Output-inflation cycles in an economy with staggered wage setting

The question whether increased price flexibility is stabilizing in macromodels of the business cycle has been recently questioned by De Long and Summers (1986). The present paper is an attempt to reconsider the question by applying some methods from the theory of nonlinear dynamics, especially bifurcation theory, to the analysis of a dynamic model with sluggish price adjustment. It is argued that, when inflation plays a destabilizing role through the Mundell effect, a stable closed orbit representing the perfect-foresight dynamics of the output-inflation pair may appear in the vicinity of a stationary state. Moreover, bifurcation theory is applied to find analytical results about the relation between the amplitude of the cycles and the ‘degree’ of flexibility of prices. This relation is shown to be positive in a variety of cases.     

Fiscal Policy and Long-run Growth in R&D-based Models with Endogenous Market Structure

This paper shows that in a model of endogenous growth that does not exhibit the scale effect, taxes on consumption and labor income and the level and composition of public expenditure have no effect on steady-state growth. The only fiscal instruments that affect steady-state growth are taxes on asset and corporate income. In line with standard intuition, tax rates and public expenditure have level effects on income per capita. These results emphasize that although growth is endogenous, in the sense that it is determined by the model and it is subject to policy action, instruments that work by changing market size do not affect it. Effective growth-enhancing policies operate through the interest rate.     

Schumpeterian Growth with Productive Public Spending and Distortionary Taxation

Schumpeterian growth theory eliminates the scale effect by positing a process of development of new product lines that fragments the aggregate market in submarkets whose size does not increase with population or the size of the workforce. This entails the sterilization of the growth effects of selected fiscal variables. This insight is applied to shed new light on the role of distortionary taxes on consumption, household labor and assets income, corporate income, and of productive public spending. The framework allows the identification of which of these fiscal variables have permanent (steady‐state) growth effects, and which ones have only transitory effects. It also allows the transitional dynamics to be solved analytically and thus the analysis of the welfare effects of revenue‐neutral changes in tax structure. It is found that replacing taxes that distort labor supply with taxes that distort saving/investment choices raises welfare, and the intuition behind this surprising result is discussed.     

Scale effects in endogenous growth theory: an error of aggregation not specification

Modern Schumpeterian growth theory focuses on the product line as the main locus of innovation and exploits endogenous product proliferation to sterilize the scale effect. The empirical core of this theory consists of two claims: (i) growth depends on average employment (i.e., employment per product line); (ii) average employment is scale invariant. We show that data on employment, R&D personnel, and the number of establishments in the US for the period 1964–2001 provide strong support for these claims. While employment and the total number of R&D workers increase with no apparent matching change in the long-run trend of productivity growth, employment and R&D employment per establishment exhibit no long-run trend. We also document that the number of establishments, employment and population exhibit a positive trend, while the ratio employment/establishment does not. Finally, we provide results of time series tests consistent with the predictions of these models.     

Gross Credit Flows

The paper estimates gross credit flows for the U.S. banking system between 1979 and 1999 and shows that sizable gross flows coexist at any phase of the cycle, even within narrowly defined loan categories, bank size categories, and regional units. To investigate the macroeconomic dimensions of gross credit flows, the paper studies the cyclical behaviour of aggregate credit flows and documents three key cyclical facts. First, excess credit reallocation is countercyclical: for any given rate of change of net credit, gross flows are larger in a recession than in a boom. Second, gross credit flows are highly volatile, with a cyclical volatility which appears more than an order of magnitude larger than GDP volatility. Third, credit contraction is more volatile than credit expansion. Furthermore, the behaviour of gross flows over the 1991 recession suggests that persistent and historically high credit contraction is a key feature of the relatively mild cyclical downturn. The results lend some support to aggregate models that emphasize the asymmetric behaviour of credit expansion and credit contractions.     

Optimal debt contracts and moral hazard along the business cycle

Summary. We analyze the Pareto optimal contracts between lenders and borrowers in a model with asymmetric information. The model generalizes the Rothschild-Stiglitz pure adverse selection problem by including moral hazard. Entrepreneurs with unequal abilities borrow to finance alternative investment projects which differ in degree of risk and productivity. We determine the endogenous distribution of projects as functions of the amount of loanable funds, when lenders have no information about borrowers ability and technological choices. Then, we embed these results in a dynamic competitive economy and show that the average quality of the selected projects in equilibrium may be high in recessions and low in booms. This phenomenon may generate (a) multiple steady states, (b) a smaller impact of exogenous shocks on output relative to the full information case, (c) endogenous fluctuations.Received: 11 June 2001, Revised: 17 June 2003, JEL Classification Numbers: A10, G14, G20, E32.Correspondence to: Pietro ReichlinPietro Reichlin acknowledges financial support from MURST and Paolo Siconolfi acknowledges financial support from the GSB of Columbia University.     

Asset restructuring strategies in bank acquisitions: Does distance between dealing partners matter?

One of the most lively-debated effects of banking acquisitions is the change in lending and asset allocation of the target bank in favour of transaction-based products, at the expense of small and informationally opaque borrowers. These changes may be the result of two distinct restructuring strategies pursued by the acquirer with respect to the asset portfolio of the acquired bank: a cleaning strategy (CS), in which the acquirer makes a clean sweep of all the negative net present value activities in the portfolio of the acquired bank, and a portfolio strategy (PS), in which the acquiring bank permanently changes the portfolio allocation of the acquired bank. In this paper we focus on Italian bank acquisitions and test which asset restructuring strategy was predominantly pursued over the period 1997–2003. Moreover, we distinguish acquisitions according to their geographic diversifying character and to the physical and cultural distances that separate acquiring from acquired banks. When we look at the mean value, we do not find clear evidence of a primacy either of CSs or PSs. When we separate in-market from out-of-market bank acquisitions, however, results show that the CSs prevail only in the former type of deals, while in the latter the portfolio of acquired banks is subject to PSs. Finally, we find that differences in asset restructuring strategies can be explained by differences in corporate culture and the workplace environment of the dealing partners.     

Signaling Strategies for Innovative Design: A Study on Design Tradition and Expert Attention

There is increasing acknowledgement that innovative product design has a positive effect on financial performance. However, innovative design may require specific efforts to aid interpretation and appreciation by the market. So far, little is known about how companies can enhance their chances of success when introducing innovative designs. This study contributes to the development of this area of research. Drawing on signaling theory, it examines the role of two types of signals that may act as enablers for market acceptance of innovative design: adherence to a national design tradition, and attention from experts and specialized media. Using data collected from Danish design‐intensive companies, findings show that design innovativeness has a positive impact on financial performance. The analyses demonstrate that the effect is reinforced if a novel design adheres to a national design tradition. In addition, novel designs will be more positively accepted if they receive attention from design experts and attract media coverage. Research also contributes to signaling theory, as it shows how intrinsic—design innovativeness and adherence to a design tradition—and extrinsic—expert and media attention—cues interact and influence financial performance. The paper concludes by discussing managerial implications, particularly in relation to the new product development process and the role of design, and by suggesting avenues for further research.