nep-bec New Economics Papers
on Business Economics
Issue of 2009‒10‒31
thirty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Time-varying capital requirements in a general equilibrium model of liquidity dependence By Francisco Covas; Shigeru Fujita
  2. Factor Demand Linkages, Technology Shocks and the Business Cycle By Holly, Sean; Petrella, Ivan
  3. Overborrowing and systemic externalities in the business cycle By Javier Bianchi
  4. The determinants of bank capital structure. By Reint Gropp; Florian Heider
  5. Cointegrated TFP Processes and International Business Cycles By Pau Rabanal; Vicente Tuesta; Juan F. Rubio-Ramirez
  6. Market Wide Liquidity Instability in Business Cycles By Chatterjee, Sidharta
  7. Who Benefits from Capital Account Liberalization? Evidence from Firm-Level Credit Ratings Data By Martin Schindler; Patricio Valenzuela; Alessandro Prati
  8. Bank regulation, capital and credit supply: Measuring the Impact of Prudential Standards By William Francis; Matthew Osborne
  9. Paulson's Gift By Pietro Veronesi; Luigi Zingales
  10. Flexible Contracts By Piero Gottardi; Jean Marc Tallon; Paolo Ghirardato
  11. India Transformed? Insights from the Firm Level 1988-2005 By Laura Alfaro; Anusha Chari
  12. Competition or collaboration? The reciprocity effect in loan syndication By Jian Cai
  13. Banks, Financial Markets and International Consumption Risk Sharing By Markus Leibrecht; Johann Scharler
  14. Is the automotive supply chain compatible with Corporate Social Responsible practices? (In French) By Vincent FRIGANT (GREThA UMR CNRS 5113)
  15. Global economy dynamics? Panel data approach to spillover effects By Daco, Gregory; Hernandez Martinez, Fernando; Hsu, Li-Wu
  16. Are U.S. banks too large? By David C. Wheelock; Paul Wilson
  17. Globalization and Protection of Employment By Justina A.V. Fischer; Frank Somogyi
  18. Evaluating German Business Cycle Forecasts Under an Asymmetric Loss Function By Jörg Döpke; Ulrich Fritsche; Boriss Siliverstovs
  19. Evidence of Regulatory Arbitrage in Cross-Border Mergers of Banks in the EU By Santiago Carbo-Valverde; Edward J. Kane; Francisco Rodriguez-Fernandez
  20. Merger Performance and Efficiencies in Horizontal Merger Policy in the US and the EU By Kamerbeek, S.P.
  21. Capacity Utilisation, Constraints and Price Adjustments under the Microscope By Sarah M. Lein; Eva Köberl
  22. Technological Externalities and Economic Distance: A case of the Japanese automobile suppliers By TAKEDA Yosuke; UCHIDA Ichiro
  23. Financial intermediaries and monetary economics By Tobias Adrian; Hyun Song Shin
  24. The Effects of Leniency on Maximal Cartel Pricing By Harold Houba; Evgenia Motchenkova; Quan Wen
  25. On the non-causal link between volatility and growth By Olaf POSCH; Klaus W€LDE
  26. Accounting Discretion of Banks During a Financial Crisis By Luc Laeven; Harry Huizinga
  27. Why are the 2000s so different from the 1970s? A structural interpretation of changes in the macroeconomic effects of oil prices By Olivier J. Blanchard; Marianna Riggi
  28. Bargaining with Non-convexities By Herings P. Jean-Jacques; Predtetchinski Arkadi
  29. Evaluation of Nonlinear time-series models for real-time business cycle analysis of the Euro area By Monica Billio; Laurent Ferrara; Dominique Guegan; Gian Luigi Mazzi
  30. Risk, Leverage, and Regulation of Financial Intermediaries By Tianxi, Wang

  1. By: Francisco Covas; Shigeru Fujita
    Abstract: This paper attempts to quantify business cycle effects of bank capital requirements. The authors use a general equilibrium model in which financing of capital goods production is subject to an agency problem. At the center of this problem is the interaction between entrepreneurs' moral hazard and liquidity provision by banks as analyzed by Holmstrom and Tirole (1998). They impose capital requirements on banks and calibrate the regulation using the Basel II risk-weight formula. Comparing business cycle properties of the model under this procyclical regulation with those under hypothetical countercyclical regulation, the authors find that output volatility is about 25 percent larger under procyclical regulation and that this volatility difference implies a 1.7 percent reduction of the household's welfare. Even with more conservative parameter choices, the volatility and welfare differences under the two regimes remain nonnegligible.
