How important is the intensive margin of labor adjustment?

Using new quarterly data for hours worked in OECD countries, Ohanian and Raffo (2011) argue that in many OECD countries, particularly in Europe, hours per worker are quantitatively important as an intensive margin of labor adjustment, possibly because labor market frictions are higher than in the US. I argue that this conclusion is not supported by the data. Using the same data on hours worked, I find evidence that labor market frictions are higher in Europe than in the US, like Ohanian and Raffo, but also that these frictions seem to affect the intensive margin at least as much as the extensive margin of labor adjustment.

Sources of comparative advantage in polluting industries (with appendix)

We study the determinants of comparative advantage in polluting industries. We combine dataon environmental policy at the country level with data on pollution intensity at the industry levelto show that countries with laxer environmental regulation have a comparative advantage in polluting industries. Further, we address the potential problem of reverse causality. We propose aninstrument for environmental regulation based on meteorological determinants of pollution dispersion identified by the atmospheric pollution literature. We find that the effect of environmentalregulation on the pattern of trade is causal and comparable in magnitude to the effect of physicaland human capital.

The network origins of aggregate fluctuations

This paper argues that in the presence of intersectoral input-output linkages, microeconomicidiosyncratic shocks may lead to aggregate fluctuations. In particular, itshows that, as the economy becomes more disaggregated, the rate at which aggregatevolatility decays is determined by the structure of the network capturing such linkages.Our main results provide a characterization of this relationship in terms of the importanceof different sectors as suppliers to their immediate customers as well as theirrole as indirect suppliers to chains of downstream sectors. Such higher-order interconnectionscapture the possibility of "cascade effects" whereby productivity shocks to asector propagate not only to its immediate downstream customers, but also indirectlyto the rest of the economy. Our results highlight that sizable aggregate volatility isobtained from sectoral idiosyncratic shocks only if there exists significant asymmetryin the roles that sectors play as suppliers to others, and that the "sparseness" of theinput-output matrix is unrelated to the nature of aggregate fluctuations.

Credit lines: The other side of corporate liquidity

In this paper we offer the first large sample evidence on the availability and usage ofcredit lines in U.S. public corporations and use it to re-examine the existing findings oncorporate liquidity. We show that the availability of credit lines is widespread and thataverage undrawn credit is of the same order of magnitude as cash holdings. We test thetrade-off theory of liquidity according to which firms target an optimum level of liquidity,computed as the sum of cash and undrawn credit lines. We provide support for the existenceof a liquidity target, but also show that the reasons why firms hold cash and credit linesare very different. While the precautionary motive explains well cash holdings, the optimumlevel of credit lines appears to be driven by the restrictions imposed by the credit line itself,in terms of stated purpose and covenants. In support to these findings, credit line drawdownsare associated with capital expenditures, acquisitions, and working capital.

Has the Euro-Mediterranean partnership affected Mediterranean business cycles?

We date turning points of the reference cycle for 19 Mediterranean countries andanalyze their structure and interdependences. Fluctuations are volatile and not highlycorrelated across countries; recessions are deep but asynchronous making average outputlosses in the area limited. Heterogeneities across countries and regions are substantial.Mediterranean cycles are time varying but their evolution is not linked withthe Euro-Mediterranean partnership process. The concordance of cyclical fluctuationsis poorly related to trade and financial linkages and to their evolution over time.

Money doctors

We present a new model of money management, in which investors delegate portfolio management to professionals based not only on performance, but also on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and allows managers to charge higher fees to investors who trust them more. Money managers compete for investor funds by setting their fees, but because of trust the fees do not fall to costs. In the model, 1) managers consistently underperform the market net of fees but investors still prefer to delegate money management to taking risk on their own, 2) fees involve sharing of expected returns between managers and investors, with higher fees in riskier products, 3) managers pander to investors when investors exhibit biases in their beliefs, and do not correct misperceptions, and 4) despite long run benefits from better performance, the profits from pandering to trusting investors discourage managers from pursuing contrarian strategies relative to the case with no trust. We show how trust-mediated money management renders arbitrage less effective, and may help destabilize financial markets.

Determining underlying macroeconomic fundamentals during emerging market crises: Are conditions as bad as they seem?

Emerging market crises are characterized by large swings in both macroeconomic fundamentalsand asset prices. The economic significance of observed movements in macroeconomicvariables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of effective fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).

Endogenous credit cycles

I develop an overlapping-generations framework in which changes in lending standards generateendogenous cycles. In my economy, entrepreneurs who are privately informed about thequality of their projects need to borrow funds. Intermediaries screen entrepreneurs both throughthe amount of investment undertaken and through the level of entrepreneurial net worth.I show that endogenous regime switches in financial contracts from pooling to separatingand vice-versa may generate fluctuations even in the absence of exogenous shocks. Whenthe economy is in the pooling (separating) regime, lending standards seem lax ( tight ) andinvestment is high (low). Differently from the existing literature, my model does not requireentrepreneurial net worth to be counter cyclycal or inconsequential for determining aggregateinvestment.

The return of the wage Phillips curve

The standard New Keynesian model with staggered wage settingis shown to imply a simple dynamic relation between wage inflationand unemployment. Under some assumptions, that relation takes aform similar to that found in empirical wage equations-starting fromPhillips' (1958) original work-and may thus be viewed as providingsome theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the U.S. economy, even under the strong assumption of a constant natural rate ofunemployment.