Financial Structure and Aggregate Economic Activity: An Overview

This paper surveys literature which explores the possible links between the financial system and aggregate economic behavior. The survey is in two parts: The first reviews the traditional work and the second discusses new research.

Banking in General Equilibrium

This paper attempts to provide a step towards understanding the role of financial intermediaries ("banks") in aggregate economic activity. We first develop a model of the intermediary sector which is highly simplified, but rich enough to motivate several special features of bauks. Of particular importance in our model is the assumption that banks are more efficient than the public in evaluating and auditing certain information --intensive loan projects. Banks are also assumed to have private information about their investments, which motivates the heavy reliance of banks on debt rather than equity finance and their need for buffer stock capital. We embed this intermediary sector in a general equilibrium framework, which includes consumers and a non-banking investment sector. Mainly because banks have superior access to some investments, factors affecting the size or efficiency of banking will also have an impact on the aggregate economy. Among the factors affecting intermediation, we show, are the adequacy of bank capital, the riskiness of bank investments, and the costs of bank monitoring. We also show that our model is potentially useful for understanding the macroeconomic effects of phenomena such as financial crises, disintermediation, banking regulation, and certain types of monetary policy.

Taxation, Corporate Capital Structure, and Financial Distress

Is corporate leverage excessive? Is the tax code distorting corporate capital structure decisions in a way that increases the possibility of an economic crisis owing to "financial instability"? Answering these kinds of questions first requires some precision in terminology. In this paper, we describe the cases for and against the trend toward high leverage, and evaluate the role played by taxation. While provision of proper incentives to managers may in part underlie the trend to the debt, high leverage may in practice be a blunt way to address the problem, and one which opens up the possibility for undue exposure to the risks of financial distress. Our story takes as given the kinds of managerial incentive problems deemed important by advocates of leverage. We maintain, however, that when a firm is subject to business-cycle risk as well as individual risk, a profit maximizing arrangement is not simple debt, but rather a contract with mixed debt and equity features. That is, the contract should index the principal obligation to aggregate and/or industry-level economic conditions. We argue that the tax system encourages corporations to absorb more business cycle risk than they would otherwise. It does so in two respects: First, it provides a relative subsidy to debt finance; second, it restricts debt for tax purposes from indexing the principal to common disturbances. At a deeper level, the issue hinges on the institutional aspects of debt renegotiation. If renegotiation were costless, then debt implicitly would have the equity features relevant for responding to business-cycle risk. However, because of the diffuse ownership pattern of much of the newly issued debt and also because of certain legal restrictions, renegotiation is likely to be a costly activity.

Ena/VASP regulates mDia2-initiated filopodial length, dynamics, and function

Filopodia are long plasma membrane extensions involved in the formation of adhesive, contractile, and protrusive actin-based structures in spreading and migrating cells. Whether filopodia formed by different molecular mechanisms equally support these cellular functions is unresolved. We used Enabled/vasodilator-stimulated phosphoprotein (Ena/VASP)–deficient MV[superscript D7] fibroblasts, which are also devoid of endogenous mDia2, as a model system to investigate how these different actin regulatory proteins affect filopodia morphology and dynamics independently of one another. Filopodia initiated by either Ena/VASP or mDia2 contained similar molecular inventory but differed significantly in parameters such as number, length, F-actin organization, lifetime, and protrusive persistence. Moreover, in the absence of Ena/VASP, filopodia generated by mDia2 did not support initiation of integrin-dependent signaling cascades required for adhesion and subsequent lamellipodial extension, thereby causing a defect in early cell spreading. Coexpression of VASP with constitutively active mDia2[superscript M/A] rescued these early adhesion defects. We conclude that Ena/VASP and mDia2 support the formation of filopodia with significantly distinct properties and that Ena/VASP regulates mDia2-initiated filopodial morphology, dynamics, and function.National Institutes of Health (U.S.) (Grant GM58801)National Cancer Institute (U.S.). Integrative Cancer Biology Program (Grant 1-U54-CA112967

Local Nodes in Global Networks: The Geography of Knowledge Flows in Biotechnology Innovation

The literature on innovation and interactive learning has tended to emphasize the importance of local networks, inter-firm collaboration and knowledge flows as the principal source of technological dynamism. More recently, however, this view has come to be challenged by other perspectives that argue for the importance of non-local knowledge flows. According to this alternative approach, truly dynamic economic regions are characterized both by dense local social interaction and knowledge circulation, as well as strong inter-regional and international connections to outside knowledge sources and partners. This paper offers an empirical examination of these issues by examining the geography of knowledge flows associated with innovation in biotechnology. We begin by reviewing the growing literature on the nature and geography of innovation in biotechnology research and the commercialization process. Then, focusing on the Canadian biotech industry, we examine the determinants of innovation (measured through patenting activity), paying particular attention to internal resources and capabilities of the firm, as well as local and global flows of knowledge and capital. Our study is based on the analysis of Statistics Canada’s 1999 Survey of Biotechnology Use and Development, which covers 358 core biotechnology firms. Our findings highlight the importance of in-house technological capability and absorptive capacity as determinants of successful innovation in biotechnology firms. Furthermore, our results document the precise ways in which knowledge circulates, in both embodied and disembodied forms, both locally and globally. We also highlight the role of formal intellectual property transactions (domestic and international) in promoting knowledge flows. Although we document the importance of global networks in our findings, our results also reveal the value of local networks and specific forms of embedding. Local relational linkages are especially important when raising capital—and the expertise that comes with it—to support innovation. Nevertheless, our empirical results raise some troubling questions about the alleged pre-eminence of the local in fostering innovation

The Growth Cone Cytoskeleton in Axon Outgrowth and Guidance

Axon outgrowth and guidance to the proper target requires the coordination of filamentous (F)-actin and microtubules (MTs), the dynamic cytoskeletal polymers that promote shape change and locomotion. Over the past two decades, our knowledge of the many guidance cues, receptors, and downstream signaling cascades involved in neuronal outgrowth and guidance has increased dramatically. Less is known, however, about how those cascades of information converge and direct appropriate remodeling and interaction of cytoskeletal polymers, the ultimate effectors of movement and guidance. During development, much of the communication that occurs between environmental guidance cues and the cytoskeleton takes place at the growing tip of the axon, the neuronal growth cone. Several articles on this topic focus on the “input” to the growth cone, the myriad of receptor types, and their corresponding cognate ligands. Others investigate the signaling cascades initiated by receptors and propagated by second messenger pathways (i.e., kinases, phosphatases, GTPases). Ultimately, this plethora of information converges on proteins that associate directly with the actin and microtubule cytoskeletons. The role of these cytoskeletal-associated proteins, as well as the cytoskeleton itself in axon outgrowth and guidance, is the subject of this article

Ena/VASP is required for endothelial barrier function in vivo

Enabled/vasodilator-stimulated phosphoprotein (Ena/VASP) proteins are key actin regulators that localize at regions of dynamic actin remodeling, including cellular protrusions and cell–cell and cell–matrix junctions. Several studies have suggested that Ena/VASP proteins are involved in the formation and function of cellular junctions. Here, we establish the importance of Ena/VASP in endothelial junctions in vivo by analysis of Ena/VASP-deficient animals. In the absence of Ena/VASP, the vasculature exhibits patterning defects and lacks structural integrity, leading to edema, hemorrhaging, and late stage embryonic lethality. In endothelial cells, we find that Ena/VASP activity is required for normal F-actin content, actomyosin contractility, and proper response to shear stress. These findings demonstrate that Ena/VASP is critical for actin cytoskeleton remodeling events involved in the maintenance of functional endothelia