Research Database

We use a calibrated model of the dynamics of organization capital and industry evolution to measure the size of investment in organization capital in the steady state and the dynamics of organization capital during the transition following a major reform. We find that, in the steady state, aggregate net investment in organization capital is roughly one-fifth of measured output. During the initial phase of transition, the failure rate of plants rises 200-400 percent, measured output and aggregate productivity stagnate, physical investment falls, and net investment in organization capital rises between 300 and 500 percent above its steady-state level.

What quantitative lessons can we learn from models of endogenous technical change through innovative investments by firms for the impact of changes in the economic environment on the dynamics of aggregate productivity in the short, medium, and long run? We present a unifying model that nests a number of canonical models in the literature and characterize their positive implications for the transitional dynamics of aggregate productivity and their welfare implications in terms of two sufficient statistics. We review the current state of measurement of these two sufficient statistics and discuss the range of positive and normative quantitative implications of our model for a wide array of counterfactual experiments, including the link between a decline in the entry rate of new firms and a slowdown in the growth of aggregate productivity given that measurement. We conclude with a summary of the lessons learned from our analysis to help direct future research aimed at building models of endogenous productivity growth useful for quantitative analysis.

Although many studies have investigated the relationship between market structure and the prices of bank services, most have been concerned with metropolitan areas. These studies generally have used bank balance sheet and income statement ratios as bank conduct proxies. Moreover, prior studies have approximated local banking markets with county or SMSA boundaries.

This study develops a methodology for delineating the geographic boundaries of local banking markets through the use of secondary economic and demographic data. This methodology is utilized to delineate rural banking markets in the states of Iowa, Minnesota, and Wisconsin. The relationship between those markets and rural bank conduct is investigated. Conduct is measured with explicit price and nonprice information generated by telephone survey.

The market determination methodology is based on the assumption that people will bank where they live, work, or obtain goods and services. Using a classification system which categorizes communities according to variety and amount of retail business transactions, a gradient concept is developed which initially approximates market boundaries according to local minima in the gradient.

This procedure, which determines where residents are likely to shop, is supplemented with commuting data based on minor civil divisions to determine where residents work. The resulting “areas of convenience” designate the locale where local customers will ordinarily select banking services.

The natural banking markets determined for the entire state of Minnesota are compared with banking markets approximated by county or SMSA boundaries. The counties or SMSAs are allowed to underestimate or overestimate the natural market by as much as 30 percent of total deposits before being classified as unacceptable approximators. According to these criteria, 61 percent of the counties and SMSAs are found to be unacceptable approximators. When the criteria are tightened to permit only 10 percent underestimation or overestimation, 79 percent of the counties and SMSAs are rated unacceptable. This implies that researchers and policy makers should be cautious about approximating local banking markets with political boundaries. Additional methods for testing the procedure and making it operational are suggested.

The methodology is used to delineate local banking markets in Iowa, Minnesota, and Wisconsin. Twenty-five rural markets are randomly selected from each state. A total of 333 banks from these markets forms the basis for the structure-conduct analysis. These banks are surveyed by telephone to determine explicit price and nonprice information.

Three estimation models (linear, hyperbolic, and cubic) are developed to analyze the relationship between rural bank market structure and the survey variables. The basic linear model generally provides the best fit.

Increases in concentration are significantly associated with increases in the rates rural banks charge on each type of loan included in the study. Moreover, increases in market share are significantly associated with increases in nonprice effort. Consequently, policy makers are confronted with selecting between: (1) higher prices and increased provision of ancillary banking services, or (2) lower prices and less service.

Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression.

The recurrent banking panics of the 19th century and the Great Depression of the 1930s are widely viewed as failures of our economic system. A simple version of Samuelson’s overlapping generations model is used to generate such failures of Walrasian equilibrium. The spontaneous “panics” generated involve a collapse of bank credit, causing in turn a drop in investment demand. The model suggests that both the recent technological advances in the intermediation industry and the current move towards deregulation of that industry are ominous developments.

In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone crises can end.

We show that some classes of sterilized interventions have no effect on equilibrium prices and quantities. The proof does not require complete markets, Ricardian equivalence, monetary neutrality, or the law of one price. Moreover, regressions of exchange rates or interest differentials on variables measuring debt’s currency composition contain no information about the effectiveness of such interventions. Other interventions require changes in monetary and fiscal policy; their effects depend, generally, on the influence of these changes on the economy and not on the intervention alone. In short, sterilized intervention is not, as the portfolio balance approach indicates, an extra policy instrument.

Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice; we do not. Focusing on the state-of-the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis.

In this chapter, we review the monetary and fiscal history of Argentina for the period 1960–2017, a time during which the country suffered several balance of payments crises, three periods of hyperinflation, two defaults on government debt, and three banking crises. All told, between 1969 and 1991, after several monetary reforms, thirteen zeros had been removed from its currency. We argue that all these events are the symptom of a recurrent problem: Argentina’s unsuccessful attempts to tame the fiscal deficit. An implication of our analysis is that the future economic evolution of Argentina depends greatly on its ability to develop institutions that guarantee that the government does not spend more than its genuine tax revenues over reasonable periods of time.

I propose an equilibrium menu cost model with a continuum of sectors, each consisting of strategically engaged firms. Compared to a model with monopolistically competitive sectors that is calibrated to the same data on good-level price flexibility, the dynamic duopoly model features a smaller inflation response to monetary shocks and output responses that are more than twice as large. The model also implies (i) four times larger welfare losses from nominal rigidities, (ii) smaller menu costs and idiosyncratic shocks are needed to match the data, (iii) a U-shaped relationship between market concentration and price flexibility, for which I find empirical support.