Changes in the duration of economic expansions and contractions in the United States

This paper employs nonparametric change-point tests to business cycle duration data in the United States. The findings are consistent with recent studies citing longer expansions and shorter contractions since World War II. However, it is found that these shifts occurred much earlier. There is evidence of a single abrupt change-point to longer expansions that occurred in 1929. The shift towards shorter contractions was gradual: the transition began in 1918 and was completed in 1938.

The Problem With Interim Employment

This paper examines why unemployed skilled workers are reluctant to accept interim unskilled jobs. We develop a bilateral search model in which workers face a job change cost and firms incur a hiring cost for each vacancy filled. The outcome of the bilateral search displays mismatching where skilled workers are matched with unskilled jobs. The extent of mismatching, however, is limited. We find that there exists a critical skill level where workers who possess skill in excess of this value are over-qualified and are not hired for interim unskilled jobs.

The effects of cash flows of nonfinancial firms on investment, on the bank loan market, and on monetary policy effectiveness

This dissertation examines the influence of internal cash flows of nonfinancial firms on the credit market and the monetary policy transmission mechanism. We find supportive evidence of the credit view of the monetary policy transmission mechanism, but the strength of the credit channel is reduced once cash flows are considered.^ We find that long-term movements in cash flow cause long-term movements in business investment. This relationship is traced to an accelerator-type investment mechanism. Using band spectral techniques, we document a close relationship between output and cash flow over low-frequency components, while output and interest rates do not affect investment.^ Chapter 3 examines the relationship between cash flow, the bank loan market, and the commercial paper market. The main hypothesis is that cash flow affects both loan demand and loan supply, and consequently commercial paper demand. Cash flow affects loan demand because cash flow replaces borrowed funds. The loan supply effects are traced to the signalling properties of cash flow and the credit worthiness of borrowers. The empirical work uses vector autoregressive models. In the 1970s, when the influence of the commercial paper market was low compared to later periods, there is a positive relationship between cash flow and bank loans. In the 1980s, there was tremendous growth in the importance of the commercial paper market, and we find an inverse relationship between cash flows and bank loans.^ We demonstrate that the money-interest rate relationship depends on the operating policy of the Federal Reserve. The money-interest rate relationship depends on two opposing effects: the liquidity effect, which suggests an inverse relationship, and an anticipated inflation effect, which suggests a positive relationship. The model shows that the liquidity effect dominates when the Federal Reserve targets money while the anticipated inflation effect dominates for an interest rate target. Using the Kalman filter, a time varying parameter model demonstrates that liquidity effect dominates since 1979 when it is generally understood that the Federal Reserve pursued a money target.

Estimates of the likelihood of extreme returns in international stock markets

This study applies extreme-value theory to daily international stock-market returns to determine (1) whether or not returns follow a heavy-tailed stable distribution, (2) the likelihood of an extreme return, such as a 20% drop in a single day, and (3) whether or not the likelihood of an extreme event has changed since October 1987. Empirical results reject a heavy-tailed stable distribution for returns. Instead, a Student-t distribution or an autoregressive conditional heteroscedastic process is better able to capture the salient features of returns. We find that the likelihood of a large single-day return diff ers widely across markets and, for the G-7 countries, the 1987 stock-market drop appears to be largely an isolated event. A drop of this magnitude, however, is not rare in the case of Hong Kong. Finally, there is only limited evidence that the chance of a large single-day decline is more likely since the October 1987 market drop; however, exceptions include stock markets in Germany, The Netherlands and the UK.