97-01. Huggett, M., and Ventura, G., "Understanding Why High Income Households Save More Than Low Income Households,"

Abstract: This paper investigates why high income households save on average a higher fraction of income than do low income households in US cross-section data. The three explanations considered are (1) age differences across households, (2) temporary earnings shocks and (3) the structure of social security payments. We use a calibrated life-cycle model to evaluate the quantitative importance of these explanations. We find that age and the structure of social security payments are quantitatively important in replicating the pattern of average savings rates and income found in US cross-section data. Surprisingly, temporary shocks turn out to be of secondary importance.

97-02. Antinolfi, G., and Huybens, E., "Money, Real Exchange Rates, and Capital Accumulation in a Small Open Economy with Financial Market Frictions,"

Abstract: We consider a small open economy that produces and consumes two goods, one tradable and one not. Domestic residents combine their own income with credit obtained either abroad or at home to invest in capital production, which requires the tradable good. Capital investments in the tradable sector are subject to a costly state verification (CSV) problem, and the associated bank loans are subject to a binding reserve requirement. Under one technical condition, the presence of these financial market frictions leads to the existence of two steady state equilibria: one with a relatively high real exchange rate and a relatively low level of output, and one with a relatively low real exchange rate and a relatively high level of output. An increase in the world interest rate has an ambiguous effect on the real exchange rate in the low-output steady state, while output necessarily declines. In the high-output steady state, an increase in the world interest rate necessarily results in a decline in the real exchange rate, while the effect on output is ambiguous. An increase in the domestic money growth rate or the reserve requirement increases the real exchange rate and decreases the level of output in the low-output steady state, but decreases the real exchange rate and increases the level of output in the high-output steady state. At the same time, sufficiently large increases in the rate of money growth or the world interest rate can transform the high-output-low-real-exchange-rate steady state from a sink to a source. Thus while small increases in the interest rate or the money growth rate may be conducive to higher long-run levels of real activity, excessive increases can induce a kind of "crisis". This finding accords well with an array of empirical evidence. Finally, the model delivers a set of prescriptions for what a small open economy can do to protect itself against a "crisis" induced by rising world interest rates.

97-03. Gómez, J.P., and Zapatero, F., "The Role of Institutional Investors in International Trading: an Explanation of the Home Bias Puzzle,"

Abstract: We postulate that the growing participation of institutional investors in capital markets along with their particular objective function might help to explain the home equity bias puzzle. We model an institutional investor as a risk averse investor that has access to international financial markets and tries to maximize expected utility resulting from the difference between final wealth and an exogenously given index formed exclusively by domestic securities (the benchmark index); we show that for some values of the covariances and betas, this objective will induce a home bias. We study the effects of this optimal strategy on a simple one-period equilibrium and obtain a multibeta CAPM; as a novelty, one of the betas is refered to the excess return of the benchmark index. We test this model using data from six countries and we show that the index helps to explain the excess return of domestic securities. This effect is obvious when we compare a recent subperiod (when institutional investors have a larger weight in capital markets) with a previous subperiod.

97-04. Auernheimer, L., and Rumbos, B., "Variable Capital Utilization in a General Equilibrium., "Supply Side Model,"

Abstract: We introduce a variable rate of capital utilization and depreciation into a modified Ramsey- type neoclassical growth model via the well-known concept of pure user cost. The optimal utilization rate is found to be determined by the opportunity cost of holding capital or the net real interest rate, and this rate may vary in the short run so total services of capital become a control rather than a state variable. We find a slower rate of convergence towards the steady state when a variable utilization rate of capital is introduced, and a response to certain shocks that exhibit a higher (than in the non-flexibility case) persistence. Noteworthy is the case when a (technology) shock is anticipated; with the initial response of output in a direction opposite to that of the final adjustment. Finally, it is found that, contrary to the conventional case in which capital utilization is fixed, a fall (rise) in the interest rate can have an important contractionary (expansionary) effect on output and wages.

97-05. Ortigueira, S., "A Dynamic Analysis of an Endogenous Growth Model with Leisure,"

Abstract: The main goal in this paper is to analyze an economic model of endogenous growth where human capital accumulation acts as the engine propelling economic activity. The added ingredient in our model is that agents derive utility from consumption and leisure, where leisure is defined as the amount of time devoted to those activities augmented by the level of education. Under regular conditions we show that there is a unique globally stable balanced growth path. We also provide a characterization of the behavior of our economic variables along the transition.

97-06. Huybens, E., and Smith, B.D., "Inflation, Financial Markets and Long-Run Real Activity,"

Abstract: Empirical evidence suggests that real activity, the volume of bank lending activity, and the volume of trading in equity markets are strongly positively correlated. At the same time, inflation and financial market activity are strongly negatively correlated (in the long run), as are inflation and the real rate of return on equity. Inflation and real activity are also negatively correlated in the long run, particularly for economies with relatively high rates of inflation. We present a monetary growth model in which banks and secondary capital markets play a crucial allocative function. We show that -at least under certain configurations of -parameters the predictions of the model are consistent with these and several other observations about inflation, finance and long-run real activity.

97-07. Johnson, P., "Monetary Exchange as a Social Convention: Emergence and Stability of an Intermediating Commodity," 

Abstract: This paper investigates the stability of monetary exchange equilibria and the conditions necessary for an equilibrium of this type to emerge endogenously. Previous research on money as a medium of exchange has depended on either initial conditions or steady state conditions to pinpoint equilibria. These approaches are not satisfactory for addressing the issue of emergence, either because the determining element is exogenous, or because there are multiple equilibria without criteria for selecting between them. We construct an N -person non-cooperative anonymous game from an economy with many commodities and bilateral exchange. The environment is restricted so that in addition to direct barter opportunities there is a commodity - a token commodity with no value in consumption - which can be used for intermediate exchanges. We make use of recent advances in evolutionary learning in games pioneered in Young (1993) and Kandori, Mailath, and Rob (1993) to characterize conditions under which monetary trade is typically observed in the longrun regardless of initial conditions and discuss how informational assumptions affect transition time.

97-08. Bencivenga, V., Huybens, E., and Smith, B.D., "What to Stabilize in the Open Economy?: Some Notes on a Problem of Keynes,"

Abstract: We consider the question of how to best maintain price level stability in the open economy and evaluate three possible policy choices (a) a constant money growth rate rule; (b) a fixed exchange rate; and (c) a policy of explicit commitment to a price level target. In each case we assume that policy is conducted by injecting or withdrawing reserves from the banking system. In evaluating the three regimes we adopt Keynes criteria for a desirable policy the best policy should leave the least scope for indeterminacy and excessive economic volatility. In a steady state equilibrium the choice of regime is largely irrelevant any steady state equilibrium under one regime can be duplicated by an appropriate choice of the control variable under any other regime However we show that the set of equilibria under the three regimes is dramatically diferent. When all countries follow the policy of fixing a constant rate of money growth there are no equilibria displaying endogenously arising volatility and if hyperinationary equilibria are excluded there is no indeterminacy of equilibrium. Under a regime of fixed exchange rates indeterminacies and endogenously arising fluctuations are impossible if the country with the low reserve deposit ratio is charged with maintaining the fixedrate. Finally when one country targets the time path of its price level under very weak conditions there will be indeterminacy of equilibrium and endogenously arising volatility driven by expectations. 

97-09. Zapatero, F., and Reverter, L. F., "Exchange Rate Intervention with Options,"

97-10. Sharma, T., "Joint Ventures and Stock Markets as Commitment Devices,"