman rule is optimal the mean and variability of wealth tend to fall with inflation in the steady state and the welfare effects of inflation are very small with defection constraints the effects of inflation on the distribution of welfare and consumption are large but the effect on average welfare is still small the relaxation of defection constraints resulting from higher inflation can cause a substantial increase in the real interest rate journal of economic literature classification numbers d8 e4 g2

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

risk spillovers in oil related cds stock and credit markets abstract this paper examines risk transmission and migration among six us measures of credit and market risk during the full period 2004 2011 period and the 2009 2011 recovery subperiod with a focus on four sectors related to the highly volatile oil price there are more long run equilibrium risk relationships and short run causal relationships among the four oil related credit default swaps cds indexes the expected equity volatility vix index and the swaption expected volatility smove index for the full period than for the recovery subperiod the auto sector cds spread is the most error correcting in the long run and also leads in the risk discovery process in the short run on the other hand the cds spread of the highly regulated natural monopoly utility sector does not error correct the four oil related cds spread indexes are responsive to vix in the short and long run while no index is sensitive to smove which in turn unilaterally assembles risk migration from vix the 2007 2008 great recession seems to have led to localization and less migration of credit and market risk in the oil related sectors

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

modelling the dependence structures of australian itraxx cds index in contrast to market expectations the correlation between credit default swap cds spreads and their respective stock prices in australia was found to be positive the global financial crisis gfc affected the nonlinear association between the two asset classes with firms experiencing financial distress and stock prices plummeting cdss issuers reacted to such exogenous shocks by increasing their risk premiums on their spreads reflecting the increased inherent risk by splitting the data into pre and post gfc contexts and by employing the use of archimedean copulas we observe a negative co movement in the post gfc period this finding is robust to several equity indices overall such result is critical for investors engaging in arbitrageur activities

dynamic nonlinear impacts of oil price returns and financial uncertainties on credit risks of oil exporting countries abstract this paper investigates the dynamic and nonlinear impact of oil price returns on the sovereign credit default swap cds spreads for the oil rich countries of the gulf cooperation council gcc and other important oil exporting countries namely venezuela mexico and russia we employ the standard quantile regression analysis the rolling quantile regression and finally the quantile on quantile qq approach that allows one to investigate the dependence dynamics of the sovereign cds spreads under different credit market conditions the empirical results show that oil price returns significantly and favorably decrease the sovereign credit risk premium of the non gcc oil exporting countries under consideration however the results also suggest no or little impact on the sovereign credit risk premium of saudi arabia uae and norway which have the most significant sovereign wealth funds in the world the negative i e favorable impact of oil price returns on the sovereign cds spreads where present gradually increases with the quantile level and is the highest during the bullish credit market conditions the results also show that those cds spreads are more sensitive to the global bond market uncertainty factor than to the global equity market uncertainty factor

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

dynamics of cds spread indexes of us financial sectors this article examines the credit default swap cds spread index for three sectors banking financial services and insurance in the short and long run in the long run the results show that the index of the insurance sector which sells the long term cds contracts has the highest adjustment while the banking sector is not error correcting in the short run although the insurance sector cds spread index has general predictive power of all sector cds spreads the evidence suggests that the banking sector particularly leads the financial services and this in turn leads the insurance sector implying a leading sector cds pricing role for the banking spreads in the short run the short run sensitivity generalized impulse response function girf and generalized variance decomposition gvdc analyses also demonstrate that the sectors credit risk responds more to credit events in the banking sector than in the other two sectors other than their own over a 50 day horizon however the lowest cross sector cds

creditgrades and the itraxx cds index market in the study reported the creditgrades model was used to calculate credit default swap spreads and the spreads were compared with empirically observed cds spreads for eight itraxx indices covering europe theoretical and empirical spread changes were found to be significantly correlated also lagged theoretical spread changes were correlated with current itraxx spread changes the correlations indicate a close relationship between the stock market and the cds market and also indicate some predictive ability of the creditgrades model simple trading strategies based on the autocorrelation and predictive ability of the model produced positive profits before trading costs when trading was within the bid ask spread

investment in segmented capital markets bankers screening devices are identified to determine firms probability of borrowing in the formal segment of the capital market in pakistan incorporating this information investment functions are estimated using a two stage switching regressions model with endogenous switching it is concluded that firms that borrow in the formal markets behave according to the flexible accelerator model of investment while non borrowing firms plough back profits furthermore the former have higher capital output ratios and find it less difficult to adjust to their desired capital stocks compared to the latter investment determinants related to entrepreneurial and firm features are also identified

the welfare cost of inflation under imperfect insurance abstract this paper examines the welfare cost of inflation in an economy where agents hold money in order to smooth consumption in the face of income variability for which there is no insurance the findings indicate that for the type of economies considered here the area under the empirical money demand curve is a poor measure of the welfare cost of inflation this area accounts for only one fourth of the true costs in the case of 5 inflation

