Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) 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.
Keyword: CSV, Open economy, International lending, Costly state verification, Capital investment, Closed economy, Credit rationing, International capital markets, and Credit Subject (JEL): F34 - International Lending and Debt Problems and O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Creator: Green, Edward J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 509 Abstract:
Thinking regarding the privatization of state industries and enterprises in the former Comecon countries has tended to focus on the efficiency gains that would occur in the privatized sector. Based on the comparatively good performance and the rather rigid configuration of Comecon production institutions, the scope for such productivity gains seems small. Rather, productivity and innovation in the post-Comecon economies are likely to depend greatly on the emergence of new, initially small, entrepreneurial firms. The extent and form of privatization may affect these firms' prospects for success. How the privatized-firm and entrepreneurial sector will interact depends on public-finance considerations as well as on considerations of industrial organization.
Keyword: Soviet bloc, Entrepreneurship, State enterprise, Comecon, Eastern bloc, Privatization, Council for Mutual Economic Assistance, Private enterprise, and Growth Subject (JEL): G38 - Corporate Finance and Governance: Government Policy and Regulation, L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices, and L33 - Comparison of Public and Private Enterprises and Nonprofit Institutions; Privatization; Contracting Out
Creator: Aiyagari, S. Rao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 518 Abstract:
This paper is about a useful way of taking account of frictions in asset pricing and macroeconomics. I start by noting that complete frictionless markets models have a number of empirical deficiencies. Then I suggest an alternative class of models with incomplete markets and heterogenous agents which can also accommodate a variety of other frictions. These models are quantitatively attractive and computationally feasible and have the potential to overcome many or all of the empirical deficiencies of complete frictionless markets models. The incomplete markets model can also differ significantly from the complete frictionless markets model on some important policy questions.
Keyword: Macroeconomics, Incomplete markets, Frictionless market model, Asset pricing, and Friction Subject (JEL): G12 - Asset Pricing; Trading Volume; Bond Interest Rates and E13 - General Aggregative Models: Neoclassical
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 512 Abstract:
We investigate ex-ante efficient contracts in an environment in which implementation is costless. In this environment, standard debt contracts will typically not be optimal. Optimal contracts may involve defaults, even in states in which the borrower is fully able to repay. We then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts. When model parameters are calibrated to realistic values, the welfare loss from exogenously imposing this restriction is extremely small. Thus, if the implementation costs are actually nontrivial (as seems likely), standard debt contracts will be (very close to) optimal.
Keyword: CSV, Optimal contract, CESV, Standard debt contract, Ex ante contract, Costly state verification, Loans, Financial contract, Bankruptcy, Costly ex-post state verification, Contracts, and Debt Subject (JEL): G10 - General Financial Markets: General (includes Measurement and Data) and D86 - Economics of Contract: Theory
Creator: Glosten, Lawrence R., Jagannathan, Ravi, and Runkle, David Edward Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 505 Abstract:
Earlier researchers have found either no relation or a positive relation between the conditional expected return and the conditional variance of the monthly excess return on stocks when they used the standard GARCH-M model. This is in contrast to the negative relation found when other approaches were used to model conditional variance. We show that the difference in the estimated relation arises because the standard GARCH-M model is misspecified. When the standard model is modified allow for (i) the presence for seasonal patterns in volatility, (ii) positive and negative innovations to returns to having different impacts on conditional volatility, and (iii) nominal interest rates to affect conditional variance, we once again find support for a negative relation. Using the modified GARCH-M model, we also show that there is little evidence to support the traditional view that conditional volatility is highly persistent. Also, positive unanticipated returns result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility of a similar magnitude. Hence the time series properties of the monthly excess return on stocks appear to be substantially different from that of the daily excess return on stocks.
Keyword: Stock market, Rate of return, Risk, Asset valuation, Return rate, and Stocks Subject (JEL): G12 - Asset Pricing; Trading Volume; Bond Interest Rates and G11 - Portfolio Choice; Investment Decisions
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 399 Abstract:
In this paper we analyze the constraints imposed by dynamic consistency in a model of optimal taxation. We assume that only distorting taxes are available to finance government consumption. Optimal fiscal policy requires the use of debt to smooth distortions over time. Dynamic consistency requires that governments at each point in time not have an incentive to default on the inherited debt. We consider policy functions which map the history of the economy including the actions of past governments into current decisions. A sustainable plan is a sequence of history-contingent policies which are optimal at each date given that future policies will be selected according to the plan. We show that if agents discount the future sufficiently little and if government consumption fluctuates then optimal sustainable plans yield policies and allocations which are identical to those under full commitment. We contrast our notion of dynamic consistency with other definitions.
