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on Business Economics |
| By: | Riccardo DiCecio; Michael T. Owyang |
| Abstract: | Since Galí [1999], long-run restricted VARs have become the standard for identifying the effects of technology shocks. In a recent paper, Francis et al. [2008] proposed an alternative to identify technology as the shock that maximizes the forecast-error variance share of labor productivity at long horizons. In this paper, we propose a variant of the Max Share identification, which focuses on maximizing the variance share of labor productivity in the frequency domain. We consider the responses to technology shocks identified from various frequency bands. Two distinct technology shocks emerge. An expansionary shock increases productivity, output, and hours at business-cycle frequencies. The technology shock that maximizes productivity in the medium and long runs instead has clear contractionary effects on hours, while increasing output and productivity. |
| Keywords: | Business cycles ; Technology - Economic aspects ; Productivity |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2010-025&r=bec |
| By: | Nathan S. Balke; Stephen P.A. Brown; Mine K. Yücel |
| Abstract: | Oil price shocks are thought to have played a prominent role in U.S. economic activity. In this paper, we employ Bayesian methods with a dynamic stochastic general equilibrium model of world economic activity to identify the various sources of oil price shocks and economic fluctuation and to assess their effects on U.S. economic activity. We find that changes in oil prices are best understood as endogenous. Oil price shocks in the 1970s and early 1980s and the 2000s reflect differing mixes of shifts in oil supply and demand, and differing sources of oil price shocks have differing effects on economic activity. We also find that U.S. output fluctuations owe mostly to domestic shocks, with productivity shocks contributing to weakness in the 1970s and 1980s and strength in the 2000s. |
| Keywords: | Petroleum products - Prices ; Petroleum industry and trade ; Economic conditions - United States ; Business cycles |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1003&r=bec |
| By: | Tobias Adrian; Erkko Etula; Jan J. J. Groen |
| Abstract: | Theories of systemic risk suggest that financial intermediaries’ balance-sheet constraints amplify fundamental shocks. We provide supporting evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediaries’ balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to systemic risk monitoring. |
| Keywords: | Systemic risk ; Intermediation (Finance) ; Foreign exchange ; Assets (Accounting) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:461&r=bec |
| By: | Tobias Adrian; Erkko Etula |
| Abstract: | We derive equilibrium pricing implications from an intertemporal capital asset pricing model where the tightness of financial intermediaries’ funding constraints enters the pricing kernel. We test the resulting factor model in the cross-section of stock returns. Our empirical results show that stocks that hedge against adverse shocks to funding liquidity earn lower average returns. The pricing performance of our three-factor model is surprisingly strong across specifications and test assets, including portfolios sorted by industry, size, book-to-market, momentum, and long-term reversal. Funding liquidity can thus account for well-known asset pricing anomalies. |
| Keywords: | Capital assets pricing model ; Intermediation (Finance) ; Stocks - Rate of return ; Assets (Accounting) ; Liquidity (Economics) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:464&r=bec |
| By: | Luca Guerrieri; Dale Henderson; Jinill Kim |
| Abstract: | Investment-specific technology (IST) shocks are often interpreted as multi-factor productivity (MFP) shocks in a separate investment-producing sector. However, this interpretation is strictly valid only when some stringent conditions are satisfied. Some of these conditions are at odds with the data. Using a two-sector model whose calibration is based on the U.S. Input-Output Tables, we consider the implications of relaxing several of these conditions. In particular, we show how the effects of IST shocks in a one-sector model differ from those of MFP shocks to an investment-producing sector of a two-sector model. Importantly, with a menu of shocks drawn from recent empirical studies, MFP shocks induce a positive short-run correlation between consumption and investment consistent with U.S. data, while IST shocks do not. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1000&r=bec |
| By: | De Francesco, Massimo A.; Salvadori, Neri |
| Abstract: | We analyze a Bertrand-Edgeworth game in homogeneous product industry, under effcient rationing, constant marginal cost until full capacity utilization, and identical technology across firms. We solve for the equilibrium and establish its uniqueness for capacity configurations in the mixed strategy region of the capacity space such that the capacities of the largest and smallest firm are sufficiently close. |
| Keywords: | Bertrand-Edgeworth competition; mixed strategy equilibrium; almost symmetric oligopoly; Mixed strategy equilibrium |
| JEL: | L13 D43 C72 |
| Date: | 2010–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24228&r=bec |
| By: | Mark Huggett; Greg Kaplan |
| Abstract: | We provide theory for calculating bounds on both the value of an individual’s human capital and the return on an individual’s human capital, given knowledge of the process governing earnings and financial asset returns. We calculate bounds using U.S. data on male earnings and financial asset returns. The large idiosyncratic component of earnings risk implies that bounds on values and returns are quite loose. However, when aggregate shocks are the only source of earnings risk, both bounds are tight. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:448&r=bec |
| By: | Adam Copeland; Adam Hale Shapiro |