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

the welfare effect of access to credit i present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit aects welfare when credit markets feature limited participation allowing more agents to use credit has an ambiguous eect on welfare because it may make consumption risk sharing more ine cient i calibrate the model using u s data on credit card transactions and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

dynamic correlation and equicorrelation analysis of global financial turmoil evidence from emerging east asian stock markets abstractthis study investigates the dynamic conditional correlations dccs between eight emerging east asian stock markets and the us stock market and analyses the dynamic equicorrelation among these nine stock markets we find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis we refer to this finding as contagion from the us stock market to the emerging east asian markets we also find an additional significant process of increasing correlations and equicorrelation herding in the second phase of the global financial crisis further we employ two new models namely dccx mgarch a dcc multivariate garch model with exogenous variables and decox mgarch a dynamic equicorrelation multivariate garch model with exogenous variables to identify the channels of contagion we find that an increase in the vix index increases the conditional correlations and equicorrelation while increases in ted spreads decrease the conditional corre

ricardian equivalence in the presence of capital market imperfections abstract it is a common claim that ricardian equivalence fails if capital markets are imperfect the validity of this claim is examined for the case of informationally imperfect capital markets we present three alternative models of adverse selection and analyze the effects of debt finance in these models it is shown that a debt financed tax cut can lead to pareto improvement in some cases in the theoretically most preferable model however ricardian equivalence survives in spite of genuine imperfections in the capital market the results point to the importance of specifying the exact nature of imperfection

some consequences of credit rationing in an endogenous growth model an endogenous growth model is developed where all investment is financed via credit extension there is also an adverse selection problem in loan markets so that in equilibrium credit rationing arises endogenously the result is that equilibrium levels of credit rationing and real growth rates are jointly determined in this context several changes in the environment can have unusual consequences for instance improvements in the technology for producing capital can reduce growth because of their adverse impacts on credit rationing for similar reasons various government investment subsidies can be growth reducing this phenomenon is often observed empirically

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

oil price shocks and emu sovereign yield spreads abstract this study examines for the first time the relationship among the oil price shocks and the sovereign yield spreads in the emu which is collectively the largest oil importer of the world in a time varying environment in particular we examine the time varying correlation between oil price shocks and the 10 year sovereign yield spread of core and periphery countries in the emu by employing a scalar bekk framework the main findings reveal that the correlations between sovereign yield spreads and oil price shocks are indeed time varying and are influenced by specific economic and geopolitical events that took place during the study period furthermore even though the correlation patterns are constantly low or zero prior to the great recession a change is revealed in the post 2008 period when correlations become moderate and more volatile finally we do not observe noteworthy differences in the correlation behaviour between core and periphery countries to different oil price shocks the findings of this study are particularly useful and provide valuable information to marketplace participants

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

cross quantilogram based correlation and dependence between renewable energy stock and other asset classes abstract we study the cross quantile dependence of renewable energy re stock returns on aggregate stock returns changes in oil and gold prices and exchange rates applying a recently developed cross quantilogram approach we provide two novel findings first although prior studies show that re stock returns have a positive dependence on changes in oil prices and in the aggregate stock index we find that the relationship is not symmetric across quantiles and that this asymmetry is higher in longer lags second while the extant literature provides evidence that exchange rates and gold returns exert a positive influence on aggregate stock returns we report that this positive influence on re stock returns is observed only during extreme market conditions these results are robust i even after controlling for economic policy and equity market uncertainties as well as ii in both a time static full sample and recursive subsamples

international economic policy uncertainty and stock prices wavelet approach this paper examines the link between economic policy uncertainty and stock price in both a time and frequency domain wavelet analysis reveals that the relationship is generally negative but changes over time exhibiting low to high frequency cycles moreover the timing of frequency changes overlaps when us policy uncertainty comoves with other countries policy uncertainty