Keyword: Economic policy, Debt, and Fiscal policy Subject (JEL): E62 - Fiscal Policy and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Boyd, John H. and Graham, Stanley L. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 398 Abstract:
This study estimates the effects of allowing bank holding companies (BHCs) to enter several lines of financial business not now permitted. A simulation technique is used to estimate the risk and return of hypothetical financial corporations after merger between a BHC and a large firm in each of these industries: securities, real estate, life insurance, property and casualty insurance, and insurance agencies. The study concludes that a merger between a BHC and a life insurance company may decrease the probability of bankruptcy for the merged firm relative to the BHC alone. This result does not hold true, however, for BHC mergers with firms in the other industries. In particular, BHC mergers with securities or real estate firms are found to increase the probability of bankruptcy.
Keyword: Merger, Bank holding companies, Insurance, Real estate, Bankruptcy, Securities, Risk, and Bank holding company Subject (JEL): G28 - Financial Institutions and Services: Government Policy and Regulation, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 392 Keyword: Discounted repeated game, Repeated game, Game theory, and Aps example Subject (JEL): C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
Creator: Levine, David K. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 388 Abstract:
Previous authors have argued that the optimal monetary policy is contractionary. If buyers value consumption substantially more than sellers, there is some randomness and informational constraints make asset trading useful, we show that there is an incentive compatible expansionary policy that dominates all incentive compatible contractionary policies.
Keyword: Optimal monetary policy, Contraction, Trade, Private information, Asset trading, and Expansion Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design and E52 - Monetary Policy
Creator: Levine, David K. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 386 Abstract:
In a monetary model, it is shown that if there is a unique Pareto inefficient barter equilibrium, then a monetary equilibrium exists when traders are sufficiently patient.
Keyword: Money, Monetary equilbria, Inflation, Barter equilibria, and Consumers Subject (JEL): E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems and D51 - Exchange and Production Economies
Creator: Williamson, Stephen D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 382 Abstract:
A model with private information is constructed that supports conventional arguments for a government monopoly in supplying circulating media of exchange. The model also yields predictions, including rate-of-return dominance of circulating media of exchange, that are consistent with observations from free banking regimes and fiat money regimes. In a laissez faire banking equilibrium, fiat money is not valued, and the resulting allocation is not Pareto optimal. However, if private agents are restricted from issuing circulating notes, there exists an equilibrium with valued fiat money that Pareto dominates the laissez faire equilibrium and is constrained Pareto optimal.
Keyword: Currency, Fiat money, Assymetric information, Monetary economics, Monetary exchange, Private information, Laissez faire banking, Free banking, and Money Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Doan, Thomas, Litterman, Robert B., and Sims, Christopher A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 243 Abstract:
This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. The procedure is applied to ten macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations. Although cross-variables responses are damped by the prior, considerable interaction among the variables is shown to be captured by the estimates. We provide unconditional forecasts as of 1982:12 and 1963:3* We also describe how a model such as this can be used to make conditional projections and to analyse policy alternatives. As an example, we analyze a Congressional Budget Office forecast made in 1982:12. While no automatic causal interpretations arise from models like ours, they provide a detailed characterization of the dynamic statistical interdependence of a set of economic variables, which may help in evaluating causal hypotheses, without containing any such hypotheses themselves.
Keyword: Forecasting, Macroeconomics, and Bayesian methods Subject (JEL): E27 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications and C11 - Bayesian Analysis: General
Please note: this collection is the new home of the greatdepressionsbook.com website. Scroll down to see the accompanying data for each chapter of the book. The computer programs needed to calibrate the neoclassical growth model and then solve the model numerically, using data from Finland as an example, are included in the list of works but can also be found here.
The worldwide Great Depression of the 1930s was a watershed for both economic thought and economic policymaking. It led to the belief that market economies are inherently unstable and to the revolutionary work of John Maynard Keynes. Its impact on popular economic wisdom is still apparent today.
This book, which uses a common framework to study sixteen depressions, from the interwar period in Europe and America as well as from more recent times in Japan and Latin America, challenges the Keynesian theory of depressions. It develops and uses a methodology for studying depressions that relies on growth accounting and the general equilibrium growth model.
Each chapter of the book is accompanied by a data file that contains all of the data used in the analysis. This collection also provides links to computer programs for applying the methodology.
The files below demonstrate how to calibrate the neoclassical growth model and then solve the model numerically, using data from Finland as an example. You can download all files at once by clicking "create the zip" or you can download individual files by clicking on the title or selecting "download" from the action column.
BaseCaseCalibration.xls calibrates model parameters and derives a sequence of TFP values in the ‘calibration’ worksheet. The parameters are also saved in paramBase.txt, and the series of TFP values along with labor endowment and taxes are saved in dataBase.txt. The MATLAB program depressions.m uses these text files and solveModel.m to solve the model numerically. The output this program saves to output.xls can be used to generate the graphs in BaseCaseCalibration.xls.
These files can be used to model any economy over any period by replacing the data in BaseCaseCalibration.xls and saving the results in the correct format to paramBase.txt and dataBase.txt. The files below contain an overview of the calibration procedures, the MATLAB programs, and instructions on using the files on your own data. More details can be found in the files themselves.