Credit crunch in a model of financial intermediation and occupational choice

In this paper, we introduce a dynamic general equilibrium model with numerous and heterogeneous investment projects and endogenous occupational choice to study a credit crunch. Asset accumulation of assets by households as they face various employment and return risks over a long lifetime determines whether they are entrepreneurs or workers. The origin of a credit crunch may be found in the conservative lending by banks during periods of financial duress and reduced profitability because of capital requirements. Using an example from Canada, monetary policy is shown to be largely ineffective in alleviating the credit crunch, while flexible loan regulation can erase it.     

Existence of Edgeworth equilibria for economies with asymmetric information

We analyze a general equilibrium model with asymmetrically informed agents. A basic and well-known consequence of asymmetric information is the failure of equal treatment property. Despite of this, we show that in every replica economy a private core allocation, which treats agents of the same type equally, exists. This result is provided in the framework of two different models, with and without expectations, and it suffices to guarantee in both cases the existence of a private Edgeworth equilibrium. The author is grateful to an anonymous referee for his/her careful reading and helpful comments and acknowledges support by Research Grant no. 2006132713-005 (Ministero Italiano dell’Università e della Ricerca).     

Unique and multiple equilibria in a macroeconomic model with environmental quality: An analysis of local stability

This paper develops and analyzes an economic growth model which incorporates environmental quality into the production and utility functions. We solve our model for the balanced growth path and find that a unique low growth equilibrium is attained when environmental quality is given less weight in the utility function. Multiple equilibria exist if environment quality is given greater weight in the utility function. We also perform local stability analysis of our model. We conclude that an economy in which the environmental quality is given relatively less importance by the agents will be caught in low growth, high consumption poverty traps as is the case for many developing countries while other economies can potentially reach a relatively low consumption, high growth steady state if they place greater weight on environmental quality. Finally we look at how the gap between low and high growth equilibria shrinks when individuals place greater weight on environmental quality and how governmental policies can promote growth when societies give less weight to the environment.     

Implementing efficient allocations in a model of financial intermediation

In a finite-trader version of the Diamond and Dybvig (J. Polit. Econ. 91 (1983) 401) model, the ex ante efficient allocation is implementable by a direct mechanism (i.e., each trader announces the type of his own ex post preference) in which truthful revelation is the strictly dominant strategy for each trader. When the model is modified by formalizing the sequential-service constraint (cf. Wallace (Fed. Reserve Bank Minneapolis Quart. Rev. 12 (1988) 3)), the truth-telling equilibrium implements the symmetric, ex ante efficient allocation with respect to iterated elimination of strictly dominated strategies.     

Existence of nontrivial equilibria in repeated games with imperfect private monitoring

We consider finitely repeated games with imperfect private monitoring, and provide several sufficient conditions for such a game to have an equilibrium whose outcome is different from repetition of Nash equilibria of the stage game. Surprisingly, the conditions are consistent with uniqueness of the stage game equilibrium. A class of repeated chicken is shown to satisfy the condition.     

Creditworthiness and thresholds in a credit market model with multiple equilibria

Summary. The paper studies creditworthiness in a model with endogenous credit cost and debt constraints. Such a model can give rise to multiple candidates for steady state equilibria. We use new analytical techniques such as dynamic programming (DP) with flexible grid size to find solutions and to locate thresholds that separate different domains of attraction. More specifically, we (1) compute present value borrowing constraints and thus creditworthiness, (2) locate thresholds where the dynamics separate to different domains of attraction, (3) show jumps in the decision variable, (4) distinguish between optimal and non-optimal steady states, (5) demonstrate how creditworthiness and thresholds change with change of the credit cost function of the debtor and (6) explore the impact of debt ceilings and consumption paths on creditworthiness.JEL Classification Numbers: C61, C63, D91, D92, E51, G12, G32.An earlier version of this paper has been prepared for the 1998 North American Winter Meeting of the Econometric Society, January 1998, Chicago. We want to thank Jess Benhabib, Buz Brock, Gustav Feichtinger, Franz Wirl, Michael Woodford, Wolf-Jürgen Beyn and Thorsten Pampel for helpful discussions and comments on various versions of the paper. We also want to thank participants in a workshop at the University of Technology, Vienna, the Macroeconomic Workshop at Columbia University, and the SCE conference, at Yale University, June 2001. We are also grateful for comments from a referee of the journal.     