seigniorage as a tax a quantitative evaluation in this paper we construct a computable general equilibrium model calibrate it to selected data for the american economy and use it to explore the efficacy of the seigniorage tax associated with various monetary arrangements we find that the key feature of any monetary tax arrangement is its equilibrium after tax real return schedule on liquid assets held by the households we also find that considerable seigniorage which we define to be the diserence between government expenditures other than interest paid on government debt and taxes collected can be large we find that the seigniorage tax is a poor one relative to a tax on labor income ln particular we find that if the after tax real return on saving deposits is 5 percent as it was on average in the 1974 1978 period welfare is one half percent of consumption lower than it would be if the after tax real return were zero as it approximately was in both the 1964 1968 and 19841988 periods the work builds on that of a imrohoroglu 1990 who finds that for worlds in which non interest bearing nominal assets are the only liquid assets the cost of constant inflation is far greater than the area under the empirical demand for money relation with such arrangements the after tax real return is the negative of the inflation rate the key feature of her model is that agents hold money in order to smooth consumption in the face of idiosyncratic income variability for which there

eurozone sovereign contagion evidence from the cds market 2005 2010 abstract this paper analyses the dynamics of the credit default swap cds market of piigs france germany and the uk for the period of 2005 2010 the study is performed on the basis of the datastream and dtcc data on cds spreads and the bis data on cross border exposures the analysis of the data shows that sovereign risk mainly concentrates in the eu countries the ewma correlation analysis and the granger causality test demonstrate that there was contagion effect since correlations and cross county interdependencies increased already after august 2007 furthermore the irf analysis shows that among piigs the cds markets of spain and ireland have the biggest impact on the european cds market whereas the cds market of the uk does not cause a big distress in the eurozone the adjusted correlation analysis confirms that greece and other piigs even spain and italy have lower capacity to trigger contagion than core eu countries besides portugal is the most vulnerable country in the sample whereas the uk is the most immune to shocks

optimal monetary policy distribution efficiency versus production efficiency this paper investigates the trade off between distribution effect and production effect of monetary policy when there exist unobservable idiosyncratic liquidity shocks in the absence of risk sharing arrangements such as a credit market monetary policy serves to provide ex post insurance to smooth consumption specifically issuing interest bearing bonds restores credit transactions on money through bond money exchanges such a policy has a positive distribution effect but the resulting inflation hampers production efficiency it is demonstrated that the trade off between distribution efficiency gain and production efficiency loss would result in net welfare enhancement if consumers are relative risk averse enough politique monetaire optimale efficacite dans la distribution versus efficacite dans la production ce memoire examine la relation d equivalence entre l effet sur la distribution et l effet sur la production de la politique monetaire quand existent des chocs de liquidite idiosyncratiques non observables en l absence d arrangement pour le partage des risques tel qu un marche du credit la politique monetaire sert d assurance ex post pour lisser les variations dans les niveaux de consommation specifiquement emettre des obligations qui paient des interets restore les transactions monetaires de credit via les echanges obligations monnaie une telle politique a un effet positif sur la distribution mais l inflation qui en resulte nuit a l efficacite de la production on montre que la relation d equivalence entre les gains d efficacite dans la distribution et la perte d efficacite dans la production resultent en une amelioration du niveau net de bien etre si les consommateurs ont une aversion suffisamment grande au risque relatif

love thy children abstract this paper proves that barro s 1974 debt neutrality proposition whose relevance hinges in an economy with bequest motives on bequests being operative in the economy without public debt is not applicable to a wide class of overlapping generation economies those with a weak bequest motive in particular it is shown that the bequest motive is always too weak and public debt therefore non neutral when non physical assets have a well defined function reducing oversavings in the corresponding economy without bequest motive i e when the non altruistic economy is dynamically inefficient

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

money and risk sharing we study the use of money for sharing consumption risk in our model agents randomly receive endowments at some points in time and produce at other points due to information frictions agents cannot use intertemporal contracts to share risk the use of money allows agents to overcome these information frictions the friedman rule is shown to generate efficient risk sharing furthermore we quantify the welfare costs of incomplete risk sharing and find that with 10 inflation the welfare cost of inefficient risk sharing is approximately 1 1 5 of steady state consumption

option valuation with co integrated asset prices abstract this paper investigates theoretical and practical aspects of options that are based upon two or more assets which are co integrated for this purpose a new discrete time model of asset prices is developed a model featuring both the co integration property as well as stochastic volatilities using a garch equilibrium based option pricing approach it is shown that when volatilities are deterministic the option prices do not depend on the co integration parameters except for the mis specification effect as to the manner in which the volatilities are estimated however with stochastic volatilities the option prices explicitly depend upon the co integration parameters in order to understand these results better this paper also examines a continuous time diffusion limit of the asset price system and empirically studies the co integration effect using spread options based upon the s p500 and the nasdaq100 these numerical results suggest that consideration of co integration can substantially alter the value delta and vega of a spread option