Firm-specific investment, sticky prices and the Taylor principle

According to the Taylor principle a central bank should adjust the nominal interest rate by more than one-for-one in response to changes in current inflation. Most of the existing literature supports the view that by following this simple recommendation a central bank can avoid being a source of unnecessary fluctuations in economic activity. The present paper shows that this conclusion is not robust with respect to the modelling of capital accumulation. We use our insights to discuss the desirability of alternative interest raterules. Our results suggest a reinterpretation of monetary policy under Volcker and Greenspan: The empirically plausible characterization of monetary policy can explain the stabilization of macroeconomic outcomes observed in the early eighties for the US economy. The Taylor principle in itself cannot.

Local volatility changes in the black-scholes model

In this paper we address a problem arising in risk management; namely the study of price variations of different contingent claims in the Black-Scholes model due to anticipating future events. The method we propose to use is an extension of the classical Vega index, i.e. the price derivative with respect to the constant volatility, in thesense that we perturb the volatility in different directions. Thisdirectional derivative, which we denote the local Vega index, will serve as the main object in the paper and one of the purposes is to relate it to the classical Vega index. We show that for all contingent claims studied in this paper the local Vega index can be expressed as a weighted average of the perturbation in volatility. In the particular case where the interest rate and the volatility are constant and the perturbation is deterministic, the local Vega index is an average of this perturbation multiplied by the classical Vega index. We also study the well-known goal problem of maximizing the probability of a perfect hedge and show that the speed of convergence is in fact dependent of the local Vega index.

Interbank comptetition with costly screening

We analyse credit market equilibrium when banks screen loan applicants. When banks have a convex cost function of screening, a pure strategy equilibrium exists where banks optimally set interest rates at the same level as their competitors. This result complements Broecker s (1990) analysis, where he demonstrates that no pure strategy equilibrium exists when banks have zero screening costs. In our set up we show that interest rate on loansare largely independent of marginal costs, a feature consistent with the extant empirical evidence. In equilibrium, banks make positive profits in our model in spite of the threat of entry by inactive banks. Moreover, an increase in the number of active banks increases credit risk and so does not improve credit market effciency: this point has important regulatory implications. Finally, we extend our analysis to the case where banks havediffering screening abilities.

The transmission of US shocks to Latin America

I study whether and how US shocks are transmitted to eight Latin American countries. US shocks are identified using sign restrictions and treated as exogenous with respect to Latin American economies. Posterior estimates for individual and average effects are constructed. US monetary shocks produce significant fluctuations in Latin America, but real demand and supply shocks do not. Floaters and currency boarders display similar output but different inflation and interest rate responses. The financial channel plays a crucial role in the transmission. US disturbances explain important portions of the variability of LatinAmerican macrovariables, producing continental cyclical fluctuations and, in two episodes, destabilizing nominal exchange rate effects. Policy implications are discussed.

Educational opportunity and the college premium

Since World War II, the United States government has made improved accessto higher education a priority. This e¤ort has substantially increasedthe number of people who complete college. We show that by reducing theeffective interest rate on borrowing for education, such policies canactually increase the gap in wages between those with a college educationand those without. The mechanism that drives our results is the signaling role of education first explored by Spence (1973). We argue that financialconstraints on education reduce the value of education as a signal. Wesolve for the reduced form relationship between the interest rate and thewage premium in the steady state of a dynamic asymmetric information model.In addition, we discuss evidence of decreases in borrowing costs for educationfinancing in the U.S.

How well do individuals predict the selling prices of their homes?

Self-reported home values are widely used as a measure of housing wealth by researchers employing a variety of data sets and studying a number of different individual and household level decisions. The accuracy of this measure is an open empirical question, and requires some type of market assessment of the values reported. In this research, we study the predictive power of self-reported housing wealth when estimating sales prices utilizing the Health and Retirement Study. We find that homeowners, on average, overestimate the value of their properties by between 5% and 10%. More importantly, we are the first to document a strong correlation between accuracy and the economic conditions at the time of the purchase of the property (measured by the prevalent interest rate, the growth of household income, and the growth of median housing prices). While most individuals overestimate the value of their properties, those who bought during more difficult economic times tend to be more accurate, and in some cases even underestimate the value of their house. These results establish a surprisingly strong, likely permanent, and in many cases long-lived, effect of the initial conditions surrounding the purchases of properties, on how individuals value them. This cyclicality of the overestimation of house prices can provide some explanations for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of increases in interest rates which could jeopardize their ability to live up to their financial commitments.

