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Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 353 Abstract:
In recent financial crises and in recent theoretical studies of them, abrupt declines in capital inflows, or sudden stops, have been linked with large drops in output. Do sudden stops cause output drops? No, according to a standard equilibrium model in which sudden stops are generated by an abrupt tightening of a country’s collateral constraint on foreign borrowing. In this model, in fact, sudden stops lead to output increases, not decreases. An examination of the quantitative effects of a well-known sudden stop, in Mexico in the mid-1990s, confirms that a drop in output accompanying a sudden stop cannot be accounted for by the sudden stop alone. To generate an output drop during a financial crisis, as other studies have done, the model must include other economic frictions which have negative effects on output large enough to overwhelm the positive effect of the sudden stop.
Assujettir: O19 - International Linkages to Development; Role of International Organizations, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, F21 - International Investment; Long-term Capital Movements, and O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 204 Abstract:
We ask what fraction of the variation in incomes across countries can be accounted for by investment distortions. In our neoclassical growth model the relative price of investment to consumption is a good measure of the distortions. Using data on relative prices we estimate a stochastic process for distortions and compare the resulting variance of incomes in the model to that in the data. We find that the variation of incomes in the model is roughly 4/5 of the variability of incomes in the data. Our model does well in accounting for 6 key regularities on income and investment in the data.
The paper itself is followed by three appendices: Appendix 1 describing the log-likelihood function, Appendix 2 describing the construction of labor share of income associated with the production of consumption and investment goods, and the Data Appendix.
Assujettir: O11 - Macroeconomic Analyses of Economic Development, H20 - Taxation, Subsidies, and Revenue: General, O10 - Economic Development: General, and O57 - Comparative Studies of Countries