the american business cycle continuity and change in recent decades the american economy has experienced the worst peace time inflation in its history and the highest unemployment rate since the great depression these circumstances have prompted renewed interest in the concept of business cycles which joseph schumpeter suggested are like the beat of the heart of the essence of the organism that displays them in the american business cycle some of the most prominent macroeconomics in the united states focuses on the questions to what extent are business cycles propelled by external shocks how have post 1946 cycles differed from earlier cycles and what are the major factors that contribute to business cycles they extend their investigation in some areas as far back as 1875 to afford a deeper understanding of both economic history and the most recent economic fluctuations seven papers address specific aspects of economic activity consumption investment inventory change fiscal policy monetary behavior open economy and the labor market five papers focus on aggregate economic activity in a number of cases the papers present findings that challenge widely accepted models and assumptions in addition to its substantive findings the american business cycle includes an appendix containing both the first published history of the nber business cycle dating chronology and many previously unpublished historical data series

market contagion evidence from the panics of 1854 and 1857 to test a model of contagion where individuals hear some bad news and communicate it to their acquaintances who then pass it on leading to a market panic requires a knowledge of the information networks of participants something hitherto unavailable for two panics in the 1850s this paper examines the behavior of irish depositors in a new york bank as recent immigrants their social network was determined largely by their place of origin in ireland and where they lived in new york during both panics this social network turns out to be the prime determinant of behavior

delays and equilibria with large and small information in social learning abstract the general model of social learning with irreversible investment and endogenous timing is analyzed for any distribution of private informations strategic complementarities and multiple equilibria appear which are generated solely by information externalities different equilibria generate strikingly different amounts of information the impacts of various assumptions bounded beliefs large number of agents discrete time and short periods are examined carefully the properties are robust to the introduction of observation noise with a continuum of agents

pre play research in a model of bank runs se estudia un modelo de corrida bancaria en el que los depositantes no llegaron a un consenso sobre la accion a elegir pero pueden informarse acerca de las intenciones de los otros jugadores la propiedad de equilibrio indeterminado reaparece en el juego con adquisicion de informacion en el escenario bajo analisis el equilibrio con niveles positivos de adquisicion de informacion resulta en mayores probabilidades de quiebra del banco la correlacion en las senales aumenta el espacio de parametros para el cual existen equilibrios con niveles positivos de adquisicion de informacion y mayor probabilidad de quiebra del banco

on the aggregate welfare cost of great depression unemployment abstract the potential benefit of policies that eliminate a small likelihood of economic crises is calculated an economic crisis is defined as an increase in unemployment of the magnitude observed during the great depression for the u s the maximum likelihood estimate of entering a depression is found to be about once every 83 years the welfare gain from setting this small probability to zero can range between 1 and 7 of annual consumption in perpetuity for most estimates more than half of these large gains results from a reduction in individual consumption volatility

rules of thumb for social learning this paper studies agents who consider the experiences of their neighbors in deciding which of two technologies to use we analyze two learning environments one in which the same technology is optimal for all players and another in which each technology is better for some of them in both environments players use exogenously specified rules of thumb that ignore historical data but may incorporate a tendency to use the more popular technology in some cases these naive rules can lead to fairly efficient decisions in the long run but adjustment can be slow when a superior technology is first introduced

word of mouth communication and social learning this paper studies the way that word of mouth communication aggregates the information of individual agents we find that the structure of the communication process determines whether all agents end up making identical choices with less communication making this conformity more likely despite the players naive decision rules and the stochastic decision environment word of mouth communication may lead all players to adopt the action that is on average superior these socially efficient outcomes tend to occur when each agent samples only a few others i introduction economic agents must often make decisions without knowing the costs and benefits of the possible choices given the frequency with which such situations arise it is understandable that agents often choose not to perform studies or experiments but instead rely on whatever information they have obtained via casual word of mouth communication reliance on this sort of easily obtained information appears to be common in circumstances ranging from consumers choosing restaurants or auto mechanics to business managers evaluating alternative organizational structures this paper studies two related environments in arguing that individuals reliance on word of mouth communication has interesting implications for their aggregate behavior first motivated by the diffusion of new technologies we consider a choice between two competing products with unequal qualities or payoffs and show that the structure of communication is important in determining whether the population as a whole is likely to learn to use the superior product second we consider a choice between two products or practices that are equally good and ask whether consumers are likely to herd onto a single choice or whether diversity will obtain even in the long run we explore the implications of word of mouth communication in a simple nonstrategic environment there is a large population of identical players each of whom repeatedly chooses between two possible actions each player s payoff is determined by his own

social interaction and stock market participation we propose that stock market participation is influenced by social interaction in our model any given social investor finds the market more attractive when more of his peers participate we test this theory using data from the health and retirement study and find that social households those who interact with their neighbors or attend church are substantially more likely to invest in the market than non social households controlling for wealth race education and risk tolerance moreover consistent with a peer effects story the impact of sociability is stronger in states where stock market participation rates are higher