| Abstract: | We study the effect of market structure on a personal computer manufacturer’s decision to adopt new technology. This industry is unusual because there exist two horizontally segmented retail markets with different degrees of competition: the IBM-compatible (or PC) platform and the Apple platform. We first document that, relative to Apple, producers of PCs typically have more frequent technology adoption, shorter product cycles, and steeper price declines over the product cycle. We then develop a parsimonious vintage-capital model that matches the prices and sales of PC and Apple products. The model predicts that competition is the key driver of the rate at which technology is adopted. |
| Keywords: | Computer industry ; Technological innovations ; Competition |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:462&r=bec |
| By: | Goto, Makoto; Kijima, Masaaki; Suzuki, Teruyoshi |
| Abstract: | This paper proposes a new pricing model for corporate securities issued by a levered firm with the possibility of debt renegotiation. We take the structural approach that the firm's earnings follow a geometric Brownian motion with stochastic collaterals. While equity holders can default the firm for their own benefits when the earnings become insufficient to go on the firm, they may want to liquidate it by repaying the face value of debt to debt holders in order to get enough residuals, when the value of collaterals becomes sufficiently high. Unlike the existing theoretical models, the bivariate structure enables us to distinguish strategic default, liquidity default and the ordinary liquidation. It is shown that liquidity default and liquidation possibly occur without entering debt renegotiation, which makes the contribution of strategic debt service to credit spreads lower than that obtained in the previous models, irrespective of the equity holders' bargaining power. Our model resolves the inconsistency reported in recent empirical studies. |
| Keywords: | Structural model, Debt renegotiation, Strategic debt service, Credit spread, Liquidity default, Strategic default, Liquidation, M&A, |
| JEL: | D81 G32 G33 G35 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:hok:dpaper:224&r=bec |
| By: | Janine Aron; John V. Duca; John Muellbauer; Keiko Murata; Anthony Murphy |
| Abstract: | The consumption behaviour of U.K., U.S. and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for U.K. and U.S. but not Japanese households has undergone large shifts since 1980. The average consumption-to-income ratio shifted up in the U.K. and U.S. as mortgage downpayment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is roughly similar in the U.S. and U.K., while land prices in Japan still have a negative effect on consumer spending. Together with evidence for negative real interest rate effects in the U.K. and U.S. and positive ones in Japan, this suggests important differences in the transmission of monetary and credit shocks between Japan and the U.S., U.K. and other credit-liberalized economies. |
| Keywords: | Households - Economic aspects ; Consumption (Economics) ; Credit ; Business cycles ; Financial markets ; Economic conditions - United States ; Economic conditions - Japan ; Economic conditions - Great Britain |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1002&r=bec |
| By: | Giacinto Micucci (Bank of Italy); Paola Rossi (Bank of Italy) |
| Abstract: | The literature on debt restructuring usually assumes that banks behave in a uniform way towards firms in distress. Using a recent survey of Italian banks, we show that banks follow different strategies when they decide whether to take part in the workout process, in that some of them do restructure their debt claims towards small and medium-sized enterprises in distress, while others do not. We explain this heterogeneity by considering the role of banksÂ’ internal organization and lending technologies, which the literature has shown to be strictly tied to the type of relationship developed with the borrower (transactional versus relationship lending). We find that the probability of debt restructuring is higher when the bank: i) is geographically closer to borrowing firms; ii) relies more on soft than hard information; and iii) adopts a decentralized structure with more power allocated to local managers. However there are important complementarities among organizational variables: the adoption of credit scoring increases the likelihood of restructuring if banks also use these techniques systematically in the monitoring process and if they adopt more decentralized structures. Bank size per se is not able to fully explain this heterogeneous behaviour, as organizational forms and lending technologies may also have important consequences on bank decisions. |
| Keywords: | financial distress, debt restructuring, small and medium-sized enterprises (SMEs), bank heterogeneity, bank organization, lending technologies. |
| JEL: | G21 G33 L2 O3 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_763_10&r=bec |
| By: | Paulo Bastos; Odd Rune Straume |
| Abstract: | This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by rms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intraindustry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. In addition, since product differentiation is resource consuming, freer trade entails a potential trade-off between production and variety. The import competition effect highlighted by the model, which plays a key role in determining the general equilibrium, is consistent with panel data on Chilean manufacturing plants. |
| Keywords: | Trade liberalization, Product differentiation, Innovation,Wage inequality, General oligopolistic equilibrium |
| JEL: | F15 F16 L13 O31 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4679&r=bec |
| By: | Sangeeta Pratap (Hunter College); Carlos Urrutia (Instituto Tecnologico Autonomo de Mexico) |