    Keywords: Bank capital ; Business cycles ; Bank reserves
    Date: 2009
  2. By: Holly, Sean; Petrella, Ivan
    Abstract: This paper argues that factor demand linkages are crucial in the transmission of both sectoral and aggregate shocks. We show this using a panel of highly disaggregated manufacturing sectors together with sectoral structural VARs. When sectoral interactions are explicitly accounted for, a contemporaneous technology shock to all manufacturing sectors implies a positive response in both output and hours at the aggregate level. Otherwise, there is a negative correlation as in much of the existing literature. Furthermore, we find that technology shocks are important drivers of business cycles.
    Keywords: Multisectors; Technology shocks; Business cycles; Long-run restrictions; Cross Sectional Dependence.
    JEL: E32 C31 E20
    Date: 2009–09
  3. By: Javier Bianchi
    Abstract: Credit constraints that link a private agent’s debt to market-determined prices embody a credit externality that drives a wedge between competitive and constrained socially optimal equilibria, inducing private agents to overborrow. The externality arises because agents fail to internalize the debt-deflation effects of additional borrowing when negative income shocks trigger the credit constraint. We quantify the effects of this inefficiency in a two-sector dynamic stochastic general equilibrium model of a small open economy calibrated to emerging markets. The credit externality increases the probability of financial crises by a factor of seven and causes the maximum drop in consumption to increase by 10 percentage points.
    Date: 2009
  4. By: Reint Gropp (European Business School, Wiesbaden and Centre for European Economic Research (ZEW) Mannheim, Germany.); Florian Heider (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The paper shows that mispriced deposit insurance and capital regulation were of second order importance in determining the capital structure of large U.S. and European banks during 1991 to 2004. Instead, standard cross-sectional determinants of non-financial firms’ leverage carry over to banks, except for banks whose capital ratio is close to the regulatory minimum. Consistent with a reduced role of deposit insurance, we document a shift in banks’ liability structure away from deposits towards non-deposit liabilities. We find that unobserved timeinvariant bank fixed effects are ultimately the most important determinant of banks’ capital structures and that banks’ leverage converges to bank specific, time invariant targets. JEL Classification: G32, G21.
    Keywords: bank capital, capital regulation, capital structure, leverage.
    Date: 2009–09
  5. By: Pau Rabanal; Vicente Tuesta; Juan F. Rubio-Ramirez
    Abstract: A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that TFP processes for the U.S. and the "rest of the world," is characterized by a vector error correction (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also we show that the observed increase of the real exchange rate volatility with respect to output in the last 20 year can be explained by changes in the parameter of the VECM.
    Keywords: Business cycles , Consumer goods , Demand , Economic models , Exchange rates , External shocks , Industrial production , International trade , Price elasticity , Prices , Private consumption , Productivity , Real effective exchange rates , Spillovers ,
    Date: 2009–09–29
  6. By: Chatterjee, Sidharta
    Abstract: This paper deals with an existing question; does market liquidity disequilibrium leads to stock market bubble burst? Contemporary research has shown that liquidity is the key driving force behind capital market growth and its sustenance. Stock markets usually react to changes in market-wide liquidity, whose supply-demand cycle fluctuates with investor behavior actions. Market illiquidity due to supply shocks or sudden redemption, does exert strain on the financial markets as of when if too much untenable, lead to market crash. In this paper, we investigate how market-wide fluctuations in liquidity result in return volatilities and stock market return asymmetries as also to prove the notion whether liquidity per se, is the sole driver of stock market growth.