Macroeconomic modeling for monetary policy evaluation

We describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation. We point to some of the key differences with respect to the earlier generation ofmacro models, and highlight the insights for policy that these new frameworks have to offer. Our discussion emphasizes two key aspects of the new models: the significant role of expectations of future policy actions in the monetary transmission mechanism, and the importance for the central bank of tracking of the flexible price equilibrium values of the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy.

The new Keynesian approach to monetary policy analysis: Lessons and new directions

I discuss several lessons regarding the design and conduct of monetary policy that have emerged out of the New Keynesian research program. Those lessons include the bene.ts of price stability, the gains from commitment about future policies, the importance of nat-ural variables as benchmarks for policy, and the bene.ts of a credible anti-inflationary stance. I also point to one challenge facing NK modelling efforts: the need to come up with relevant sources of policy tradeoffs. A potentially useful approach to meeting that challenge, based on the introduction of real imperfections, is presented.

The variability of money velocity in a generalized cash-in-advance model

This paper presents a general equilibrium model of money demand wherethe velocity of money changes in response to endogenous fluctuations in the interest rate. The parameter space can be divided into two subsets: one where velocity is constant and equal to one as in cash-in-advance models, and another one where velocity fluctuates as in Baumol (1952). Despite its simplicity, in terms of paramaters to calibrate, the model performs surprisingly well. In particular, it approximates the variability of money velocity observed in the U.S. for the post-war period. The model is then used to analyze the welfare costs of inflation under uncertainty. This application calculates the errors derived from computing the costs of inflation with deterministic models. It turns out that the size of this difference is small, at least for the levels of uncertainty estimated for the U.S. economy.

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.

A model of collateral, investment and adverse selection

This paper characterizes the relationship between entrepreneurial wealth and aggregate investmentunder adverse selection. Its main finding is that such a relationship need not bemonotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in whichinvestment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurialwealth is relatively low; (ii) separating equilibria, in which investment is increasing inentrepreneurial wealth, are most likely to arise when entrepreneurial wealth is relatively highand; (iii) for a given interest rate, an increase in entrepreneurial wealth may generate a discontinuousfall in investment.

Is bank debt special for the transmission of monetary policy? Evidence from the stock market

We combine existing balance sheet and stock market data with two new datasets to studywhether, how much, and why bank lending to firms matters for the transmission of monetarypolicy. The first new dataset enables us to quantify the bank dependence of firms precisely,as the ratio of bank debt to total assets. We show that a two standard deviation increase inthe bank dependence of a firm makes its stock price about 25% more responsive to monetarypolicy shocks. We explore the channels through which this effect occurs, and find that thestock prices of bank-dependent firms that borrow from financially weaker banks display astronger sensitivity to monetary policy shocks. This finding is consistent with the banklending channel, a theory according to which the strength of bank balance sheets mattersfor monetary policy transmission. We construct a new database of hedging activities andshow that the stock prices of bank-dependent firms that hedge against interest rate riskdisplay a lower sensitivity to monetary policy shocks. This finding is consistent with aninterest rate pass-through channel that operates via the direct transmission of policy ratesto lending rates associated with the widespread use of floating-rates in bank loans and creditline agreements.