| Abstract: | The financial crises or “sudden stops” of the last decade in emerging economies were accompanied by a large fall in total factor productivity. In this paper we explore the role of financial frictions in exacerbating the misallocation of resources and explaining this drop in TFP. We build a dynamic two-sector model of a small open economy with a cash in advance constraint where firms have to finance a part of their purchase of intermediate goods prior to production. The model is calibrated to the Mexican economy before the 1995 crisis and subject to an unexpected shock to interest rates. The financial friction can generate an endogenous fall in TFP of about 3.5 percent and can explain 74 percent of the observed fall in GDP per worker. Adding a cost of adjusting labor between the two sectors and sectoral specificity of capital also generates the sectoral patterns of output and resource use observed in the data after the sudden stop. The results highlight the interaction between interest rates and allocative inefficiencies as an explanation of the real effects of the financial crisis. |
| Keywords: | Financial frictions, labor market turbulence, adjustment costs, sudden stops, total factor productivity, output fluctuations |
| JEL: | D14 D43 D91 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:htr:hcecon:429&r=bec |
| By: | Francisco Nadal De Simone; Franco Stragiotti |
| Abstract: | This paper performs market and funding liquidity stress testing of the Luxembourg banking sector using stochastic haircuts and run-off rates. It takes into account not only the shocks to the banking sector and banks? responses to them, but second-round effects due to the effects of banks? reactions on asset prices and reputation. In general, banks? business lines and, therefore their buffers? composition, determine the net effect of the shocks on banks? stochastic liquidity buffers. So, results differ across banks. Second-round effects exemplify the relevance of contagion effects that reduce the systemic benefits of diversification. While systemic liquidity risk is low following a shock to the interbank market, for Luxembourg, with its high number of subsidiaries of large foreign financial institutions, the results indicate the importance of monitoring the liquidity of parent groups to which Luxembourg institutions belong. In particular, shocks to related-party deposits are important. Finally, the results, including those of a run-on-deposits shock, show the relevance of system-wide measures to minimize the systemic effects of liquidity crises. |
| Keywords: | stress test, liquidity risk, banks, stochastic, contagion, macro-prudential |
| JEL: | E5 C1 G2 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:cahier_etudes_45&r=bec |
| By: | Katsuyuki Shibayama |
| Abstract: | This article investigates a dynamic general equilibrium model with a stockout constraint, which means that no seller can sell more than the inventories that she has. The model successfully explains two inventory facts; (i) inventory investment is procyclical, and (ii) production is more volatile than sales. The key intuition is that, since inventories and demand are complements in generating sales, the optimal level of inventories is increasing in expected demand. Thus, when demand is expected to be strong, firms increase their production not only to meet their demand but also to accumulate inventories. Also, our model shows that the inventory to sales ratio is persistent and countercyclical, while the (endogenous) markup is countercyclical. These are because a high interest rate in booms discourages firms to hold inventories. |
| Keywords: | Public-private partnerships; Social Marginal Cost Pricing; Incentives; Contracts; EU Transport Policy |
| JEL: | L14 L33 L51 L91 R48 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1005&r=bec |
| By: | Martimort, David; Poudou, Jean-Christophe; Sand-Zantman, Wilfried |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/2676/&r=bec |
| By: | Ralph de Haas; Neeltje van Horen |
| Abstract: | To what extent was the credit contraction during the global financial crisis due to more intense screening and monitoring by banks? We address this question by analyzing changes in the structure of a large number of syndicated loans to private, non-financial corporations. We find an increase in retention rates among syndicate arrangers during the crisis that we cannot explain by borrower risk or interbank liquidity alone. This increased ‘skin in the game’ is especially pronounced when information asymmetries between the borrower and the lending syndicate – or within the syndicate – are high. This indicates that the reduction in bank lending during the crisis was at least partly caused by stricter bank screening and monitoring: a wake-up call. |
| Keywords: | bank lending; financial crisis; loan retention; screening and monitoring; syndication |
| JEL: | D82 G15 G21 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:255&r=bec |
| By: | Sangeeta Pratap (Hunter College); Erwan Quintin (University of Wisconsin, Madison) |
| Abstract: | Financial crises cause a significant reallocation of labor as relative prices change drastically and economies confront a variety of shocks. Using household survey data for Mexico, we show that gross and net labor flows between industries and occupations increase substantially during the 1994-95 crisis. We also find significant wage losses associated with moving: individuals who switch industry or occupation during the crisis lose more than 10% of hourly earnings compared to similar workers who do not move. This suggests that crises are times of labor market turbulence, during which human capital is destroyed in the process of directing workers to different economic activities. This phenomenon could account for a significant part of the large fall in TFP that typically accompanies crises in emerging economies. We describe a map from our earnings estimates to aggregate TFP and show that productivity losses associated with occupation and industry changes can explain about 40% of the observed fall in TFPin Mexico in 1995. |
| Keywords: | Financial crises, labor market turbulence, total factor productivity, output fluctuations |
| JEL: | D14 D43 D91 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:htr:hcecon:428&r=bec |
| By: | Paolo Fegatelli |
