Liquidity of secondary capital markets: Allocative efficiency and the maturity composition of the capital stock

Summary We investigate the function of liquid financial markets for the allocation of productive capital. We consider an economy where agents endogenously choose among capital production technologies with differing gestation periods. Long-gestation capital investments must be rolled-over in secondary capital markets. The use of such investment technologies therefore requires the support of liquid financial markets. We investigate how changes in the liquidity of these markets (i.e., in the costs of transacting) affect (a) the choice of capital production technology, (b) per capita income and the per capita capital stock, (c) the level of financial market activity, (d) the real return on savings and (e) welfare in a steady state equilibrium. Improvements in financial market liquidity raise rates of return on savings, and favor the increased use of long gestation capital investments. However, such improvements may or may not lead to higher levels of real activity or steady state welfare. We describe conditions under which various outcomes occur.We have benefited from the comments of seminar participants at the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Minneapolis, the International Monetary Fund, Berkeley, Boston College, Boston University, Brown, Chicago, Illinois, Miami, UC San Diego, Simon Fraser, University of British Columbia, University of Washington, Yale, the Canadian Macro Study Group Meetings, the Murrary S. Johnson Conference (University of Texas/Federal Reserve Bank of Dallas), and the Far West Rotating Economic Theory Conference. We would also like to thank John Bryant, Andreas Hornstein, Dan Peled, Bill Schworm, Karl Shell, Bart Taub and an anonymous referee for their comments on an earlier draft of the paper.     

Explaining Differences in Economic Growth among OECD Countries

This paper re-examines the determinants of growth of GDP per capita using panel data for OECD countries for the period 1970–1999 with data averaged over five-year periods from new perspectives. First, we introduce indicators of innovation input and technological specialization simultaneously into the empirical growth equation. Second, we employ the system-GMM (Generalized-Method-of-Moments) panel estimator that controls for (a) the possible specification bias when variables are highly persistent over time and (b) the possible simultaneity bias. We find a large and statistically significant impact of business enterprise R&D (BERD) intensity on GDP per capita with an elasticity of 0.22. The share of high-technology exports is also significantly positively related to GDP per capita, but the magnitude suggests that BERD is more important than technological specialization in explaining the level of GDP per capita. Furthermore, we find that the budget deficit and government consumption (both measured as percentages of GDP) and the volatility of growth are significantly negatively related to GDP per capita.The authors would like to thank Gunther Tichy for helpful comments on an earlier draft of this article. We also thank the participants of the Austrian economic association conference (NOEG) and the Empirical Industrial Organization workshop at the WU WIEN for helpful comments. We gratefully acknowledge financial support from the OeNB Jubiläumsfonds Project and the Austrian Federal Ministry for Economy and Labor (BMWA).JEL codes: E62, H20, H50, O23, O40     

A model of the federal funds market

Summary This paper develops a stochastic general equilibrium model of the federal funds market that incorporates non-Fisherian effects on interest rates stemming from both supply and demand shocks to reserves. Such a model may reconcile the widespread belief in a liquidity effect of money supply shocks with the difficulty many researchers have had in finding empirical support for such an effect. The model also cautions against interpreting the observed negative correlation between the federal funds rate and innovations to nonborrowed reserves as empirical confirmation of the ability of the Federal Reserve to lower short-term real interest rates.This paper should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or its staff. We gratefully acknowledge lengthy discussions and correspondence with V. V. Chari, Marty Eichenbaum, and especially Larry Christiano, that helped to clarify many issues. We were told many institutional details by Jim Clouse and Josh Feinman, and we received many helpful comments from David Altig, Michael Dotsey, and participants at the conference on Recent Research on the Liquidity Effect of Monetary Policy, 1993, Federal Research Bank of Cleveland, the conference on Recent Macroeconomic Research: Lessons for Policymaking, 1993, Federal Reserve Bank of Atlanta and the conference on Operating Procedures and the Conduct of Monetary Policy, 1992, Federal Reserve Bank of St. Louis.     

