Creator: Allen, Franklin, 1956- and Gale, Douglas. Series: Monetary theory and financial intermediation Abstract:
Traditional theories of asset pricing assume there is complete market participation so all investors participate in all markets. In this case changes in preferences typically have only a small effect on asset prices and are not an important determinant of asset price volatility. However, there is considerable empirical evidence that most investors participate in a limited number of markets. We show that limited market participation can amplify the effect of changes in preferences so that an arbitrarily small degree of aggregate uncertainty in preferences can cause a large degree of price volatility. We also show that in addition to this equilibrium with limited participation and volatile asset prices, there may exist a Pareto-preferred equilibrium with complete participation and less volatility.
Fach: C58 - Financial Econometrics and G12 - General financial markets - Asset pricing ; Trading volume ; Bond interest rates
Creator: Townsend, Robert M., 1948- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 77 Abstract:
This thesis consists of a series of essays on the theory of exchange under uncertainty. The first essay examines the welfare implications of futures markets in the context of complete markets for contingent claims. It is shown that in a C-good, S-state world the equilibrium allocations resulting from the operation of pre-state noncontingent futures markets and post-state spot markets may be Pareto optimal. This proposition turns on the fact that a futures contract can be interpreted as a security whose state-specific return is the post-state spot price. If the matrix of spot prices has rank S, then, with futures and spot markets, agents can achieve the same allocations over states as with complete markets for contingent claims.
Stichwort: Markets and Uncertainty Fach: G10 - General financial markets - General, D80 - Information, knowledge, and uncertainty - General, and Y40 - Dissertations (unclassified)
Creator: Azariadis, Costas. and Smith, Bruce D., d. 2002. Series: Finance, fluctuations, and development Abstract:
We study a variant of the one-sector neoclassical growth model of Diamond in which capital investment must be credit financed, and an adverse selection problem appears in loan markets. The result is that the unfettered operation of credit markets leads to a one-dimensional indeterminacy of equilibrium. Many equilibria display economic fluctuations which do not vanish asymptotically; such equilibria are characterized by transitions between a Walrasian regime in which the adverse selection problem does not matter, and a regime of credit rationing in which it does. Moreover, for some configurations of parameters, all equilibria display such transitions for two reasons. One, the banking system imposes ceilings on credit when the economy expands and floors when it contracts because the quality of public information about the applicant pool of potential borrowers is negatively correlated with the demand for credit. Two, depositors believe that returns on bank deposits will be low (or high): these beliefs lead them to transfer savings out of (into) the banking system and into less (more) productive uses. The associated disintermediation (or its opposite) causes banks to contract (expand) credit. The result is a set of equilibrium interest rates on loans that validate depositors' original beliefs. We investigate the existence of perfect foresight equilibria displaying periodic (possibly asymmetric) cycles that consist of m periods of expansion followed by n periods of contraction, and propose an algorithm that detects all such cycles.
Stichwort: Equilibrium, Business cycles, Credit markets, and Interest rates Fach: O41 - One, Two, and Multisector Growth Models, E44 - Money and interest rates - Financial markets and the macroeconomy, E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Boyd, John H. and Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 522 Abstract:
We consider a two country growth model with international capital markets. These markets fund capital investment in both countries, and operate subject to a costly state verification (CSV) problem. Investors in each country require some external finance, but also provide internal finance, which mitigates the CSV problem. When two identical (except for their initial capital stocks) economies are closed, they necessarily converge monotonically to the same steady state output level. Unrestricted international financial trade precludes otherwise identical economies from converging, and poor countries are necessarily net lenders to rich countries. Oscillation in real activity and international capital flows can occur.
Stichwort: CSV, International lending, Capital investment, Credit rationing, International capital markets, Credit, Costly state verification, Closed economy, and Open economy Fach: O16 - Economic development - Financial markets ; Saving and capital investment ; Corporate finance and governance and F34 - International finance - International lending and debt problems
Creator: Rolnick, Arthur J., 1944- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 65 Stichwort: Certificates of deposit, Reserve requirements, and Regulation Q Fach: G28 - Financial institutions and services - Government policy and regulation
Creator: Bordo, Michael D., Rappoport, Peter., and Schwartz, Anna J. (Anna Jacobson), 1915-2012. Series: Monetary theory and financial intermediation Abstract:
In this paper we examine the evidence for two competing views of how monetary and financial disturbances influenced the real economy during the national banking era, 1880-1914. According to the monetarist view, monetary disturbances affected the real economy through changes on the liability side of the banking system's balance sheet independent of the composition of bank portfolios. According to the credit rationing view, equilibrium credit rationing in a world of asymmetric information can explain short-run fluctuations in real output. Using structural VARs we incorporate monetary variables in credit models and credit variables in monetarist models, with inconclusive results. To resolve this ambiguity, we invoke the institutional features of the national banking era. Most of the variation in bank loans is accounted for by loans secured by stock, which in turn reflect volatility in the stock market. When account is taken of the stock market, the influence of credit in the VAR model is greatly reduced, while the influence of money remains robust. The breakdown of the composition of bank loans into stock market loans (traded in open asset markets) and other business loans (a possible setting for credit rationing) reveals that other business loans remained remarkably stable over the business cycle.
Fach: N21 - Economic History: Financial Markets and Institutions: U.S.; Canada: Pre-1913 and N11 - Macroeconomics and monetary economics ; Growth and fluctuations - United States ; Canada : Pre-1913
Creator: Lacker, Jeffrey Malcolm. and Schreft, Stacey Lee Series: Monetary theory and financial intermediation Abstract:
We describe a stochastic economic environment in which the mix of money and trade credit used as means of payment is endogenous. The economy has an infinite horizon, spatial separation and a credit-related transaction cost, but no capital. We find that the equilibrium prices of arbitrary contingent claims to future currency differ from those from one-good cash-in-advance models. This anomaly is directly related to the endogeneity of the mix of media of exchange used. In particular, nominal interest rates affect the risk-free real rate of return. The model also has implications for some long-standing issues in monetary policy and for time series analysis using money and trade credit.
Fach: G12 - General financial markets - Asset pricing ; Trading volume ; Bond interest rates and E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems
Creator: Prati, Alessandro, 1961- Series: Monetary theory and financial intermediation Abstract:
The data and press commentaries studied in this paper call for a reinterpretation of the French inflationary crisis and its stabilization in 1926. In contrast with T. J. Sargent's (1984) interpretation, there is evidence that the budgetary situation was well in hand and that only fear of a capital levy made the public unwilling to buy government bonds. As a result, the government had to repay the bonds coming to maturity with monetary financing. Only when Poincare introduced a bill to shift the tax burden off bondholders did the demand for government bonds recover and inflation stop.
Fach: E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, E65 - Macroeconomic policy, macroeconomic aspects of public finance, and general outlook - Studies of particular policy episodes, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and N24 - Economic History: Financial Markets and Institutions: Europe: 1913-