Modelos de tasas de interes en Chile: una revisión

Con este trabajo revisamos los Modelos de niveles de las tasas de intereses en Chile. Además de los Modelos de Nivel tradicionales por Chan, Karoly, Longstaff y Lijadoras (1992) en EE. UU, y Parisi (1998) en Chile, por el método de Probabilidad Maximun permitimos que la volatilidad condicional también incluya los procesos inesperados de la información (el modelo GARCH ) y también que la volatilidad sea la función del nivel de la tasa de intereses (modelo TVP-NIVELE) como en Brenner, Harjes y la Crona (1996). Para esto usamos producciones de mercado de bonos de reconocimiento, en cambio las producciones mensuales medias de subasta PDBC, y la ampliación del tamaño y la frecuencia de la muestra a 4 producciones semanales con términos(condiciones) diferentes a la madurez: 1 año, 5 años, 10 años y 15 años. Los resultados principales del estudio pueden ser resumidos en esto: la volatilidad de los cambios inesperados de las tarifas depende positivamente del nivel de las tarifas, sobre todo en el modelo de TVP-NIVEL. Obtenemos pruebas de reversión tacañas, tal que los incrementos en las tasas de intereses no eran independientes, contrariamente a lo obtenido por Brenner. en EE. UU. Los modelos de NIVELES no son capaces de ajustar apropiadamente la volatilidad en comparación con un modelo GARCH (1,1), y finalmente, el modelo de TVP-NIVEL no vence los resultados del modelo GARCH (1,1)

Le prêt à intérêt dans l'Antiquité préchrétienne : Jérusalem, Athènes, Rome : étude juridique, philosophique et historiographique

Le prêt à intérêt était pratiqué par tous les peuples de l'Antiquité préchrétienne, à l'exception du peuple d'Israël. L'auteur examine d'abord l'interdiction du prêt à intérêt dans l'Ancien Testament. Il expose ensuite la pratique du prêt à intérêt en Grèce, avant de détailler les critiques d'Aristote. Enfin, l'auteur retrace l'évolution du prêt (mutuum) et de la réglementation de l'intérêt à Rome, des origines à Constantin. Il met l'accent sur trois grandes controverses parmi les romanistes modernes (XVIe - XXIe s.) : sur le nexum, sur la centesima et, surtout, sur le mystérieux fenus unciarium, le taux d'intérêt fixé par les Douze Tables, pour lequel l'éventail des interprétations va de 1 à 100 % par an ! L'auteur recense les opinions de plus de 400 juristes et historiens, discute les plus importantes et propose sa conclusion. The loan at interest was used by all the peoples of pre-Christian Antiquity, excepting the people of Israel. The author first focuses on the prohibition of lending at interest in the Old Testament. He then explores the use of loans at interest in Greece before examining Aristotle's criticism. Eventually, the author follows the evolution of loan (mutuum) and interest regulation in Rome, from the origins to Constantine. Three great controversies among modern Roman law scholars (16th - 21th) are considered: nexum, centesima and above all, the mysterious fenus unciarium, the interest rate defined by the Twelve Tables, for which the range of interpretations varies between 1 and 100% per year! The author gives an inventory of more than 400 opinions expressed by jurists and historians, discusses the most important ones and suggests a solution.

Modelos de tasas de interes en Chile: una revisión

Con este trabajo revisamos los Modelos de niveles de las tasas de intereses en Chile. Además de los Modelos de Nivel tradicionales por Chan, Karoly, Longstaff y Lijadoras (1992) en EE. UU, y Parisi (1998) en Chile, por el método de Probabilidad Maximun permitimos que la volatilidad condicional también incluya los procesos inesperados de la información (el modelo GARCH ) y también que la volatilidad sea la función del nivel de la tasa de intereses (modelo TVP-NIVELE) como en Brenner, Harjes y la Crona (1996). Para esto usamos producciones de mercado de bonos de reconocimiento, en cambio las producciones mensuales medias de subasta PDBC, y la ampliación del tamaño y la frecuencia de la muestra a 4 producciones semanales con términos(condiciones) diferentes a la madurez: 1 año, 5 años, 10 años y 15 años. Los resultados principales del estudio pueden ser resumidos en esto: la volatilidad de los cambios inesperados de las tarifas depende positivamente del nivel de las tarifas, sobre todo en el modelo de TVP-NIVEL. Obtenemos pruebas de reversión tacañas, tal que los incrementos en las tasas de intereses no eran independientes, contrariamente a lo obtenido por Brenner. en EE. UU. Los modelos de NIVELES no son capaces de ajustar apropiadamente la volatilidad en comparación con un modelo GARCH (1,1), y finalmente, el modelo de TVP-NIVEL no vence los resultados del modelo GARCH (1,1)