UNDERSTANDING PER‐CAPITA INCOME GROWTH IN PREINDUSTRIAL EUROPE

In a Malthusian environment, per‐capita incomes are stagnant, meaning they cannot exhibit sustained growth. However, they can still display volatility and persistence when hit by shocks. This article simulates a Malthusian model with realistic life‐cycle structure and stochastic and accelerating growth in land productivity. We find that differences across simulated economies are quantitatively similar to those found in recently compiled data over GDP per capita for several European countries before 1800. This speaks to the relevance of the Malthusian model for understanding preindustrial development in Europe, contrasting with contentions to the contrary in some of the existing literature.     

Australia, Japan and the OECD: GDP Rankings and Revealed Preference

Data on volumes and prices of consumption and investment are used to compare Australian real GDP for 1990 with the other OECD countries. Australian consumption patterns, including leisure, and price structure are very different from most other countries and especially from those of Japan. The Australian bundle of consumption, investment and leisure is revealed preferred to that of Japan and a number of other countries which are conventionally ranked above Australia in comparisons of real GDP per capita at international prices.     

On the optimality of interest-bearing reserves in economies of overlapping generations

Summary Paying interest on required reserves is considered in an overlapping generations model in which the return to capital dominates the return to fiat money. As Smith (1991) showed, financing interest on reserves benefits the initial old at the expense of future generations. We show that the transfer of wealth associated with interest on reserves can be offset by an accommodating open market purchase, so that the payment of interest on reserves is a Pareto improvement. We also show that paying interest on reserves improves welfare even when financed by distorting taxes on capital.The authors thank Mike Cox, Greg Huffman, Evan Koenig, and Bruce Smith for helpful discussion. Any remaining errors are solely ours. This work originated while Freeman was a Research Associate at the Federal Reserve Bank of Dallas. The views expressed herein do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.     

Do the global stochastic trends drive the real house prices in OECD countries?

This paper demonstrates that in the long-run the main determinants of the real housing prices for a panel dataset comprising the quarterly observations of 12 OECD countries are the real GDP per capita and the real interest rate along with the global stochastic trends.     

Constructing Bounds on Per Capita Income Differentials across Countries

The results of purchasing power parity (PPP)-based comparisons of income across countries can be quite sensitive to the choice of index number formula. Tighter bounds on per capita income differentials can be constructed either by assuming homothetic preferences, or by estimating a demand system. Both approaches are used to construct bounds on per capita income differentials across the OECD countries. The paper concludes by discussing the strengths and weaknesses of each approach.
JEL Classification C 43; F 31; O 47     

More on money as a medium of exchange

Summary We extend the analysis of Kiyotaki and Wright, who study economies where the commodities that serve as media of exchange (or, commodity money) are determined endogenously. Kiyotaki and Wright consider only steady-state, pure-strategy equilibria; here we allow dynamic and mixed-strategy equilibria. We demonstrate that symmetric, steady-state equilibria in mixed-strategies always exist, while sometimes no such equilibria exist in pure-strategies. We prove that the number of symmetric steady-state equilibria is generically finite. We also show, however, that for some parameter values there exists a continuum of dynamic equilibria. Further, some equilibria display cycles.We thank the National Science Foundation and the University of Pennsylvania Research Foundation for financial support, as well as seminar participants at Stanford University, the London School of Economics, the Econometric Society World Congress in Barcelona, and the Conference on Monetary Theory and Financial Institutions at the Federal Reserve Bank of Minneapolis for their comments or suggestions. Alberto Trejos provided research assistance. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.     

中国地区居民生活水平比较——基于全球夜间灯光数据

当衡量一国或地区居民生活水平时,统计学上一般有收入和消费两种视角。本文利用城乡住户调查中的人均可支配收入和国民经济核算中的居民消费水平,以全球夜间灯光数据为参照,综合收入端与消费端信息,对1997—2016年中国31个地区的真实生活水平进行比较分析。研究证实,灯光亮度与消费水平和人均可支配收入之间均存在显著的线性关系,可以用来估算真实生活水平。根据不同模型的回归结果得到,真实生活水平的最优无偏估计中消费水平的权重范围为（2795%,3831%）,人均可支配收入水平的权重范围为（6169%,7205%）。相对于消费水平,人均可支配收入更能准确地反映真实生活水平。本文进一步分析发现,样本期内居民生活水平增速小于人均GDP增速,可见经济的发展并未完全转化为生活水平的提高。中西部地区与东部地区的生活水平仍然存在巨大差距,东部地区的平均生活水平分别是中部和西部地区的17倍和21倍。     

