Systemic risk in the financial sector; a review and synthesis

In a financial crisis, an initial shock gets amplified while it propagates to other financial intermediaries, ultimately disrupting the financial sector. We review the literature on such amplification mechanisms, which create externalities from risk taking. We distinguish between two classes of mechanisms: contagion within the financial sector and pro-cyclical connection between the financial sector and the real economy. Regulation can diminish systemic risk by reducing these externalities. However, regulation of systemic risk faces several problems. First, systemic risk and its costs are difficult to quantify. Second, banks have strong incentives to evade regulation meant to reduce systemic risk. Third, regulators are prone to forbearance. Finally, the inability of governments to commit not to bail out systemic institutions creates moral hazard and reduces the market’s incentive to price systemic risk. Strengthening market discipline can play an important role in addressing these problems, because it reduces the scope for regulatory forbearance, does not rely on complex information requirements, and is difficult to manipulate.

Solving Life Cycle Models, Optimal Age-Dependent Unemployment Insurance, and Adaptive Beliefs in a Real Business Cycle Model

This dissertation consists of three essays, which all rely on dynamic optimization in discrete time. The first essay is called 'Solving Life Cycle Models' and deals with the methodology of solving life-cycle models. The second essay is called 'Optimal Age-Dependent Unemployment Insurance', and investigates optimal unemployment insurance in a life-cycle model in partial equilibrium with wealth accumulation, and job search. The third essay is called 'Adaptive Beliefs in a Real Business Cycle Model' and investigates how the business cycle properties of a standard macroeconomic model change when agents extrapolate recent changes in productivity into the future

Solving Life Cycle Models, Optimal Age-Dependent Unemployment Insurance, and Adaptive Beliefs in a Real Business Cycle Model

This dissertation consists of three essays, which all rely on dynamic optimization in discrete time. The first essay is called 'Solving Life Cycle Models' and deals with the methodology of solving life-cycle models. The second essay is called 'Optimal Age-Dependent Unemployment Insurance', and investigates optimal unemployment insurance in a life-cycle model in partial equilibrium with wealth accumulation, and job search. The third essay is called 'Adaptive Beliefs in a Real Business Cycle Model' and investigates how the business cycle properties of a standard macroeconomic model change when agents extrapolate recent changes in productivity into the future

Introducing home production in a life-cycle model

In this paper we will analyze the effects of the introduction of home production in the life-cycle model as developed by Van Erp en De Hek (2009). To introduce home-production we have added an extra nest in the utility function: the consumption good in the model of Van Erp and De Hek is substituted with a composite consumption good that consists of goods directly purchased at the market and goods that are produced at home. For the latter goods we also assume that inputs have to be bought in the market. With this adjusted model, we analyze what the effects on labour supply, wealth and consumption patterns are. Surprisingly, the introduction of home production results in more accumulation of wealth.