International capital flows and credit market imperfections: A tale of two frictions

The financial crisis of 2007-08 has underscored the importance of adverse selection in financialmarkets. This friction has been mostly neglected by macroeconomic models of financialimperfections, however, which have focused almost exclusively on the effects of limited pledgeability.In this paper, we fill this gap by developing a standard growth model with adverseselection. Our main results are that, by fostering unproductive investment, adverse selection:(i) leads to an increase in the economy s equilibrium interest rate, and; (ii) it generates a negativewedge between the marginal return to investment and the equilibrium interest rate. Underfinancial integration, we show how this translates into excessive capital inflows and endogenouscycles. We also extend our model to the more general case in which adverse selection and limitedpledgeability coexist. We conclude that both frictions complement one another and show thatlimited pledgeability exacerbates the effects of adverse selection.

Nominal debt as a burden on monetary policy

We study the effects of nominal debt on the optimal sequential choice of monetary policy. When the stock of debt is nominal, the incentive to generate unanticipated inflation increases the cost of the outstanding debt even if no unanticipated inflation episodes occur in equilibrium. Without full commitment, the optimal sequential policy is to deplete the outstanding stock of debt progressively until these extra costs disappear. Nominal debt is therefore a burden on monetary policy, not only because it must be serviced, but also because it creates a time inconsistency problem that distorts interest rates. The introduction of alternative forms of taxation may lessen this burden, if there is enough commtiment to fiscal policy. If there is full commitment to an optimal fiscal policy, then the resulting monetary policy is the Friedman rule of zero nominal interest rates.

Recurrent hyperinflations and learning

This paper uses a model of boundedly rational learning to accountfor the observations of recurrent hyperinflations in the lastdecade. We study a standard monetary model where the fullyrational expectations assumption is replaced by a formaldefinition of quasi-rational learning. The model under learningis able to match remarkably well some crucial stylized factsobserved during the recurrent hyperinflations experienced byseveral countries in the 80's. We argue that, despite being asmall departure from rational expectations, quasi-rationallearning does not preclude falsifiability of the model and itdoes not violate reasonable rationality requirements.

A positive theory of geographic mobility and social insurance

This paper presents a tractable dynamic general equilibrium model thatcan explain cross-country empirical regularities in geographical mobility,unemployment and labor market institutions. Rational agents vote overunemployment insurance (UI), taking the dynamic distortionary effects ofinsurance on the performance of the labor market into consideration.Agents with higher cost of moving, i.e., more attached to their currentlocation, prefer more generous UI. The key assumption is that an agent'sattachment to a location increases the longer she has resided there. UIreduces the incentive for labor mobility and increases, therefore, thefraction of attached agents and the political support for UI. The mainresult is that this self-reinforcing mechanism can give rise to multiplesteady-states-one 'European' steady-state featuring high unemployment,low geographical mobility and high unemployment insurance, and one'American' steady-state featuring low unemployment, high mobility andlow unemployment insurance.

Patterns of convergence and divergence in the euro area

We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples.

The effects of monetary policy on stock market bubbles: Some evidence

We estimate the response of stock prices to exogenous monetary policy shocks usinga vector-autoregressive model with time-varying parameters. Our evidence points toprotracted episodes in which, after a a short-run decline, stock prices increase persistently in response to an exogenous tightening of monetary policy. That responseis clearly at odds with the "conventional" view on the effects of monetary policy onbubbles, as well as with the predictions of bubbleless models. We also argue that it isunlikely that such evidence be accounted for by an endogenous response of the equitypremium to the monetary policy shocks.

Towards economic and monetary union: changing trends in payment systems for new european members

The objective of this paper is preciselyto study the evolution of payment systems within the accession countries between 1996 and 2003 and compare them with those of the E.U. and the Eurozone countries

Lyfe-cycle effects on household expenditures: A latent-variable approach

Using data from the Spanish household budget survey, we investigate life-cycle effects on several product expenditures. A latent-variable model approach is adopted to evaluate the impact of income on expenditures, controlling for the number of members in the family. Two latent factors underlying repeated measures of monetary and non-monetary income are used as explanatory variables in the expenditure regression equations, thus avoiding possible bias associated to the measurement error in income. The proposed methodology also takes care of the case in which product expenditures exhibit a pattern of infrequent purchases. Multiple-group analysis is used to assess the variation of key parameters of the model across various household life-cycle typologies. The analysis discloses significant life-cycle effects on the mean levels of expenditures; it also detects significant life-cycle effects on the way expenditures are affected by income and family size. Asymptotic robust methods are used to account for possible non-normality of the data.