Inequality and economic growth: the role of initial income

We estimate a panel model where the relationship between inequality and GDP per capita growth depends on countries’ initial incomes. Estimates of the model show that the relationship between inequality and GDP per capita growth is significantly decreasing in countries’ initial incomes. Results from instrumental variables regressions show that in Low Income Countries transitional growth is boosted by greater income inequality. In High Income Countries inequality has a significant negative effect on transitional growth. For the median country in the world, that in the year 2015 had a PPP GDP per capita of around 10000USD, IV estimates predict that a 1 percentage point increase in the Gini coefficient decreases GDP per capita growth over a 5-year period by over 1 percentage point; the long-run effect on the level of GDP per capita is around ??5%.     

INTERNATIONAL COMPARISONS OF INTER-INDUSTRY WAGE DIFFERENTIALS

We use OECD data to examine inter-industry wage differentials (relative wages among industries) for 14 OECD countries over the period 1970–85. We find, first, that the industrial wage structures have shown remarkable stability over time in terms of rank order for all the countries in the sample. Second, despite their rank order stability, wage structures show a tendency to expand or contract. While the U.S. has shown increasing industry wage dispersion between 1970 and 1985, the pattern is very mixed for other countries. Unionization is a significant factor in explaining cross-country differences. Third, industry wage rankings show some evidence of becoming increasingly similar across nations over time, and this movement is associated with a convergence of per capita incomes. Fourth, industry wage differentials are positively related to an industry's productivity growth, output growth, capital intensity, and export orientation.     

Domestic financial market frictions,unrestricted international capital flows,and crises in small open economies

Summary. We present an example of a small open economy where small increases in the world interest rate may induce a sharp decline in output and a precipitous depreciation of the exchange rate. Due to a costly state verification problem in domestic credit markets, combined with unrestricted international capital flows, our economy generates two long-run equilibria, one with low GDP and a relatively depreciated real exchange rate (RER), and one with high GDP and a relatively appreciated RER. The first is always a saddle, while the second may be a sink or a source, depending on the level of the world interest rate. A crisis is identified with the economy switching from an equilibrium path approaching the high-output steady state to the saddlepath approaching the low-output steady state. In Mexicos recent history, periods of growth associated with appreciation of the RER have alternated with periods of sharp contraction and depreciation of the RER. Our economy displays such behavior in response to changes in the world interest rate.Received: 9 April 2002, Revised: 20 March 2003JEL Classification Numbers: E5, F4.G. Antinolfi, E. Huybens: We thank Steve Fazzari, Tim Kehoe, Todd Keister, Manuel Santos, Karl Shell and especially Bruce Smith for very helpful discussions. Jaime Calleja Alderete, Eduardo Camero Godínez, and Juan Vargas Hernández provided excellent research assistance. All remaining errors are ours. Huybens was an assistant professor in the Centro de Investigación Económica, ITAM, at the time this article was written, and part of this work was completed while Antinolfi was a visiting scholar at the Federal Reserve Bank of St. Louis. The views expressed herein are those of the authors, and do not reflect those of the World Bank or the Federal Reserve Bank of St. Louis. Correspondence to: G. Antinolfi     