    Keywords: Liquidity; business cycles; investor behavior; returns asymmetry
    JEL: C32 E44
    Date: 2009–10–24
  7. By: Martin Schindler; Patricio Valenzuela; Alessandro Prati
    Abstract: We provide new firm-level evidence on the effects of capital account liberalization. Based on corporate foreign-currency credit ratings data and a novel capital account restrictions index, we find that capital controls can substantially limit access to, and raise the cost of, foreign currency debt, especially for firms without foreign currency revenues. As an identification strategy, we exploit, via a difference-in-difference approach, within-country variation in firms' access to foreign currency, measured by whether or not a firm belongs to the nontradables sector. Nontradables firms benefit substantially more from capital account liberalization than others, a finding that is robust to a broad range of alternative specifications.
    Keywords: Access to capital markets , Asset management , Capital account liberalization , Capital controls , Corporate sector , Credit , Debt , Economic models , Foreign exchange transactions , Foreign investment , Time series ,
    Date: 2009–09–29
  8. By: William Francis (Financial Services Authority); Matthew Osborne (Financial Services Authority)
    Abstract: The existence of a “bank capital channel”, where shocks to a bank’s capital affect the level and composition of its assets, implies that changes in bank capital regulation have implications for macroeconomic outcomes, since profit-maximising banks may respond by altering credit supply or making other changes to their asset mix. The existence of such a channel requires (i) that banks do not have excess capital with which to insulate credit supply from regulatory changes, (ii) raising capital is costly for banks, and (iii) firms and consumers in the economy are to some extent dependent on banks for credit. This study investigates evidence on the existence of a bank capital channel in the UK lending market. We estimate a long-run internal target risk-weighted capital ratio for each bank in the UK which is found to be a function of the capital requirements set for individual banks by the FSA and the Bank of England as the previous supervisor (Although within the FSA’s regulatory capital framework the FSA’s view of the capital that an individual bank should hold is given to the firm through individual capital guidance, for reasons of simplicity/consistency this paper refers throughout to “capital requirements”). We further find that in the period 1996-2007, banks with surpluses (deficits) of capital relative to this target tend to have higher (lower) growth in credit and other on- and off-balance sheet asset measures, and lower (higher) growth in regulatory capital and tier 1 capital. These findings have important implications for the assessment of changes to the design and calibration of capital requirements, since while tighter standards may produce significant benefits such as greater financial stability and a lower probability of crisis events, our results suggest that they may also have costs in terms of reduced loan supply. We find that a single percentage point increase in 2002 would have reduced lending by 1.2% and total risk weighted assets by 2.4% after four years. We also simulate the impact of a countercyclical capital requirement imposing three one-point rises in capital requirements in 1997, 2001 and 2003. By the end of 2007, these might have reduced the stock of lending by 5.2% and total risk-weighted assets by 10.2%.
    Keywords: bank, capital, financial regulation, prudential policy, credit, lending
    Date: 2009–09
  9. By: Pietro Veronesi; Luigi Zingales
    Abstract: We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’ cost of $25 -$47 billions with a net benefit between $84bn and $107bn. By looking at the limited cross section we infer that this net benefit arises from a reduction in the probability of bankruptcy, which we estimate would destroy 22% of the enterprise value. The big winners of the plan were the three former investment banks and Citigroup, while the loser was JP Morgan.
    JEL: G21 G28
    Date: 2009–10
  10. By: Piero Gottardi; Jean Marc Tallon; Paolo Ghirardato
    Abstract: This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. Delegation grants some flexibility in the choice of the action by the agent, but also requires the use of an appropriate incentive contract so as to realign his interests with those of the principal. The parties’ understanding of the possible circumstances in which actions will have to be chosen and their attitude towards risk and uncertainty play then an important role in determining the costs of delegation. The main focus of the paper lies indeed in the analysis of these costs and the consequences for whether or not delegation is optimal. We determine and characterize the properties of the optimal flexible contract both when the parties have sharp probabilistic beliefs over the possible events in which the agent will have to act and when they only have a set of such beliefs. We show that the higher the agent’s degree of risk aversion, the higher the agency costs for delegation and hence the less profitable is a flexible contract versus a rigid one. The agent’s imprecision aversion in the case of multiple priors introduces another, additional agency costs; it again implies that the higher the degree of imprecision aversion the less profitable flexible contracts versus rigid ones. Even though, with multiple priors, the contract may be designed in such a way that principal and agent end up using ’different beliefs’ and hence engage in speculative trade, this is never optimal, in contrast with the case where the parties have sharp heterogeneous beliefs.
