Research Database

The paper considers a model in which private foreign investors make direct long-lived capital investments in a small developing country that is subject to stochastic shocks to production. Depending upon the preferences of the host country, we find that expropriation can occur because of either desperation or opportunism. We show that under reasonable assumptions, increased investment makes expropriation less likely to occur and that the level of investment chosen by atomistic foreign investors may be nonoptimal.

This paper develops a two-country model in which trade is central to the process by which technology diffuses from the innovating country (North) to the backward country (South). Innovation in North leads to the introduction of higher-quality equipment goods that South can import only after some resources have been spent to adapt those equipment goods to the local conditions of South. Barriers to trade and policies that increase the cost of adapting equipment goods to the local environment decrease the rate of technology adoption, leading to a lower steady state relative income level in South. The model is calibrated to quantify this negative impact of barriers to trade and technology adoption on relative income levels and explore some additional implications of the model.

The implications of adding household production to an otherwise standard real business cycle model are explored in this article. The model developed treats the business and household sectors symmetrically. In particular, both sectors use capital and labor to produce output. The article finds that the household production model can outperform the standard model in accounting for several aspects of U.S. business cycle fluctuations.

In this paper we estimate and test a conditional version of the international CAPM. By using a parsimonious parameterization recently proposed by Ding and Engle (1994), we allow risk premia, betas, and correlations to vary through time and test the cross-section restrictions of the model using a relatively large number of assets. One advantage of our test is is that it does not require the market weights to be observed in each period. In support of the international CAPM, we find that world-wide risk is priced whereas country-specific risk is not. Further, we find that the price of world risk is time-varying and has a strong January seasonal. When the price of risk is allowed to vary, a January dummy and the world dividend yield are driven out as independently priced factors. However, contrary to the prediction of the model, differences in risk premia across countries are explained not only by world-wide risk, but also by a constant country-specific factor. The estimated correlations reveal three main facts, cross-country correlations vary through time; they have been affected only to a limited extent by the process of liberalization of the last decade; they tend to increase during severe bear markets in the U.S. However, international correlations are smaller than correlations among U.S. assets. Therefore, investors gain from global diversification, even with contagious bear markets.

In "Open Market Operations in a Model of Regulated, Insured Intermediaries" [JPE, February 1980] we show that once-for-all open market purchases need not be inflationary. Here we show this result can carry over to various stationary accommodation rules given stochastic deficits. In particular, the inflationary and deflationary effects of stochastic deficits are not offset by, nor welfare improved by, a monetary policy that leans toward monetarism. Moreover, a constant money growth rule is not in the class of stationary policies given the kind of stochastic deficit we analyze, which by itself is a serious indictment of the monetarist proposal.

[Please note that the following Greek lettering is improperly transcribed.] If [0,1] is a measure space of agents and X---- a collection of pairwise uncorrelated random variables with common finite mean U and variance a , one would like to establish a law of large numbers () Xdl = U. In this paper we propose to interpret () as a Pettis integral. Using the corresponding Riemann-type version of this integral, we establish (*) and interpret it as an L2-law of large numbers. Intuitively, the main idea is to integrate before drawing an W, thus avoiding well-know measurability problems. We discuss distributional properties of i.i.d. random shocks across the population. We given examples for the economic interpretability of our definition. Finally, we establish a vector-valued version of the law of large numbers for economies.

Although the role of financial constraints on entrepreneurial choices has received considerable attention, the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth concentration and, conversely, the distribution of wealth affects entrepreneurial choices in presence of borrowing constraints. We construct a model that matches wealth inequality very well, both for entrepreneurs and non-entrepreneurs, and find that more restrictive borrowing constraints generate less wealth concentration, but also reduce average firm size, aggregate capital and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only, there would be fewer large firms, fewer entrepreneurs, and less aggregate capital, but also less wealth concentration.

Sudden Stops are financial crises defined by a large, sudden current-account reversal. They occur in both advanced and emerging economies and result in deep recessions, collapsing asset prices, and real exchange-rate depreciations. They are preceded by economic expansions, current-account deficits, credit booms, and appreciated asset prices and real exchange rates. Fisherian models (i.e. models with credit constraints linked to market prices) explain these stylized facts as an outcome of Irving Fisher's debt-deflation mechanism. On the normative side, these models feature a pecuniary externality that provides a foundation for macroprudential policy (MPP). We review the stylized facts of Sudden Stops, the evidence on MPP use and effectiveness, and the findings of the literature on Fisherian models. Quantitatively, Fisherian amplification is strong and optimal MPP reduces sharply the size and frequency of crises, but it is also complex and potentially time-inconsistent, and simple MPP rules are less effective. We also provide a new MPP analysis incorporating investment. Using a constant debt-tax policy, we construct a crisis probability-output frontier showing that there is a tradeoff between financial stability and long-run output (i.e., reducing the probability of crises reduces long-run output).

We study a random-matching, absence-of-double-coincidence environment in which people cannot precommit and in which there are two imperfect ways of keeping track of what other people have done in the past: money and a public record of all past actions that is updated with an average lag. We study how the magnitude of that lag affects the allocations that are optimal from among allocations that are stationary and feasible and that satisfy incentive constraints which arise from the absence of commitment and the imperfect ways of keeping track of what others have done in the past.

'Structural unemployment' is said to occur in regions or 'sectors' of the economy as a consequence of technological changes. In this paper we present a model which provides an environment which gives rise to unemployment which could be labelled structural unemployment. There is exogenous technological change and vintage specific human capital. Unemployment arises as workers specialized in a particular technology within a vintage decide to search for a job within their vintage, so that their previously acquired special skills are used, instead of getting employed as unskilled workers in the newest vintage. As the rate of technological change increases, the incentives to reassign specialized workers to their same vintage, inccuring therefore in search costs, becomes less attractive, and in consequence the fraction of specialized workers doing search activities decreases. This provides some rationale for the negative correlation between rates of growth and unemployment observed in the data.