Recently a number of countries have experienced a prolonged slowdown in aggregate economic activity accompanied by a signi.cant deterioration of the banks.net worth. This paper studies the optimal bank behavior when they are severely undercapitalized but continue to operate due to lax government...

Consumption in the US leads output at the business cycle frequency. Standard RBC models predict the opposite. We show in this paper that the lack of an endogenous propagation mechanism that can support demand shocks is responsible for the discrepancy between RBC theory and data.

I consider an economy populated by case-based decision makers. Consumption can be transferred between the periods by means of a riskless storage technology or a risky asset with i.i.d. dividend payments. I analyze the dynamics of asset holdings and asset prices and identify the influence of the...

This paper studies government support which targets industries capable of learning. Monitoring procedures are implemented to prevent rent-seekers from non-learning industries. But this involves bureaucratic red tape that reduces flexibility in response to world market shocks. The main thrust of...

In this paper we analyze heteroskedasticity-autocorrelation (HAC) robust tests constructed using the Bartlett kernel without truncation. We show that while such an HAC estimator is not consistent, asymptotically valid testing is still possible. We show that tests using the Bartlett kernel...

We analyze a banking system in which the class of feasible deposit contracts, or mechanisms, is broad. The mechanisms must satisfy a sequential service constraint, but partial or full suspension of convertibility is allowed. Consumers must be willing to deposit, ex ante. We show, by examples,...

Shortly after the Revolution of 1789 France experienced a period of major hyper- inflation, which lasted until 1796, when the French government abolished the paper money and returned to the specie. In 1798 the French government ordered the local authorities in all departments to construct the...

Capital gains play an important, positive role in the inter-temporal allocation of resources, but they can also be a source of economic instability. We analyze a simple overlapping-generations economy with two capital goods and irreversible investment. For each vector of initial capital/labor...

The effect of changes in commodity prices on factor rewards is studied in the multi-commodity, multi-factor case. It is shown that the inverse of the distributive share matrix must satisfy the following restriction: it cannot be anti-symmetric in its sign pattern. This means that one cannot...

Despite the important role played by durable goods production and inventory investment in the business cycle, theoretical models featuring durable goods inventories are rarely available in the literature. This paper provides a simple dynamic optimization model of durable goods inventories and...