    Keywords: Delegation, Flexibility, Agency Costs, Multiple Priors, Imprecision Aversion
    JEL: D86 D82 D81
    Date: 2009
  11. By: Laura Alfaro; Anusha Chari
    Abstract: Using firm-level data this paper analyzes the transformation of India’s economic structure following the implementation of economic reforms. The focus of the study is on publicly-listed and unlisted firms in manufacturing and services industries. Detailed balance sheet and ownership information permit an investigation of a range of variables. We analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, number, and size of firms evolved between 1988 and 2005. We find great dynamism displayed by foreign and private firms as reflected in the growth in their numbers, assets, sales and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story rather is one of an economy still dominated by the incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.
    JEL: F4 O12
    Date: 2009–10
  12. By: Jian Cai
    Abstract: It is well recognized that loan syndication generates a moral hazard problem by diluting the lead arranger's incentive to monitor the borrower. This paper proposes and tests a novel view that reciprocal arrangements among lead arrangers serve as an effective mechanism to mitigate this agency problem. Lender arrangements in about seven out of ten syndicated loans are reciprocal in the sense that lead arrangers also participate in loans that are led by their participant lenders. I develop a model in which syndicate lenders share reciprocity through such arrangements in a repeated-game setting as monitoring effort enhances lead arrangers' ability to profit from participating in loans led by others. The model generates specific predictions that I then confront with the data. I find strong and consistent empirical evidence on the reciprocity effect. Controlling for lender, borrower, and loan characteristics, I show that: (i) lead arrangers retain on average 4.3% less of the loans with reciprocity than those without reciprocity, (ii) the average interest spread over LIBOR on drawn funds is 11 basis points lower on loans with reciprocity, and (iii) the default probability is 4.7% lower among loans with reciprocity. These results indicate a cooperative equilibrium in loan syndication and have important implications to lending institutions, borrowing firms, and regulators.
    Keywords: Loans
    Date: 2009
  13. By: Markus Leibrecht; Johann Scharler
    Abstract: In this paper we empirically explore how characteristics of the domestic financial system influence the international allocation of consumption risk using a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Specifically, we find that coun- tries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the inter- national diversification of consumption risk.
    Keywords: International Risk Sharing, Financial Development, Financial System
    JEL: F36 F41
    Date: 2009–10
  14. By: Vincent FRIGANT (GREThA UMR CNRS 5113)
    Abstract: This paper tries to examine what are the conditions of the diffusion of Corporate Social Responsibility in the first tier suppliers. These types of firms are specific because, if they are subcontractors, they are also big firms with a real capability to develop their own strategies. We discuss critically the Business Case approach and the other approaches which are looking for efficiency of CSR in terms of production cost or productivity. We propose to consider how the vertical relationships are really built, and by studying the principles of buyer-suppliers coordination, we show that these relationships are creating a lot of contradictions with CSR objectives.
    Keywords: Corporate social responsibility, CSR, Coordination, Automotive, First tier suppliers
    JEL: M14 L62
    Date: 2009
  15. By: Daco, Gregory; Hernandez Martinez, Fernando; Hsu, Li-Wu
    Abstract: Over the past year, there has been considerable debate about how the slowing of the United States and other major developed economies affects output growth across the world. The main purpose of this paper is to establish relevant conclusions on how the U.S., Euro Area and Japan gross domestic product growth affect international business cycle fluctuations, with the objective of identifying the main factors that influence spillovers into other countries. Using panel data regression, we conclude that output growth in the U.S. and Euro area are significant in explaining output growth across countries. Depending on the specifications, trade linkages play a significant role while financial linkages with respect to the three regions does not (except in one particular specification). There are signs of potential omitted variable bias in some regression indicating that some relevant variables have not been taken into account. There is also clear evidence of a structural change in the transmission mechanism of shocks after 1985 – since when shocks have become more country-specific.