The capital gains from trade are not enough: Evidence from the environmental accounts of Venezuela and Mexico

In principle, a country can not endure negative genuine savings for longperiods of time without experiencing declining consumption. Nevertheless,theoreticians envisage two alternatives to explain how an exporter ofnon-renewable natural resources could experience permanent negativegenuine savings and still ensure sustainability. The first one allegesthat the capital gains arising from the expected improvement in theterms of trade would suffice to compensate for the negative savings ofthe resource exporter. The second alternative points at technologicalchange as a way to avoid economic collapse. This paper uses the dataof Venezuela and Mexico to empirically test the first of these twohypotheses. The results presented here prove that the terms oftrade do not suffice to compensate the depletion of oil reservesin these two open economies.

Globalization and risk sharing

We study the effects of globalization on risk sharing and welfare. Like previous literature, weassume that countries cannot commit to repay their debts. Unlike previous literature, we assumethat countries cannot discriminate between domestic and foreign creditors when repaying theirdebts. This creates novel interactions between domestic and international trade in assets. (i)Increases in domestic trade raise the bene.ts of enforcement and facilitate international trade.In fact, in our setup countries can obtain international risk sharing even in the absence of defaultpenalties. (ii) Increases in foreign trade .i.e. globalization.raise the costs of enforcement andhamper domestic trade. As a result, globalization may worsen domestic risk sharing and lowerwelfare. We show how these e¤ects depend on various characteristics of tradable goods andexplore the roles of borrowing limits, debt renegotiations, and trade policy.

Wage rigidity and job creation

Recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations. We use worker-level datafrom the CPS to measure the sensitivity of wages of newly hired workers to changesin aggregate labor market conditions. The wage of new hires, unlike the aggregatewage, is volatile and responds almost one-to-one to changes in labor productivity.We conclude that there is little evidence for wage stickiness in the data. We alsoshow, however, that a little wage rigidity goes a long way in amplifying the responseof job creation to productivity shocks.

Equity considerations in health care: An axiomatic bargaining approach

The general issues of equity and efficiency are placed at the center of the analysis of resource allocation problems in health care. We examine them using axiomatic bargaining theory. We study different solutions that have been proposed and relate them to previous literature on health care allocation. In particular, we focus on the solutions based on axiomatic bargaining with claims and suggest that they may be particularly appealing as distributive criteria in health policy. Finally, we present the results of a survey that tries to elicit moral intuitions of people about resource allocation problems and their different solutions.

On the distribution of income and worker assignment under intra-firm spillovers, with an application to ideas and networks

We study the earnings structure and the equilibrium assignment of workers when workers exert intra-firm spillovers on each other.We allow for arbitrary spillovers provided output depends on some aggregate index of workers' skill. Despite the possibility of increasing returns to skills, equilibrium typically exists. We show that equilibrium will typically be segregated; that the skill space can be partitioned into a set of segments and any firm hires from only one segment. Next, we apply the model to analyze the effect of information technology on segmentation and the distribution of income. There are two types of human capital, productivity and creativity, i.e. the ability to produce ideas that may be duplicated over a network. Under plausible assumptions, inequality rises and then falls when network size increases, and the poorest workers cannot lose. We also analyze the impact of an improvement in worker quality and of an increased international mobility of ideas.

Long-run substitutability between more and less educated workers: Evidence from U.S. States 1950-1990

We estimate the aggregate long-run elasticity of substitution between more and less educatedworkers (the slope of the demand curve for more relative to less educated workers) at theUS state level. Our data come from the (five)1950-1990 decennial censuses. Our empiricalapproach allows for state and time fixed effects and relies on time and state dependentchild labor and compulsory school attendance laws as instruments for (endogenous) changesin the relative supply of more educated workers. We find the aggregate long-run elasticity ofsubstitution between more and less educated workers to be around 1.5.

Capital, wages and growth: Theory and evidence

Returns to scale to capital and the strength of capital externalities play a key role for the empirical predictions and policy implications of different growth theories. We show that both can be identified with individual wage data and implement our approach at the city-level using US Census data on individuals in 173 cities for 1970, 1980, and 1990. Estimation takes into account fixed effects, endogeneity of capital accumulation, and measurement error. We find no evidence for human or physical capital externalities and decreasing aggregate returns to capital. Returns to scale to physical and human capital are around 80 percent. We also find strong complementarities between human capital and labor and substantial total employment externalities.