Agency Costs and Investment Behaviour. ENEPRI Working Paper, No. 47, 3 February 2007

How do differences in the credit channel affect investment behavior in the U.S. and the Euro area? To analyze this question, we calibrate an agency cost model of business cycles. We focus on two key components of the lending channel, the default premium associated with bank loans and bankruptcy rates, to identify the differences in the U.S. and European financial sectors. Our results indicate that the differences in financial structures affect quantitatively the cyclical behavior in the two areas: the magnitude of the credit channel effects is amplified by the differences in the financial structures. We further demonstrate that the effects of minor differences in the credit market translate into large, persistent and asymmetric fluctuations in price of capital, bankruptcy rate and risk premium. The effects imply that the Euro Area's supply elasticities for capital are less elastic than the U.S

Risk Shocks and Housing Markets

This paper analyzes the role of uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for the business cycle. Also, we demonstrate that bankruptcy costs act as an endogenous markup factor in housing prices; as a consequence, the volatility of housing prices is greater than that of output, as observed in the data. The model can also account for the observed countercyclical behavior of risk premia on loans to the housing sector.Agency costs, credit channel, time-varying uncertainty, residential investment, housing production, calibration

Time-Varying Uncertainty and the Credit Channel

We extend the Carlstrom and Fuerst (1997) agency cost model of business cycles by including time varying uncertainty in the technology shocks that affect capital production. We first demonstrate that standard linearization methods can be used to solve the model yet second moment effects still influence equilibrium characteristics. The effects of the persistence of uncertainty are then analyzed. Our primary findings fall into three broad categories. First, it is demonstrated that uncertainty affects the level of the steady-state of the economy so that welfare analyses of uncertainty that focus entirely on the variability of output (consumption) will understate the true costs of uncertainty. A second key result is that time varying uncertainty results in countercyclical bankruptcy rates – a finding which is consistent with the data and opposite the result in Carlstrom and Fuerst. Third, we show that persistence of uncertainty affects both quantitatively and qualitatively the behavior of the economy.Agency costs, Credit channel, Time-varying uncertainty

Agency Costs and Investment Behavior

How do differences in the credit channel affect investment behavior in the U.S. and the Euro area? To analyze this question, we calibrate an agency cost model of business cycles. We focus on two key components of the lending channel, the default premium associated with bank loans and bankruptcy rates, to identify the differences in the U.S. and European financial sectors. Our results indicate that the differences in financial structures affect quantitatively the cyclical behavior in the two areas: the magnitude of the credit channel effects is amplified by the differences in the financial structures. We further demonstrate that the effects of minor differences in the credit market translate into large, persistent and asymmetric fluctuations in price of capital, bankruptcy rate and risk premium. The effects imply that the Euro Area's supply elasticities for capital are less elastic than the U.S.Agency costs, Credit channel, Investment behavior, E.U. Area

Validating Predictions of Unobserved Quantities

The ultimate purpose of most computational models is to make predictions, commonly in support of some decision-making process (e.g., for design or operation of some system). The quantities that need to be predicted (the quantities of interest or QoIs) are generally not experimentally observable before the prediction, since otherwise no prediction would be needed. Assessing the validity of such extrapolative predictions, which is critical to informed decision-making, is challenging. In classical approaches to validation, model outputs for observed quantities are compared to observations to determine if they are consistent. By itself, this consistency only ensures that the model can predict the observed quantities under the conditions of the observations. This limitation dramatically reduces the utility of the validation effort for decision making because it implies nothing about predictions of unobserved QoIs or for scenarios outside of the range of observations. However, there is no agreement in the scientific community today regarding best practices for validation of extrapolative predictions made using computational models. The purpose of this paper is to propose and explore a validation and predictive assessment process that supports extrapolative predictions for models with known sources of error. The process includes stochastic modeling, calibration, validation, and predictive assessment phases where representations of known sources of uncertainty and error are built, informed, and tested. The proposed methodology is applied to an illustrative extrapolation problem involving a misspecified nonlinear oscillator

Experimental Study of Isothermal Wake-Flow Characteristics of Various Flame-Holder Shapes

An investigation of the isothermal wake-flow characteristics of several flame-holder shapes was carried out in a 4- by 4-inch flow chamber. The effects of flame-holder-shape changes on the characteristics of the Karman vortices and thus on the recirculation zones to which experimenters have related the combustion process were obtained for several flame holders. The results may furnish a basis of correlation, of combustion efficiency and stability for similarly shaped flame holders in combustion studies. Values of the spacing ratio-(ratio of lateral spacing to longitudinal spacing of vortices] obtained for the various shapes approximated the theoretical value of 0.36 given by the Karman stability analysis. Variations in vortex strength of more than 200 percent and in frequency of more than 60 percent were accomplished by varying flame-holder shape. A maximum increase in the recirculation parameter of 56 percent over that for a conventional V-gutter was also obtained. Varying flameholder shape and size enables the designer to select many schedules of variations in vortex strength and frequency- not obtainable by changing size only and may make it possible to approach theoretical maximum vortex strength for any given frequency

On simulation of local fluxes in molecular junctions

We present a pedagogical review of current density simulation in molecular junction models indicating its advantages and deficiencies in analysis of local junction transport characteristics. In particular, we argue that current density is a universal tool which provides more information than traditionally simulated bond currents, especially when discussing inelastic processes. However, current density simulations are sensitive to choice of basis and electronic structure method. We note that discussing local current conservation in junctions one has to account for source term caused by open character of the system and intra-molecular interactions. Our considerations are illustrated with numerical simulations of a benzenedithiol molecular junction.Comment: 10 pages, 6 figure

A New Test of the Einstein Equivalence Principle and the Isotropy of Space

Recent research has established that nonsymmetric gravitation theories like Moffat's NGT predict that a gravitational field singles out an orthogonal pair of polarization states of light that propagate with different phase velocities. We show that a much wider class of nonmetric theories encompassed by the $\chi g$ formalism predict such violations of the Einstein equivalence principle. This gravity-induced birefringence of space implies that propagation through a gravitational field can alter the polarization of light. We use data from polarization measurements of extragalactic sources to constrain birefringence induced by the field of the Galaxy. Our new constraint is $10^8$ times sharper than previous ones.Comment: 21 pages, Latex, 3 Postscript figure