    Keywords: Output Growth; Trade and Financial Linkages; Structural Break; Cross- Section Panel Data.
    JEL: F40 C23
    Date: 2009–03
  16. By: David C. Wheelock; Paul Wilson
    Abstract: The substantial consolidation of the U.S. banking industry since the mid-1980s has brought a large increase in average (and median) bank size, which along with concerns about banks that are "too-big-to-fail," has led many analysts to wonder whether banks are "too large." This paper presents new estimates of ray-scale and expansion-path scale economies for U.S. banks based on nonparametric, local linear estimation of a model of bank costs. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. Our estimates indicate that as recently as 2006, most U.S. banks faced increasing returns to scale, suggesting that industry consolidation and increasing scale are likely to continue unless checked by government intervention.
    Keywords: Banks and banking ; Economies of scale ; Bank failures
    Date: 2009
  17. By: Justina A.V. Fischer (OECD, ELS/SPD, Paris and Universitaet Hohenheim, Stuttgart); Frank Somogyi (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Unionists and politicians frequently claim that globalization lowers employment protection of workers. This paper tests this hypothesis in a panel of 28 OECD countries from 1985 to 2003, differentiating between three dimensions of globalization and two labor market segments. While overall globalization is shown to loosen protection of the regularly employed, it increases regulation in the segment of limited-term contracts. We find the economic one to drive deregulation for the regularly employed, but the social one to be responsible for the better protection of workers in atypical employment. We offer political economy arguments as explanations for these differential effects.
    Keywords: Globalization, international trade, integration, employment protection, labor standards, unions, cross-country analysis, panel data analysis
    JEL: C33 F15 F16 J81 J83 O57
    Date: 2009–09
  18. By: Jörg Döpke (University of Applied Sciences Merseburg, Merseburg/Germany); Ulrich Fritsche (Hamburg University, Faculty Economics and Social Sciences and German Institute of Economic Research, Hamburg/Germany); Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zürich)
    Abstract: Based on annual data for growth and inflation forecasts for Germany covering the time span from 1970 to 2007 and up to 17 different forecasts per year, we test for a possible asymmetry of the forecasters' loss function and estimate the degree of asymmetry for each forecasting institution using the approach of Elliot et al. (2005). Furthermore, we test for the rationality of the forecasts under the assumption of a possibly asymmetric loss function and for the features of an optimal forecast under the assumption of a generalized loss function. We find evidence for the existence of an asymmetric loss function of German forecasters only in case of pooled data and a quad-quad loss function. We cannot reject the hypothesis of rationality of the growth forecasts based on data for single institutions, but based on a pooled data set. The rationality of inflation forecasts frequently is rejected in case of single institutions and also for pooled data.
    Keywords: Business cycle forecast evaluation, asymmetric loss function, and rational expectations
    JEL: C53 E42
    Date: 2009–08
  19. By: Santiago Carbo-Valverde; Edward J. Kane; Francisco Rodriguez-Fernandez
    Abstract: Banks are in the business of taking calculated risks. Expanding the geographic footprint of an organization’s profit-making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe. This paper tests and confirms the hypothesis that differences in the character of safety-net benefits that are available to banks in individual EU countries help to explain the nature of cross-border merger activity. If they wish to protect taxpayers from potentially destabilizing regulatory arbitrage, central bankers need to develop statistical procedures for assessing supervisory strength and weakness in partner countries. We believe that the methods and models used here can help in this task.
    JEL: F3 G2 K2
    Date: 2009–10
  20. By: Kamerbeek, S.P.
    Abstract: In current horizontal merger policy in the US and the EU an explicit efficiency defense is allowed. On both sides of the Atlantic mergers are unconditionally approved if internal efficiencies are sufficient to reverse the mergers’ potential to harm consumers in the relevant market. Current merger policy is implicitly based on the assumption that rational managers will only propose privately profitable mergers. In this thesis I will show that the empirical evidence on merger performance suggests that this assumption can’t be sustained. Managers do propose uneconomic mergers, motivated by non-wealth maximizing behavior. To tackle this problem I argue that efficiencies should not only be used as an efficiency defense, but efficiencies should work both ways. To avoid type I and type II errors the competition authorities in the US and the EU should undertake a sequential efficiency test in their assessment of specific mergers.