Implementing Arrow-Debreu equilibria by trading infinitely-lived securities

Summary. We show that Arrow-Debreu equilibria with countably additive prices in infinite-time economy under uncertainty can be implemented by trading infinitely-lived securities in complete sequential markets under two different portfolio feasibility constraints: wealth constraint, and essentially bounded portfolios. Sequential equilibria with no price bubbles implement Arrow-Debreu equilibria, while those with price bubbles implement Arrow-Debreu equilibria with transfers. Transfers are equal to price bubbles on initial portfolio holdings. Price bubbles arise in sequential equilibrium under the wealth constraint if some securities are in zero supply or negative prices are permitted, but cannot arise with essentially bounded portfolios.Received: 19 November 2003, Revised: 24 February 2004, JEL Classification Numbers: D50, G12, E44.Correspondence to: Jan WernerWe acknowledge helpful discussions with Roko Aliprantis, Subir Chattopaydhyay, Steve LeRoy, Manuel Santos, and seminar participants at Brown University, University of Pennsylvania, NBER Workshop in General Equilibrium Theory, SITE 2000, the 2000 World Congress of the Econometric Society, and Federal Reserve Bank of Kansas City. The views expressed herein are those of the authors and do not necessarily reflect the views of Federal Reserve Bank of Kansas City or the Federal Reserve System.     

Modelling Long-Range Dependence and Non-linearity in the Infant Mortality Rates of African Countries

International Advances in Economic Research - Infant mortality rates in 34 Sub-Saharan African countries (1960–2016), obtained from the Federal Reserve Bank of St. Louis database, were...     

Has the Fed improved U.S. economic performance?

This paper finds that U.S. economic performance has not generally improved under the Federal Reserve, with the possible exception of the Great Moderation. We analyze the Fed and pre-Fed periods in terms of the rates and volatilities of inflation and real GDP growth. Comparing the pre-Fed periods to the post-World War II period and the Great Moderation, we find that real GDP growth has been lower under the Fed, while inflation has been higher. The volatilities of inflation and GDP growth have both declined under the Fed, but the reductions occurred mostly during the Great Moderation.     

An experimental examination of the house money effect in a multi-period setting

There is evidence that risk-taking behavior is influenced by prior monetary gains and losses. When endowed with house money, people become more risk taking. This paper is the first to report a house money effect in a dynamic, financial setting. Using an experimental method, we compare market outcomes across sessions that differ in the level of cash endowment (low and high). Our experimental results provide support for a house money effect. Traders’ bids, price predictions, and market prices are influenced by the amount of money that is provided prior to trading. However, dynamic behavior is difficult to interpret due to conflicting influences. JEL Classification C91 · C92 · D80 The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.     

Carry trades and US monetary policy

I document that Federal Reserve expansionary monetary policy has a positive impact on the excess returns arising from currency carry trades. I show that expansive monetary surprises are associated with an increase in future real interest differentials between high interest rate currencies and the US dollar, which leads to higher capital flows toward those currencies and an increase in their returns. Since this increase is not fully compensated by a decrease in the returns from the short position in low interest rate currencies, unexpected monetary expansions in the US result in higher carry trade returns.     

Testing convergence of European regions: A semiparametric approach

We provide a reappraisal of income convergence across European regions over the last two decades by using a semiparametric partially linear model to approximate the relationship between the average growth rate of GDP per capita and the initial GDP per capita. Estimation results point out both country heterogeneity and non-linearity in the convergence process. The findings suggest that low income regions, in particular those from new adhesion countries, diverge while medium income regions converge and that there is no evidence of convergence for high income regions.     

Convergence patterns in financial development: evidence from club convergence

This article analyzes the degree of convergence of financial development for a panel of 50 countries. We apply the methodology of Phillips and Sul (Econometrica 75:1771?C1855, 2007) to various indicators of financial development to assess the existence of convergence clubs. We consider ten alternative indicators of financial development that various researchers use to proxy for the degree of financial development in countries. Overall, the results do not support the hypothesis that all countries converge to a single equilibrium state in financial development. Nevertheless, strong evidence exists of club convergence. Countries demonstrate a high degree of convergence in the sense that in the majority of financial indexes they form only two or three convergence clubs, depending on the measure of financial development used. We also apply the Phillips and Sul method to two real variables, per capita output and fixed capital investment to GDP, and find strong evidence of five and four distinct convergence clubs, respectively. Finally, we compare the various convergence clubs associated with financial development indicators to those clubs for per capita output and fixed capital investment to GDP. We conclude that strong evidence supports the correspondence between the convergence clubs for financial development and those two real variables.