Financial constraints and house prices: an international perspective

In this paper, we show substantial empirical evidence that house prices are more sensitive to shocks to percapita income, in countries where housing finance is more developed. This result is consistent with the theoretical framework developed in the paper, where we study the impact ofprogressive relaxation of financiai constraints on housing demand and equilibrium house prices. Our results are consistent with recent literature on financiai constraints and business investment, which argues that the investment of less constrained firms can be more sensitive to changes in cash flow. More broadly, our results challenge the traditional view that financiai development leads to smaller fluctuations in key economic variables. The policy implications are c1ear and important. Even iffinancial development is desirable for other reasons, the potential associated increase in volatility should be an explicit policy concern.

Asset pricing when risk sharing is limited by default: a theoretical framework

We study the asset pricing implications of an endowment economy when agents can default on contracts that would leave them otherwise worse off. We specialize and extend the environment studied by Kocherlakota (1995) and Kehoe and Levine (1993) to make it comparable to standard studies of asset pricillg. We completely charactize efficient allocations for several special cases. We illtroduce a competitive equilibrium with complete markets alld with elldogellous solvency constraints. These solvellcy constraints are such as to prevent default -at the cost of reduced risk sharing. We show a version of the classical welfare theorems for this equilibrium definition. We characterize the pricing kernel, alld compare it with the one for economies without participation constraints : interest rates are lower and risk premia can be bigger depending on the covariance of the idiosyncratic and aggregate shocks. Quantitative examples show that for reasonable parameter values the relevant marginal rates of substitution fali within the Hansen-Jagannathan bounds.

The role of consumer's risk aversion on price rigidity

This paper aims at contributing to the research agenda on the sources of price stickiness, showing that the adoption of nominal price rigidity may be an optimal firms' reaction to the consumers' behavior, even if firms have no adjustment costs. With regular broadly accepted assumptions on economic agents behavior, we show that firms' competition can lead to the adoption of sticky prices as an (sub-game perfect) equilibrium strategy. We introduce the concept of a consumption centers model economy in which there are several complete markets. Moreover, we weaken some traditional assumptions used in standard monetary policy models, by assuming that households have imperfect information about the ineflicient time-varying cost shocks faced by the firms, e.g. the ones regarding to inefficient equilibrium output leveIs under fiexible prices. Moreover, the timing of events are assumed in such a way that, at every period, consumers have access to the actual prices prevailing in the market only after choosing a particular consumption center. Since such choices under uncertainty may decrease the expected utilities of risk averse consumers, competitive firms adopt some degree of price stickiness in order to minimize the price uncertainty and fi attract more customers fi.'

Electoral institutions,cleavage structures,and the number of parties

Theory: A classic question in political science concems ",hat deteImines the number of parties that compete in a given polity. Broadly speaking, there are two approaches to answering this question, one that emphasizes the role of electorallaws in structuring coalitional incentives, another that emphasizes the importance of pre-existing social cleavages. In tbis paper, we view the number of parties as a product of the interaction between these two forces, following Powell (1982) and Ordeshook and Shvetsova (1994). Hypotheses: The effective number of parties in a polity should be a multiplicative rather than an additive function ofthe peImissiveness ofthe electoral system and the heterogeneity ofthe society. Methods: Multiple regression on cross-sectional aggregate electoral statistics. Unlike previous studies, we (1) do not confine attention to developed democracies; (2) explicitly control for the influence of presidential elections, taking account of whether they are concurrent or nonconcurrent, and ofthe effective number ofpresidential candidates; and (3) also control for the presence and operation of upper tiers in legislative elections. Results: The hypothesis is confiImed, both as regards the number of legislative and the number of presidential parties .

Predicting Amazon Deforestation through the deterninants of demand for agricultural land

This paper develops a model of deforestation pressure in the Amazon. It is based on the determinants of demand for agricultural land, i.e. the interactions between population dynamics, urbanization and the growth of local markets, land prices, and government spending and policies. The mo deI is estimated using data from the period 1970 - 1985, and predictions for the period 1985 - 2010 are made under explicit assumptions about the underlying factors of deforestation. The predictions indicate that economic growth in the Amazon is likely to continue at high rates even if the federal government abandons its aggressive development policy. Deforestation will be much smaller if they do, though, since the active development policies tend to promote wasteful use of land.

Crédito endogeno e politica monetaria na Argentina e no Chile

In a general equilibrium Ramsey type model with heterogeneous agents we study the conditions for which a credit restriction can be a source of endogenous cycle to credit and capital.

Growth,distribution and school policy

This paper investigates the relationship between growth, income inequality, and educational policies. An endogenous growth model is built in which there are two types of labor, skilled and unskilled, and the quality of the labor force (measured by the fraction of skilled workers) will ultimately determine the economic growth rate. We show that multi pIe inequality and growth paths may arise. Countries will not necessarily converge to the same economic growth and income distribution. When the proportion of skilled workers is low, the economy grows slow, and the Gini coeflicient is high. Low expected growth rate inhibits investments in human capital and the quality of the labor force tomorrow turns out to be low again, keeping the economy in the bad equilibrium. We then analyze the effects on growth and inequality of two types of government intervention: introduction of public schools and vouchers. Both types can induce the economic agents to invest more in education. The consequence will be an increase in the quality of the labor force, leading to higher growth rates and less inequality. Finally, we examine the welfare consequences of these interventions and conclude that they may be Pareto improving.

Optimal rules for monetary policy in Brazil

This paper presents optimal rules for monetary policy in Brazil derived from a backward looking expectation model consisting of a Keynesian IS function and an Augmented Phillips Curve (ISAS). The IS function displays'a high sensitivity of aggregate demand to the real interest rate and the Phillips Curve is accelerationist. The optimal monetary rules show low interest rate volatility with reaction coefficients lower than the ones suggested by Taylor (1993a,b). Reaction functions estimated through ADL and SUR models suggest that monetary policy has not been optimal and has aimed to product rather than inflation stabilization.

An empirical comparison of forward-rate and spot-rate models for valuing interest-rate options

Our main goal is to investigate the question of which interest-rate options valuation models are better suited to support the management of interest-rate risk. We use the German market to test seven spot-rate and forward-rate models with one and two factors for interest-rate warrants for the period from 1990 to 1993. We identify a one-factor forward-rate model and two spot-rate models with two faetors that are not significant1y outperformed by any of the other four models. Further rankings are possible if additional cri teria are applied.

Convexity in multidimensional mechanism design

The present article initiates a systematic study of the behavior of a strictly increasing, C2 , utility function u(a), seen as a function of agents' types, a, when the set of types, A, is a compact, convex subset of iRm . When A is a m-dimensional rectangle it shows that there is a diffeomorphism of A such that the function U = u o H is strictly increasing, C2 , and strictly convexo Moreover, when A is a strictly convex leveI set of a nowhere singular function, there exists a change of coordinates H such that B = H-1(A) is a strictly convex set and U = u o H : B ~ iR is a strictly convex function, as long as a characteristic number of u is smaller than a characteristic number of A. Therefore, a utility function can be assumed convex in agents' types without loss of generality in a wide variety of economic environments.

A theory of weekly specials

Multiproduct retailers facing similar costs and serving the same public commonly announce different weekly specials. These promotional prices also seem to evolve randomly over the weeks. Here, weekly specials are viewed as the strategic outcome of an oligopolistic price competition among multiproduct retail stores facing nonconvex costs. Existence of an equilibrium in mixed strategies is proven. ldentical stores serving the same public will never charge the same price vector with probability one (cross-store price dispersion). Mixed strategies can generate random price dispersion over time in the repeated version of the mode!.