    Keywords: Merger; competition policy; efficiencies; efficiency defence; merger performance; rational manager
    JEL: K0 K21 L4
    Date: 2009–07–01
  21. By: Sarah M. Lein (Swiss National Bank Zurich, Switzerland); Eva Köberl (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyses the interplay of capacity utilisation, capacity constraints, demand constraints and price adjustments, employing a unique firm-level data set for Swiss manufacturing firms. Theoretically, capacity constraints limit the ability of forms to expand production in the short run and lead to increases in prices. Our results show that, on the one hand, price increases are more likely during periods when firms are faced with capacity constraints. Constraints due to the shortage of labour, in particular, lead to price increases. On the other hand, we also find evidence that firms are not reluctant to reduce prices in response to demand constraints. At the macro level, the implied capacity-utilisation Phillips curve has a convex shape during periods of excess demand and a concave shape during periods of excess supply. Our results are robust to the inclusion of proxies for changes in costs and the competitive position of firms.
    Keywords: price setting, capacity utilisation, capacity constraints, demand constraints, non-linear Phillips curve, Switzerland
    JEL: E31 E32 E52
    Date: 2009–10
  22. By: TAKEDA Yosuke; UCHIDA Ichiro
    Abstract: This paper is in the spirit of Marshall (1920), who raised the question of how economic distance affects a firm's productivity, focusing upon the role of idea sharing in relation to technological knowledge or information between firms. In order to quantify the degree of knowledge spillover or information sharing, we take the production function approach. Assuming core-periphery structure around automobile assemblies surrounded with auto-parts suppliers, we estimate plant-level production functions of the Japanese auto-parts suppliers, where productivity function depends upon the degree of information sharing measured by both geographic plant location and membership of technological cooperation associations. We take econometric issues of cross-sectional dependence of productivity and a simultaneity problem between inputs, applying methods to the standard OLS and GMM estimators. Positive technological externalities are seen in general and for independent plants, the fact which is robust to specifications of the production functions. Agglomeration effects are however rarely observed for relation-specific or cooperative plants. Some of them cost substantial negative externalities. Once a simultaneity problem is econometrically considered, instead of increasing returns, decreasing returns to scale emerge in cases of total materials. Agglomeration, if any, could be brought about not by increasing returns to scale, but by productivity spillover among suppliers proximate to automobile assemblies.
    Date: 2009–10
  23. By: Tobias Adrian; Hyun Song Shin
    Abstract: We reconsider the role of financial intermediaries in monetary economics. We explore the hypothesis that financial intermediaries drive the business cycle by way of their role in determining the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite and hence of the "risk-taking channel" of monetary policy. We document evidence that the balance sheets of financial intermediaries reflect the transmission of monetary policy through capital market conditions. We find short-term interest rates to be important in influencing the size of financial intermediary balance sheets. Our findings suggest that the traditional focus on the money stock for the conduct of monetary policy may have more modern counterparts, and we suggest the importance of tracking balance sheet quantities for the conduct of monetary policy.
    Keywords: Interest rates ; Capital market ; Intermediation (Finance) ; Monetary policy ; Risk ; Business cycles
    Date: 2009
  24. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University)
    Abstract: We analyze maximal cartel prices in infinitely-repeated oligopoly models under leniency where fines are linked to illegal gains, as often outlined in existing antitrust regulation, and detection probabilities depend on the degree of collusion. We introduce cartel culture that describes how likely cartels persist after each conviction. Our analysis disentangles the effects of traditional antitrust regulation, leniency, and cartel strategies. Without rewards to the strictly-first reporter, leniency cannot reduce maximal cartel prices below those under traditional regulation. Moreover, in order to avoid adverse effects fine reductions should be moderate in case of multiple reporters. Our results extend the current literature and partially support existing leniency programs.
