The behavior of household and business investment over the business cycle

This article describes the main characteristics of the cyclical behavior of household and business investment over the cycle in the United States and reviews the most prominent studies that have tried to explain the dynamics of these two investment components. We conclude that even though there have been advances in the understanding of the behavior of these two investment components, more research is needed. One important limitation of existing studies is that they either abstract from changes in the relative price of houses or they generate house price movements that are not aligned with the data.Business cycles

How might the Fed's large-scale asset purchases lower long-term interest rates?

Over the past two years the Federal Reserve has engaged in large-scale asset purchases (LSAPs), often grouped under the heading of "quantitative easing," as an alternative means of stimulating the economy when policy rates are at their zero lower bound. Theoretical and empirical research shows how this policy may lower long-term interest rates, and financial market data suggest that the initial launch of LSAPs had an effect on expectations about future Fed policy.Interest rates

Legal protection to foreign investors

Foreign investment is typically considered an important source of growth for developing countries. This article describes the legal protection granted to foreign investors and its enforcement mechanisms. Governments have signed international investment agreements intended to protect foreign investors from the risk of expropriation and have increasingly chosen to issue sovereign debt in international financial centers, which expose defaulting governments to litigations in foreign national courts. In most cases, governments have complied with unfavorable rulings of international arbitration courts, and many recent sovereign default episodes were followed by relatively friendly debt restructuring agreements. But there have been cases in which expropriated investors or holders of sovereign debt in default have not been compensated, which suggests that the actual legal protection granted to foreign investors is limited.Economic growth ; Business cycles

Mortgage defaults

We incorporate house price risk and mortgages into a standard incomplete market (SIM) model. We calibrate the model to match U.S. data and we show that the model also ac- counts for non-targeted features of the data such as the distribution of down payments, the life-cycle profile of home ownership, and the mortgage default rate. In addition, we show that the average coefficients that measure the agents' ability to self-insure against income shocks are similar to those of a SIM model without housing (as presented by Kaplan and Violante, 2010). However, incorporating housing increases the values of these coefficient for younger agents, which narrows the gap between the SIM model's implications and the data. The response of consumption to house price shocks is minimal. We also study the effects of default prevention policies. Introducing a minimum down payment requirement of 15% reduces defaults on mortgages by 30%, reduces the home ownership rate up to only 0.2 percentage points (if the aggregate house price level does not adjust), and may cause house prices to decline up to 0.7% (if home ownership does not adjust). Garnishing defaulters' income in excess of 43% of median consumption for one year produces a similar decline in defaults; but, since it reduces the median equilibrium down payment from 19% to 9%, it boosts home ownership up to 4.3 percentage points (if the aggregate house price level does not adjust) and may increase house prices up to 16.1% (if home ownership does not adjust). The introduction of minimum down payments or income garnishment benefit a majority of the population.Mortgage loans ; Default (Finance)

Online Appendix to "Quantitative properties of sovereign default models: solution methods"

This document describes how we evaluate the accuracy of the solution of the baseline sovereign default model using the test proposed by den Haan and Marcet (1994). We show that the solutions obtained using Chebyshev collocation and cubic spline interpolation approximate the equilibrium with reasonable accuracy and illustrate the challenges that arise when the test is applied to the solution obtained using the discrete state space technique.

Quantitative models of sovereign default and the threat of financial exclusion

Business cycles ; Debt ; Default (Finance)

Sovereign default risk with heterogenous borrowers

We study a standard quantitative model of sovereign default in which the government in a small open economy (SMO) decides how much to save and whether to default on its debt. In contrast with previous quantitative studies, we do not assume that a defaulting country is exogenously excluded from capital markets, and we assume that political parties with different discount factors alternate in power. Preliminary quantitative results indicate that even without assuming exogenous exclusion, after a default episode, the model generates difficulties in market access---in average, for the same level of debt, spreads are higher after default; due to this increase in borrowing costs, capital inflows are initially decreased, and recover slowly after that. We also describe the strategic interaction of governments with different patienceSovereign Default, Strategic Behavior; Endogenous Borrowing Constraints; Markov Perfect Equilibrium.

Income Redistribution and Disability Insurance

Social insurance

Is a new asset bubble emerging in certain markets?

Some economists have argued that recent rallies in certain asset markets — most notably, commodities and emerging market equities — represent the emergence of a new bubble fueled by accommodative monetary policy and carry trade activity. There is evidence, though, that the rallies can be explained by strong economic fundamentals in these markets.Financial markets ; Monetary policy