Undercapitalized Banks, Uncertain Government Policies, and Declines in Total Factor Productivity

Recently a number of countries have experienced a prolonged slowdown in aggregate economic activity accompanied by a signi.cant deterioration of the banks.net worth. This paper studies the optimal bank behavior when they are severely undercapitalized but continue to operate due to lax government policies. In particular, we show that when the government policies generate uncertainties regarding (i) the exact timing at which the government intervention will occur, and (ii) the fraction of the banks that will be forced to shut down, then banks change their lending behavior. These changes are largely responsible for the prolonged recession, which occurs in the aftermath of the banking crisis. The mechanism through which this e¤ect occurs is as follows. In the model economy, .rms need .time to build.in order to achieve the maximum return on investment they undertake. Due to the uncertainty regarding the probability of survival, the banks. discount rate increases dramatically. This implies that the banks do not wish to .nance long-term investment, forcing .rms to switch to the short-term projects. These projects do not require .time to build., but are less productive. As the quality of investment falls, the total factor productivity (TFP) falls, contributing to the fall in aggregate output. Such a joint decline in the TFP and aggregate output in the aftermath of the banking crisis is a salient feature of the Japan.s and Mexico.s recent experiences.

Optimal monetary policy, endogenous sticky prices and multiplicity of equilibria

We analyze optimal discretionary monetary policy in an endogenous sticky prices model. Similar models with exogenous sticky prices can deliver multiple equilibria. This is a necessary condition for the occurrence of expectation traps (when private agents’ expectations determine the equilibrium level of inflation). In our model, sticky price firms are allowed to switch to flexible pricing by paying a random cost. For plausible parametrizations, our model has a unique low-inflation equilibrium. With endogenous sticky prices, the monetary authority does not validate high-inflation expectations and deviates to the Friedman rule.Monetary policy ; Prices

Institutional causes of output volatility

The authors investigate the relationship between the quality of institutions and output volatility. Using instrumental variable regressions, they address whether higher entry barriers and lower property rights protection lead to higher volatility. They find that a 1-standard-deviation increase in entry costs increases the standard deviation of output growth by roughly 40 percent of its average value in the sample. In contrast, property rights protection has no statistically significant effect on volatility.Macroeconomics ; Production (Economic theory)

Institutional causes of macroeconomic volatility

In this paper we investigate the relation between the quality of institutions and macroeconomic volatility. Using instrumental variable regressions, we show that higher barriers to entry lead to higher volatility. In particular, a one standard deviation increase in entry costs increases the standard deviation of output growth by roughly 40% of its average value in our sample. To the contrary, property rights protection has no statistically significant effect on volatility.Economic development ; Macroeconomics - Econometric models

Endogenous productivity and multiple steady states

We endogenize total factor productivity in a neoclassical model with increasing returns to scale. We obtain multiple steady-state equilibria with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. A calibrated version of our model displays sizable differences in TFP and output across steady state equilibria.Industrial productivity

Entry costs, misallocation, and cross-country income and TFP differences

Entry costs vary dramatically across countries. To assess their impact we construct a model with endogenous entry and operation decisions by firms and calibrate it to match the U.S. distribution of firms by age and size. Higher entry costs lead to greater misallocation of productive factors and lower TFP and output. In the model, countries with entry costs in the lowest decile of the distribution have 2.32 times higher TFP (3.43 in the data) than countries in the highest decile. As in the data, higher entry costs are associated with higher mean and variance of the employment distribution across firms.Industrial productivity ; Economic development

Discrete Choice under Risk with Limited Consideration

This paper is concerned with learning decision makers' preferences using data on observed choices from a finite set of risky alternatives. We propose a discrete choice model with unobserved heterogeneity in consideration sets and in standard risk aversion. We obtain sufficient conditions for the model's semi-nonparametric point identification, including in cases where consideration depends on preferences and on some of the exogenous variables. Our method yields an estimator that is easy to compute and is applicable in markets with large choice sets. We illustrate its properties using a dataset on property insurance purchases.Comment: 76 pages, 9 figures, 15 table

Different Contexts, Different Risk Preferences?

We examine the stability of risk preferences across contexts involving different stakes. Using data on households\u27 deductible choices in three property insurance coverages and their limit choices in two liability insurance coverages, we assess the stability across the five contexts in the ordinal ranking of the households\u27 willingness to bear risk. We find evidence of stability across contexts involving stakes of the same magnitude, but not across contexts involving stakes of very different magnitudes. Our results appear to be robust to heterogeneity in wealth and access to credit, complicating seemingly ready explanations

REgional

Shortly after the Revolution of 1789 France experienced a period of major hyper- inflation, which lasted until 1796, when the French government abolished the paper money and returned to the specie. In 1798 the French government ordered the local authorities in all departments to construct the aggregate price index. Even though similar in trend, these price series display striking di¤erences both in level and short run dynamics. Some of these differences are undoubtedly caused by the absence of a uniform rule for constructing the price indices, and possibly are magnified by such distortionary factors as the laws of maximum, the heavy concentration of military con- tracts in particular locations, and the different taxation schemes. However, level of economic integration in 18th century France had a major impact on the price evo- lution during the Revolution. In this paper, using different proxies for a measure of economic distance, we show that price formation among "close" departments displayed significantly higher correlation than the one among "distant" departments.

Estimating Risk Preferences in the Field

We survey the literature on estimating risk preferences using field data. We concentrate our attention on studies in which risk preferences are the focal object and estimating their structure is the core enterprise. We review a number of models of risk preferences—including both expected utility (EU) theory and non-EU models—that have been estimated using field data, and we highlight issues related to identification and estimation of such models using field data. We then survey the literature, giving separate treatment to research that uses individual-level data (e.g., property insurance data) and research that uses aggregate data (e.g., betting market data). We conclude by discussing directions for future research