On Quality and Variety Bias in Aggregate Prices

How do product variety and quality affect the aggregate price bias? We develop a general equilibrium model that accounts for the joint interaction of product quality and variety. Our findings show that the aggregate price bias is procyclical and the contribution of product variety is persistent whereas the contribution of product quality becomes countercyclical in the medium to long run. We show that accounting for product quality and variety has critical implications on the measure of cyclical fluctuations. Measurements of cyclical fluctuations derived using the consumption deflator, which abstracts from changes in product quality and variety, underestimate the variables' true volatility.     

Pricing Behavior and the Response of Hours to Productivity Shocks

Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favor of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself. In this paper, we estimate a variety of alternative total factor productivity measures for a representative sample of Italian manufacturing firms and on average find a negative effect of productivity shocks on hours growth. More interestingly, using the reported frequency of price reviews, we show that the contractionary effect is stronger for firms with stickier prices and weaker or not significant for firms with more flexible prices. Price stickiness remains a crucial factor in shaping the response of hours after controlling for product storability or market power.     

Brokers and Order Flow Leakage: Evidence from Fire Sales

Using trade‐level data, we study whether brokers play a role in spreading order flow information in the stock market. We focus on large portfolio liquidations that result in temporary price drops, and identify the brokers who intermediate these trades. These brokers’ clients are more likely to predate on the liquidating funds than to provide liquidity. Predation leads to profits of about 25 basis points over 10 days and increases the liquidation costs of the distressed fund by 40%. This evidence suggests a role of information leakage in exacerbating fire sales.     

Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals

We study capital structure negotiation and cost of debt financing between sponsors and lenders using a sample of more than 1,000 project finance loans worth around US$195 billion closed between 1998 and 2003. We find that lenders: (i) rely on the network of nonfinancial contracts as a mechanism to control agency costs and project risks, (ii) are reluctant to price credit more cheaply if sponsors are involved as project counterparties in the relevant contracts, and finally (iii) do not appreciate sponsor involvement as a contractual counterparty of the special purpose vehicle when determining the level of leverage.     

Do Hedge Funds Manipulate Stock Prices?

We provide evidence suggesting that some hedge funds manipulate stock prices on critical reporting dates. Stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 0.30% on the last day of the quarter and a reversal of 0.25% on the following day. A significant part of the return is earned during the last minutes of trading. Analysis of intraday volume and order imbalance provides further evidence consistent with manipulation. These patterns are stronger for funds that have higher incentives to improve their ranking relative to their peers.     

The Eurosystem, the U.S. Federal Reserve, and the Bank of Japan: Similarities and Differences

The paper provides a systematic comparison of the Eurosystem, the U.S. Federal Reserve, and the Bank of Japan. These monetary authorities exhibit somewhat different status and tasks, which reflect different historical conditions and national characteristics. However, widespread changes in central banking practices in the direction of greater independence and increased transparency, as well as changes in the economic and financial environment over the past 15–20 years, have contributed to reduce the differences among these three world's principal monetary authorities. A comparison based on simple "over-the-counter" policy reaction functions shows no striking differences in terms of monetary policy implementation.     

Labor Market and Financial Shocks: A Time-Varying Analysis

We estimate a time-varying VAR model to analyze the effects of a financial shock on the U.S. labor market. We find that a tightening of financial conditions is highly detrimental to the labor market. We show that while negative financial shocks have been responsible for increases in unemployment, our model does not find significant contributions of financial shocks during periods of expansion. The source of this asymmetry is the time-varying standard deviation of the identified shock, which is higher in times of financial distress; on the other hand, we find that the transmission mechanism does not significantly change over time.