trade credit and the bank lending channel the bank lending channel theory posits that during monetary contractions banks restrict some firms loans thus reducing their desired investment independently of interest rates previous research finds small firms reduce while large firms accelerate loan growth we find that small firms increase trade credit a substitute credit indicating a strong loan demand it supports the bank lending channel they do not voluntarily cut bank loans since they increase a less desirable alternative using trade credit is propitious since unlike commercial paper investigated by previous researchers it is widely used by the small firms suffering the loan decline surprisingly we also find large firms increase trade credit a puzzle since they are typically assumed to have wide access to other credit using individual manufacturing firm data we find the reasons large firms use trade credit are financial in nature those without a bond rating increase trade credit that is without access to open market credit as relatively few firms have this mark of quality it implies that more firms are affected by credit constraints than previously believed

sectoral shocks learning and aggregate fluctuations we present a model in which sectoral shocks have aggregate consequences the model relies on irreversible investment and imperfect information to slow the adjustment of expanding industries we show that this gradual expansion is sub optimal

learning from the behavior of others conformity fads and informational cascades learning by observing the past decisions of others can help explain some otherwise puzzling phenomena about human behavior for example why do people tend to converge on similar behavior why is mass behavior prone to error and fads the authors argue that the theory of observational learning and particularly of informational cascades has much to offer economics business strategy political science and the study of criminal behavior

observational learning under imperfect information abstract we explore bayes rational sequential decision making in a game with pure information externalities where each decision maker observes only her predecessor s binary action under perfect information the martingale property of the stochastic learning process is used to establish convergence of beliefs and actions under imperfect information in contrast beliefs and actions cycle forever however despite the stochastic instability over time the private information is ignored and decision makers become increasingly likely to imitate their predecessors consequently we observe longer and longer periods of uniform behavior punctuated by increasingly rare switches

information cascades in the laboratory when a series of individuals with private information announce public predictions initial conformity can create an information cascade in which later predictions match the early announcements this paper reports an experiment in which private signals are draws from an unobserved urn subjects make predictions in sequence and are paid if they correctly guess which of two urns was used for the draws if initial decisions coincide then it is rational for subsequent decisionmakers to follow the established pattern regardless of their private information rational cascades formed in most periods in which such an imbalance occurred copyright 1997 by american economic association

taking the road less traveled by does conversation eradicate pernicious cascades abstract we offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads despite communication of the payoff outcomes from past choices this reflects both direct and indirect action based information externalities in contrast with previous cascades literature cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever furthermore the ability of individuals to communicate can reduce average decision accuracy and welfare

how do investment ideas spread through social interaction evidence from a ponzi scheme a unique data set from a large ponzi scheme allows me to study word of mouth diffusion of investment information investors could join the scheme only by invitation from an existing member which allows me to observe how the idea spreads from one person to the next based on inviter invitee relationships i find that the observed social network has a scale free connectivity structure which significantly facilitates the diffusion of the investment idea and contributes to the growth and survival of the socially spreading ponzi scheme i further find that investors invest more if their inviter has comparatively higher age education and income

exchange rate stabilization in the erm identifying european monetary policy reactions abstract we develop the structural var models for european countries france denmark and germany during the erm period to examine the monetary policy reactions especially the within erm exchange rate stabilization in addition to analyzing the impulse responses and variance decomposition we present the full monetary reaction function in an interpretable manner without introducing additional assumptions the results suggest some asymmetry in exchange rate stabilization non german exchange rate stabilization is stronger than german exchange rate stabilization but do not support the hypothesis that german monetary policy was independent of the erm

the strategy of professional forecasting we develop and compare two theories of professional forecasters strategic behavior the first theory reputational cheap talk posits that forecasters endeavor to convince the market that they are well informed the market evaluates their forecasting talent on the basis of the forecasts and the realized state if the market expects forecasters to report their posterior expectations honestly then forecasts are shaded toward the prior mean with correct market expectations equilibrium forecasts are imprecise but not shaded the second theory posits that forecasters compete in a forecasting contest with pre specified rules in a winner take all contest equilibrium forecasts are excessively differentiated

information revelation through bunching abstract in this paper we analyze a dynamic game of pure information externality each player receives a private signal and chooses whether and when to invest bunching occurs when a subgroup of the players make decisions contingent on their signals while the rest of the players wait regardless of their signals we focus on asymmetric pure strategy equilibria where players private information is revealed gradually through bunching when players become patient enough the most efficient equilibrium contains no herding of investing while the least efficient equilibrium resembles the outcomes in an exogenous timing model when players discount factors differ less patient players will bunch earlier than more patient players