A computational analysis of core convergence in a multiple equilibria economy

We examine the structure of the core of a trading economy with three competitive equilibria as the number of traders (N) is varied. The core first splits into two pieces at N=5 and then splits a second time into three pieces at N=12. Both of these splits occur not at a point but as a contiguous gap. We find that the speed of convergence of the core toward the three competitive equilibria is not uniform but when N is large, the convergence rate is approximately of the order 1/N.     

A note on some properties of the ESTAR model

Some properties of ESTAR models are derived. We demonstrate that these models can exhibit chaotic dynamics and multiple equilibria. We show that a nonchaotic deterministic model with added noise can produce a time series that (falsely) appears to be chaotic.     

Knightian uncertainty and poverty trap in a model of economic growth

This paper explores how Knightian uncertainty affects dynamic properties in an economic growth model. The decision-making theory employed in the analysis is the theory of expected utility under a non-additive probability measure, i.e., the Choquet expected utility model of preference. We apply this decision-making theory to an overlapping generations model where producers face “uncertainty” in their technologies. When the producer is averse to uncertainty, the firm's profit function may not be differentiable. Therefore, the firm's decision to invest and hire labor becomes rigid for a certain measurable range of real interest rates. In dynamic equilibrium, the existence of firm-level rigidity causes discontinuity in the wage function; this makes multiple equilibria the more likely outcomes under the log utility and Cobb–Douglas production functions. In this paper, we show that even if aversion to uncertainty is small, the “poverty trap” can arise for a wide range of parameter values.     

Generic inefficiency of equilibria in the general equilibrium model with incomplete asset markets and infinite time

Summary. We consider a Lucas asset-pricing model with heterogeneous agents, exogenous labor income, and a finite number of exogenous shocks. Although agents are infinitely lived, endowments and dividends are time-invariant functions of the exogenous shock alone and are thus restricted to lie in a finite-dimensional space; genericity analysis can be conducted on sets of zero Lebesgue measure. When financial markets are incomplete, that is, there are fewer financial securities than shocks, we show that generically in individual endowments all competitive equilibria are Pareto inefficient. Received: November 22, 1999; revised version: March 4, 2002 RID="*" ID="*" We are grateful to an anonymous referee for very insightful comments on earlier drafts.     

Wage–vacancy contracts and multiplicity of equilibria in a directed search model of the labour market

This paper studies a directed search model of the labour market, which is standard in all aspects except two. First, we allow firms to post wage–vacancy contracts advertising the number of workers they would pay as well as the payment all will receive. Second, we consider two cases: one where workers are risk neutral and one where workers are risk averse, both in finite and large economies. Our paper shows that when firms post wage–vacancy contracts, whether workers are modelled as risk neutral or risk averse matters: the types of symmetric equilibria and the nature of multiplicity of equilibria are different. Somewhat surprisingly, when there are finite numbers of risk‐neutral workers and firms, we obtain a finite number of symmetric equilibria, but when workers are risk averse, we obtain a continuum of equilibria. Furthermore, our paper sounds a cautionary note on using large economies as an approximation of finite economies: when workers are risk neutral, the nature of equilibrium is preserved going from a finite to a large economy, but the nature of equilibrium is different when workers are risk averse.     

The role of lender behavior in international project finance

Summary. A sovereign borrower seeks to raise funds internationally to finance a fixed-size project, which no single lender can finance alone. Lenders cannot lend more than their endowments, which are private information. A coordination failure arises; therefore, some socially desirable projects may not be financed, even if ex post feasible. There are multiple equilibria, and a conflict exists between lenders about which equilibrium to coordinate on. When endowments are volatile, some lenders prefer an equilibrium in which the project is financed with probability , even if ex post feasible. The government eliminates such equilibria by offering a sufficiently high return, only if endowment volatility is small. Received: June 1, 1999; revised version: December 4, 2000     

The role of the financial system in the growth–inflation link: the OECD experience

This paper jointly estimates the effects of financial development and inflation on growth using both cross-section and time-series dimensions of the data on inflation, growth, and some banking and stock market indicators over the period 1961–1993 for a sample of OECD countries. Overall, the results indicate, first, that the long-run costs of inflation are not explained by policies of financial repression and, second, that if inflation affects growth through its interaction with financial market conditions, this is not the only (nor the most important) channel.     

