Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, the rise in filings appears to mainly reflect changes in the credit market environment. We find that credit market innovations which cause a decrease in the transactions cost of lending and a decline in the cost of bankruptcy can largely accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
We propose an empirical implementation of the consumption-investment problem using the martingale representation alternative to dynamic programming. Our method is based on the direct observation of state prices from options data. This greatly simplifies the investor's task of specifying the investment opportunity set and inherits the computational convenience of the martingale representation. Our method also makes explicit the economic trade-off between exploiting differences in state prices and probabilities, which generate variation in consumption, and the consumption smoothing induced by risk aversion. Using options-implied information, we find quantitatively different optimal consumption and portfolio policies than those implied by standard return dynamics.
This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or commodity prices. The paper compares the model’s prescriptions to the policies of an actual central bank, the Bank of Canada. Finally, the paper considers the role of fiscal policy in an open economy. Coordinated fiscal and monetary responses to exchange-rate movements stabilize output at the sectoral as well as aggregate level.
Interest Rate Rules, Inflation Stabilization, and Imperfect Credibility: The Small Open Economy Case
The paper examines the robustness of Interest Rate Rules, IRRs, in the context of an imperfectly credible stabilization program, closely following the format of much of the literature in open-economy models, e.g., Calvo and Végh (1993 and 1999). A basic result is that IRRs, like Exchange Rate Based Stabilization, ERBS, programs, could give rise to macroeconomic distortion, e.g., underutilization of capacity and real exchange rate misalignment. However, while under imperfect credibility EBRS is associated with overheating and current account deficits, IRRs give rise to somewhat opposite results. Moreover, the paper shows that popular policies to counteract misalignment, like Strategic Foreign Exchange Market Intervention or Controls on International Capital Mobility may not be effective or could even become counterproductive. The bottom line is that the greater exchange rate flexibility granted by IRRs is by far not a sure shot against the macroeconomic costs infringed by imperfect credibility.
A fundamental shift in monetary policy occurred around 1980: the Fed went from a "passive" policy to an "active" policy. We study a model in which government bonds provide transactions services. We present two calibrations of our model, using pre- and post-1980 data. We show that estimates of pre- and post-1980 policy rules all lie within our determinacy regions. But, the pre-1980 policy was a very bad monetary policy, even if it avoided sunspot equilibria. Model simulations suggest that household welfare would have increased by 3.3 percent of permanent consumption in this period under an active policy.Price determinacy
We analyze stochastic adaptation in finite n-player games played by heterogeneous populations containing best repliers, better repliers, and imitators. Individuals select strategies by applying a personal learning rule to a sample from a finite history of past play. We give sufficient conditions for convergence to minimal closed sets under better replies and selection of a Pareto dominant such set. Finally, we demonstrate that the stochastically stable states are sensitive to the sample size by showing convergence to the risk-dominant equilibrium for sufficiently small sample size and to the Pareto-dominant equilibrium for sufficiently large sample size in 2x2 coordination games.Heterogeneous agents Markov chain Stochastic stability Pareto dominance Risk dominance
In this paper global macroeconomic dynamics are studied when search frictions are present in both labor and capital markets. On the basis of the Merz (1995) macroeconomic model with labor market frictions and capital accumulation, our paper offers an extension to frictions in capital markets, analogously modeled as a search and matching process. Using the Merz model as limit case, we consider exogenous as well as endogenous borrowing constraints. We also allow the cost of issuing bonds to change endogenously. As we show, capital market frictions exacerbate and accentuate the interaction between the two markets and magnify the effects of shocks on output, consumption, employment, and welfare. This interaction of the frictions in labor and capital markets are also shown to give rise to multiple equilibria. On the basis of numerical solution techniques, instead of relying on first or second order approximations around a (unique) steady state, our paper uses dynamic programming techniques to compute decision variables and the value function directly and assess the local and global dynamics of the model. The steady state solutions are studied by using the Hamiltonian and the dynamics are assessed for various model variants by using dynamic programming techniques.Search and matching frictions Global macroeconomic dynamics Credit constraints Equilibrium unemployment
This paper develops a partial-equilibrium model of a small open-economy trading an unsafe product. The model is used to analyze the welfare effects of trade with and without a country-of-origin labeling (COOL) program. The welfare gains from trade in the absence of COOL are ambiguous, may justify the imposition of a trade ban. Even if a full ban does not improve welfare and some restriction of trade is always welfare-enhancing. Under a tariff regime, more COOL trade is better than less trade. Independently of domestic market power, free trade coupled with a COOL program maximizes national welfare.Country-of-origin labeling Protection Product safety Welfare Insurance markets
The study examines the first day returns of over 480 initial public offerings (IPO) in Hong Kong during a 12-year period (1994-2005). Based on this set of observations the study builds a comprehensive model of the short-term price performance of new offerings, in the light of the existing theoretical hypotheses about IPO underpricing. Results show clear evidence of the signaling effect of underwriters' reputation. For a set of different conditions and time periods examined, the most sought after underwriters are consistently associated with less underpriced offerings. In addition, the study shows that offerings underwritten by two or more underwriters tend to be less underpriced and that underpricing may be a signal in its own right. The study also shows that the informed demand hypothesis of Rock (1986) is supported only where some specific circumstances are verified. Finally, results confirm the recent trend (in Hong Kong) towards a less aggressive underpricing.Ex-ante uncertainty Initial public offerings Subscription rate Underpricing Underwriters' reputation
Local government influence on energy conservation ambitions in existing housing sites--Plucking the low-hanging fruit?
Greater energy efficiency can be achieved in existing dwellings thanks to longer lifecycles, slow replacement rates, and technical innovations. Many such dwellings are located in dense urban neighbourhoods, where urban renewal projects are undertaken. Local government can encourage the setting of ambitious goals as a stepping stone to realizing energy efficiency goals that achieve high levels of energy efficiency. The research question which this paper addresses is: to what degree do local governments influence ambitions to conserve energy in existing housing sites? To examine this issue, thirty-three sites in the Netherlands were studied using a quantitative analysis. The results show that collaboration between local authorities and local actors increases the level of ambition to conserve energy. However, local authorities intentionally selected sites with poor energy efficiency, so it would be easy to meet ambitious energy conservation targets. Collaboration between local authorities and local actors turns out to be the key factor in selecting those sites. Moreover, there is little sign of genuine ambition. This article contributes to the debate on energy conservation policies in local housing sites. The study provides starting points for systematic, empirical research into the realisation of energy conservation in existing housing, especially in large-scale refurbishment projects.Local climate policy Energy conservation Urban renewal