We provide a new interpretation of the statistical relation between the trade balance and the terms of trade. This relation includes the J-curve, the tendency for trade balances to be negatively correlated with contemporaneous movements in the terms of trade, positively correlated with lagged...

A two-country Real Business Cycle (RBC) model is used to study the behavior of the United States trade balance. In this model, economic fluctuations are driven by productivity shocks and by variations in government purchases and in distorting taxes. The model is simulated using quarterly data on...

Herd behavior is argued by many to be present in many markets. Existing models of such behavior have been subjected to two apparently devastating critiques. The continuous investment critique is that in the basic model herds disappear if simple zero-one investment decisions are replaced by the...

This paper studies a version of the neoclassical growth model where heterogeneous establishments are subject to partial irreversibilities in investment. Under such investment technology, the optimal decision rules of establishments are of the (S,s) variety. A novel contribution of the paper is...

The paper examines the literature that attempts to resolve the equity premium and riskfree rate puzzles. It demonstrates that the puzzles will confront any model of asset prices that relies on three crucial assumptions: preferences have a particular parametric form, asset markets are complete,...

The marginal cost of plant capacity, measured by the price of equity, is significantly procyclical. Yet, the price of a major intermediate input into expanding plant capacity, investment goods, is countercyclical. The ratio of these prices is Tobin's q. Following convention, we interpret the...

In simple one-good international macro models, the presence of non-diversifiable labor income risk means that country portfolios should be heavily biased toward foreign assets. The fact that the opposite pattern of diversification is observed empirically constitutes the international...

This paper addresses the question of whether agents will invest efficiently in attributes that will increase their productivity in subsequent matches with other individuals. We present a two-sided matching model in which buyers and sellers make investment decisions prior to a matching stage....

In this paper we estimate and test a conditional version of the international CAPM. By using a parsimonious parameterization recently proposed by Ding and Engle (1994), we allow risk premia, betas, and correlations to very through time and test the cross-section restrictions of the model using a...