Identifying the global transmission of the 2007–2009 financial crisis in a GVAR model

The paper analyses and compares the role that the tightening in liquidity conditions and the collapse in risk appetite played for the global transmission of the financial crisis. Dealing with identification and the large dimensionality of the empirical exercise with a Global VAR approach, the findings highlight the diversity of the transmission process. While liquidity shocks have had a more severe impact on advanced economies, it was mainly the decline in risk appetite that affected emerging market economies. The tightening of financial conditions was a key transmission channel for advanced economies, whereas for emerging markets it was mainly the real side of the economy that suffered. Moreover, there are some striking differences also within types of economies, with Europe being more adversely affected by the fall in risk appetite than other advanced economies.     

Contests where there is variation in the marginal productivity of effort

Summary. We provide a characterization of participants' behavior in a contest or tournament where the marginal productivity of effort varies across contestants and individual productivity is private information. We then consider the optimal design of such a contest. We first analyze contestant behavior for the usual type of contest, where the highest output wins. Abilities need not be independently distributed. We demonstrate that there is a unique symmetric equilibrium output function, that output is increasing in ability, and that marginal effort is increasing in ability, while effort decreases when the cost of effort increases. Next we consider the case where the highest output need not win, with independently distributed abilities. We analyze the contest designer's decisions in choosing contest rules optimal from her perspective. We show that the output produced, probability of winning, and contest designer's expected revenue are generally increasing in contestants' ability. We examine the relationship between the marginal cost of producing output and marginal utility per dollar of the net award for winning. Received: July 30, 1998; revised version: August 7, 2000     

A Game‐Theoretic Foundation for Competitive Equilibria in the Stiglitz–Weiss Model

Financial intermediaries are, by definition, engaged in two‐sided competition. Despite the well‐known problems of achieving competitive solutions under two‐sided price competition, models of financial intermediation are commonly solved for competitive equilibria. This article provides a game‐theoretic foundation for competitive equilibria in one of the most important models of financial intermediation, the seminal Stiglitz–Weiss (1981) adverse selection model of the credit market with a continuum of borrower types.     

On the nature of equilibria in a Downsian model with candidate valence

We analyze mechanisms that are used to allocate dormitory rooms to students at college campuses. Students consist of newcoming freshmen, who do not currently occupy any rooms, and more senior students each of whom occupies a room from the previous year. In addition to the rooms already occupied by the existing tenants, there are vacated rooms by the graduating class. Students have strict preferences over dormitory rooms. Each student shall be assigned a dormitory room in an environment where monetary transfers are not allowed. An existing tenant can move to another room as a result of the assignment. We show that you request my house–I get your turn mechanisms are the only mechanisms that are Pareto-efficient, individually rational, strategy-proof, weakly neutral, and consistent.     

On the continuity of equilibrium and core correspondences in economies with differential information

Summary. We study upper semi-continuity of the private and coarse core and the Walrasian expectations equilibrium correspondences for economies with differential information, with Boylan (1971) topology on agents information fields.Received: 16 January 2004, Revised: 28 October 2004, JEL Classification Numbers: D50, D82, C70. Correspondence to: Ezra EinyWe wish to thank Carlos Herves, Nicholas Yannelis, and an anonymous referee for their helpful comments.     

Seasonal Cointegration and Long‐Run Neutrality of Money in the USA

Using the notion of seasonal cointegration and a monetarist model, this paper re‐examines the long‐run monetary neutrality hypothesis, based on the seasonally unadjusted quarterly data of the US over the period 1959Q1–2004Q4. The results indicate that money is cointegrated with price at all possible frequencies while real output is cointegrated with price only at an annual frequency. The cointegration between money and price at the zero frequency, and non‐cointegration between real output and money at all possible frequencies, suggests that money affects nominal but not real variables in the long run.