| Abstract: | This study shows how the misconception of the option value of deposit insurance by Merton (1977) and its later misuse by Keeley and Furlong (1990), among others, have led some literature supporting the adoption of binding non-risk-based capital requirements to derive incorrect conclusions about their efficacy. This study further shows that what Merton defines as the option value of deposit insurance is actually a component of a bank?s limited liability option under a third-party deposit guarantee. As such, it is already included in the value of the bank?s equity capital, and the flawed definition makes the Keeley-Furlong model internally incoherent. |
| Keywords: | Capital requirements, Credit risk, Deposit insurance, Prudential regulation, Portfolio approach |
| JEL: | G21 G28 G11 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:cahier_etudes_46&r=bec |
| By: | Fatih Guvenen; Anthony Smith |
| Abstract: | This paper uses the information contained in the joint dynamics of households’ labor earnings and consumption-choice decisions to quantify the nature and amount of income risk that households face. We accomplish this task by estimating a structural consumption-savings model using data from the Panel Study of Income Dynamics and the Consumer Expenditure Survey. Specifically, we estimate the persistence of labor income shocks, the extent of systematic differences in income growth rates, the fraction of these systematic differences that households know when they begin their working lives, and the amount of measurement error in the data. Although data on labor earnings alone can shed light on some of these dimensions, to assess what households know about their income processes requires using the information contained in their economic choices (here, consumption-savings decisions). To estimate the consumption-savings model, we use indirect inference, a simulation method that puts virtually no restrictions on the structural model and allows the estimation of income processes from economic decisions with general specifications of utility, frequently binding borrowing constraints, and missing observations. The main substantive findings are that income shocks are not very persistent, systematic differences in income growth rates are large, and individuals have substantial amounts of information about their future income prospects. Consequently, the amount of uninsurable lifetime income risk that households perceive is substantially smaller than what is typically assumed in calibrated macroeconomic models with incomplete markets. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:450&r=bec |
| By: | Scrimitore, Marcella |
| Abstract: | The paper investigates both quantity and price oligopoly games in markets with a variable number of managerial and entrepreneurial firms which defines market structure. Following Vickers (Economic Journal, 1985) which establishes an equivalence between the equilibrium under unilateral delegation and the Stackelberg quantity equilibrium, the outcomes of these games are compared with the ones in sequential multi-leaders and multi-followers games. The profitability of a managerial/entrepreneurial attitude vs leadership/followership is shown to critically depend upon the kind of strategy, price or quantity, and upon the assumed market structure. Indeed, the latter turns out to be crucial in determining the equivalence result that is shown to be contingent on the assumption that just one leader or one managerial firm operate in the market. A welfare analysis finally highlights the differences between the delegation and the sequential games, focusing on the impact of market structure and imperfect substitutability on the equilibria of the two games. |
| Keywords: | Strategic delegation; sequential games; quantity and price competition; welfare analysis. |
| JEL: | L13 L22 C72 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24245&r=bec |
| By: | Chen Zhou |
| Abstract: | This paper studies why the micro-prudential regulations fails to maintain a stable financial system by investigating the impact of micro-prudential regulation on the systemic risk in a cross-sectional dimension. We construct a static model for risk-taking behavior of financial institutions and compare the systemic risks in two cases with and without a capital requirement regulation. In a system with a capital requirement regulation, the individual risk-taking of the financial institutions are lower, whereas the systemic linkage within the system is higher. With a proper systemic risk measure combining both individual risks and systemic linkage, we find that, under certain circumstance, the systemic risk in a regulated system can be higher than that in a regulation-free system. We discuss a sufficient condition under which the systemic risk in a regulated system is always lower. Since the condition is based on comparing balance sheets of all institutions in the system, it can be verified only if information on risk-taking behaviors and capital structures of all institutions are available. This suggests that a macro-prudential framework is necessary for establishing banking regulations towards the stability of the financial system as a whole. |
| Keywords: | Banking regulation; systemic risk; capital requirement; macro-prudential regulation |
| JEL: | G28 G32 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:256&r=bec |
| By: | Derek C. Jones; Panu Kalmi; Antti Kauhanen |
| Abstract: | We investigate the impact of adopting an enterprise resource planning (ERP) system on performance changes and employee outcomes in a retail chain. We find that: (i) sales and inventory turnover initially drop by 7 % and recover in 6-12 months; (ii) inventory turnover recovers more quickly for establishments that adopt ERP later; (iii) employee outcomes, including increased workload, greater job difficulty and enhanced multitasking, vary significantly over time, though implications for employee welfare are ambiguous. |
| Keywords: | enterprise resource planning; retailing; Finland; IT |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-992&r=bec |