    Keywords: Cartel; Antitrust; Competition Policy; Leniency Program; Self-reporting; Repeated Game
    JEL: L41 K C72
    Date: 2009–09–25
  25. By: Olaf POSCH (Aarhus University and CREATES, CESifo); Klaus W€LDE (University of Mainz, CESifo, and UCL Louvain la Neuve)
    Abstract: A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the effects through which economies with different tax levels differ both in their volatility and growth. Using a continuous-time DSGE model with plausible parametric restrictions, we obtain closedform measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely.
    Keywords: Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models
    JEL: E32 E62 H3 C65
    Date: 2009–08–27
  26. By: Luc Laeven; Harry Huizinga
    Abstract: This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks.
    Keywords: Accounting , Asset management , Asset prices , Bank accounting , Bank regulations , Banks , Financial crisis , Housing prices , Investment , Liquidity management , Real estate prices ,
    Date: 2009–09–28
  27. By: Olivier J. Blanchard; Marianna Riggi
    Abstract: In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, and at least until the end of 2007, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach Blanchard and Gali (2007a) argued that this has reflected in large part a change in the causal relation from the price of oil to output and inflation. In order to shed light on the possible factors behind the decrease in the macroeconomic effects of oil price shocks, we develop a new-Keynesian model, with imported oil used both in production and consumption, and we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of the two samples (pre and post 1984), the distance between the empirical SVAR-based impulse response functions and those implied by the model. Our results point to two relevant changes in the structure of the economy, which have modified the transmission mechanism of the oil shock: vanishing wage indexation and an improvement in the credibility of monetary policy. The relative importance of these two structural changes depends however on how we formalize the process of expectations formation by economic agents.
    JEL: E3 E52
    Date: 2009–10
  28. By: Herings P. Jean-Jacques; Predtetchinski Arkadi (METEOR)
    Abstract: We show that in the canonical non-cooperative multilateral bargaining game, a subgameperfect equilibrium exists in pure stationary strategies, even when the space of feasible payoffs is not convex. At such an equilibrium there is no delay. We also have the converse result that randomization will not be used in this environment in the sense that all stationary subgame perfect equilibria do not involve randomization on the equilibrium path. Nevertheless, mixed strategy profiles can lead to Pareto superior payoffs in non-convex cases.
    Keywords: operations research and management science;
    Date: 2009
  29. By: Monica Billio (Università Ca' Foscari di Venezia - Dipartimento di Scienze Economiche); Laurent Ferrara (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, DGEI-DAMEP - Banque de France); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Gian Luigi Mazzi (Eurostat - Office Statistique des Communautés Européennes)
    Abstract: In this paper, we aim at assessing Markov-switching and threshold models in their ability to identify turning points of economic cycles. By using vintage data that are updated on a monthly basis, we compare their ability to detect ex-post the occurrence of turning points of the classical business cycle, we evaluate the stability over time of the signal emitted by the models and assess their ability to detect in real-time recession signals. In this respect, we have built an historical vintage database for the Euro area going back to 1970 for two monthly macroeconomic variables of major importance for short-term economic outlook, namely the Industrial Production Index and the Unemployment Rate.
    Keywords: Business cycle, Euro zone, Markov switching model, SETAR model, unemployment, industrial production.
    Date: 2009–08
  30. By: Tianxi, Wang
    Abstract: This paper presents a model on the leverage of financial intermediaries, where debt are held by risk averse agents and equity by the risk neutral. The paper shows that in an unregulated competitive market, financial intermediaries choose to be leveraged over the social best level. This is because the leverage of one intermediary imposes a negative externality upon others by reducing their profit margins. The paper thus founds capital adequacy regulation upon the market failure and suggests that this regulation should bind not only commercial banks, but all financial intermediaries, including private equities and hedge funds.
    Keywords: Risk Difference in Risk Preference Leverage Regulation Externality
    JEL: D62 D52 G00
    Date: 2009–06

This nep-bec issue is ©2009 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.