survey evidence on diffusion of interest and information among investors abstract questionnaire surveys of institutional and individual investors were undertaken to learn about patterns of communications it was found that direct interpersonal communications are very important in investor decisions questions elicited what fraction of investors were unsystematic and allowed themselves to be influenced by word of mouth communications or other salient stimuli randomly sampled investors were studied as well as investors in stocks whose price had recently increased dramatically contagion or epidemic models of financial markets are proposed in which interest in individual stocks is spread by word of mouth the survey evidence is interpreted as supporting such models

information revelation and strategic delay in a model of investment we model investment as an n player game with a pure informational externality each player s payoff depends only on his own action and the state of nature however because a player s action reveals his private information players wait to see what other players will do equilibrium is inefficient because delay is costly and information is imperfectly revealed we characterize the unique symmetric perfect bayesian equilibrium and study the robustness of delay which turns out to be sensitive to the reaction speed and the number of players we establish the following results i when the period length is very short the game ends very quickly and there is a form of herding or informational cascade which results in a collapse of investment ii as the period length increases the possibility of herding disappears iii as the number of players increases the rate of investment and the information flow are eventually independent of the number of players adding more players simply increases the number who delay iv in the limit the time profile of investment is extreme a period of low investment followed either by an investment surge or a collapse

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

information cascades replication and an extension to majority rule and conformity rewarding institutions in a randomly determined order each agent was given an independent private signal about which of two states was selected by a random draw after receiving the private signal each agent made a publicly announced decision about the state thus at the time of personal decision each agent had a private signal and also knew the decisions of all preceding agents the experiments focused on three different types of organization 1 agents were rewarded according to whether their announced decision was right or wrong this individualistic institution is the one studied by anderson and holt aer 1997 their discovery of information cascades is replicated 2 agents were rewarded according to whether a majority of announced decisions were right or wrong under this majority rule institution the instance of information cascades is sharply reduced 3 agents are rewarded more according to whether their personal announced decision was the same as the majority decision than they were rewarded if their decision was correct this conformity rewarding institution is motivated by proceedings in which there is incentive to produce reports that conform to the reports of others substantial information cascades are observed

domestic or u s news what drives canadian financial markets i introduction canada as a small open economy depends to a large extent on global economic developments trade and capital flow linkages to its major trading partners as well as the foreign interest rate level are important for the canadian economy in our sample period about two thirds of total portfolio investments in canada are made by u s investors the trade share with the united states is also quite large 77 in 1998 68 in 2006 in 95 of all currency transactions involving canadian dollars these are converted into u s dollars and vice versa 1 these figures indicate that economic developments in the united states and its monetary policy mp should play an important role particularly in the development of the canadian economy and its financial markets there has even been discussion of creating a monetary union between canada and the united states or unilaterally adopting a u s dollar peg for instance buiter 1999 concludes that economic arguments favor a full formally symmetric monetary union therefore when studying canadian financial markets one needs to consider economic events occurring in the united states gravelle and moessner 2001 state that throughout the 1990s canadian market participants tended to put greater emphasis on u s macroeconomic data releases than on canadian ones thus one should expect u s macroeconomic news and mp to have a significant impact on canadian financial markets in addition it is important to study mp communication in a broad sense and not only target rate changes as market participants but also adjust to news conveyed in speeches and testimony by federal open market committee fomc members as u s financial markets react to informal channels of mp we expect canadian markets will too 2 our sample period 1998 2006 includes several formal and informal changes in canadian mp ever since september 1998 the bank of canada boc has intervened in the foreign exchange market only under exceptional circumstances in september 2000 it introduced fixed announcement dates fads previously target rate changes could effectively occur on any business day 3 with the introduction of fads the boc became more independent from the federal reserve bank fed the boc does not explicitly refer to any prior decisions by the fed in its post meeting statements after may 2000 for instance between april 2002 and september 2004 the boc target rate deviates substantially from the federal funds target rate see figure a1 in the appendix this is the first paper to study the effects of formal and informal communication by the boc as well as by the fed on canadian financial markets using a novel set of data in this paper we address four research questions 1 do u s and canadian central bank communication including target rate changes and macroeconomic news have an impact on canadian financial market returns 2 which type of news u s or canadian is more relevant 3 does the introduction of the fad system change agents sensitivity to canadian news in particular is there a stronger reaction to canadian news in the april 2002 to september 2004 subsample a period during which the course of boc mp was different from that of the fed compared to reactions in other periods this is of particular interest as the boc followed the u s interest rate path closely even after introduction of the fad system 4 does u s and canadian news exert an influence on financial market volatility the remainder of this paper is organized as follows in the next section we summarize previous work in this area and outline the contributions of this paper section iii describes the construction of the news dummies and explains our data set section iv introduces the econometric methodology section v reports our empirical results for bond market returns section vi focuses on stock and foreign exchange market returns