Endowment Shocks Research Articles

Search and leisure with idiosyncratic endowment shocks in a random-matching model

Agents who realize idiosyncratic endowment shocks (High and Low) choose between leisure and searching for a trading partner. In the non-monetary economy there are two cases: everyone enjoys leisure or everyone enters the market to barter. In the first case, money can generate an equilibrium in which all agents enter the market. In the second, money can generate an outcome impossible without money, in which High agents trade while Low agents rest. Money affects the real side of the economy by driving Low quality goods out of the market, improving the quality of traded goods.

Competitive equilibria of economies with a continuum of consumers and aggregate shocks

This paper studies competitive equilibria of a production economy with aggregate productivity shocks. There is a continuum of consumers who face borrowing constraints and individual labor endowment shocks. The dynamic economy is described in terms of sequences of aggregate distributions. The existence of competitive equilibrium is proven and a recursive characterization is established. In particular, it is shown that for any competitive equilibrium, there is a payoff equivalent competitive equilibrium that is generated by a suitably defined recursive equilibrium.

Inflation volatility, government debts, and the fiscal theory of the price level

Inflation responses to aggregate demand shocks, endowment shocks, and money demand shocks are examined in the policy regime in which the fiscal theory of the price level is valid, using a simple endowment economy model. An interesting finding is that, in the presence of money demand and endowment shocks, a larger steady state real value of (nominal) government debt (bonds) lowers volatility of the inflation rate.

Noise and Aggregation of Information in Large Markets

We study a novel class of noisy rational expectations equilibria in markets with large number of agents. We show that, as long as noise (liquidity traders, endowment shocks) increases with the number of agents in the economy, the limiting competitive equilibrium is well-defined and leads to non-trivial information acquisition, perfect information aggregation, and partially revealing prices, even if per capita noise tends to zero. We find that in such equilibrium risk sharing and price revelation play different roles than in the standard limiting economy in which per capita noise is not negligible. We apply our model to study information sales by a monopolist, information acquisition in multi-asset markets, and derivatives trading, and show that our model leads to qualitatively different results with respect to those in the existing literature. The limiting equilibria are shown to be perfectly competitive, even when a strategic solution concept is used.

Competitive Equilibria of Economies with a Continuum of Consumers and Aggregate Shocks

This paper studies competitive equilibria of a production economy with aggregate productivity shocks. There is a continuum of consumers who face borrowing constraints and individual labor endowment shocks. The dynamic economy is described in terms of sequences of aggregate distributions. The existence of sequential competitive equilibria is proven and a recursive characterization is established. In particular, it is shown that for any sequential competitive equilibrium, there exists a payoff equivalent sequential competitive equilibrium that is generated by a suitably defined recursive equilibrium with state variables including continuation value.

Nominal Revaluation of Cross-Border Assets, Terms-of-Trade Changes, International Portfolio Diversification, and International Risk Sharing

1. Introduction All are subject to risks. The value of debt decreases under inflation. In open economies, cross-border are subject to risks, such as inflation risks and exchange rate risks. That is, when the price level and exchange rates fluctuate unexpectedly, the value and interest income of cross-border change, and wealth is redistributed internationally. This is called the revaluation of cross-border assets.1 This international wealth redistribution or international wealth transfer is enormous when substantial cross-border are held. In major industrial countries, foreign and liabilities have reached their GDP levels. Holdings of foreign by the United States were 73% of its GDP, and its foreign liabilities were 95%, in 2000. The ratios for the United Kingdom were even larger, 260% and 276%, respectively, in 1999.(2) In these circumstances, substantial wealth is transferred internationally through the revaluation of cross-border assets. In the United Kingdom, the annual average of this wealth redistribution was more than 5% of its annual GDP during the period 1987-2000.(3) This revaluation of cross-border assets can work as international risk sharing under some restrictive conditions. When income and the price level move inversely, the value and return on are proportional to income. Thus, by cross-owning or trading internationally, countries can share some country-specific risks. In his simple twoperiod model where the only sources of uncertainty are endowment shocks, Svensson (1989) showed that even a perfect pooling equilibrium can result by trading only nominally risk-free bonds under a monetary policy that generates negative correlation between endowment and the price level. However, he did not emphasize the role of the mechanism in overall international risk sharing, and possibly for this reason, the result is not well known. In this paper, I apply the idea to the aggregate level of international risk sharing by considering all types of cross-border as opposed to limiting the study to only bonds themselves. The mechanism can be thought of as a analogy to Cole and Obstfeld (1991). In Cole and Obstfeld's (1991) model, changes in the terms of trade can automatically transfer wealth to insure country-specific risks. In the revaluation, the relative nominal price (nominal exchange rate) changes between countries, instead of relative real price (terms of trade) changes, make international risk sharing possible.4 Cole and Obstfeld (1991) further suggested that the welfare gains from international portfolio diversification may be small, and the in international portfolio investments may be justified since changes in the terms of trade can insure some country-specific risks.5 Similarly, if the revaluation works as international risk sharing, it may serve as another justification for home bias in equities since equities are only parts of total cross-border assets, and the revaluation of other cross-border (such as bonds, direct investments, currencies, loans, and so on) can provide risk sharing.6 On the other hand, the revaluation has some interesting implications on the comparison between the flexible and the fixed exchange rate regimes. If it works as (or against) international risk sharing, it provides another merit (or drawback) of the flexible exchange rate regime since the changes in the exchange rate can provide international risk sharing (or increase the country-specific risks). This paper empirically examines three international risk-sharing channels: the revaluation of cross-border assets, the terms-of-trade channel suggested by Cole and Obstfeld (1991), and cross-border security ownership (or international portfolio diversification) that is thought of as a natural way of sharing country-specific risks. …

Aggregate precautionary savings: when is the third derivative irrelevant?

When are aggregate precautionary savings positive? We address this question in the context of a general equilibrium model where infinitely-lived agents receive idiosyncratic labor endowment shocks, hold a risk-free asset to smooth consumption and face a liquidity constraint. We prove that (1) the steady-state capital stock is always larger in any equilibrium with idiosyncratic shocks and a liquidity constraint than without idiosyncratic shocks (i.e. aggregate precautionary savings are positive) as long as consumers are risk averse and (2) aggregate precautionary savings occurs if and only if the liquidity constraint binds for some agents.

Sovereign Debt as Intertemporal Barter

Author(s): Kletzer, Kenneth M.; Wright, Brian D. | Abstract: Borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk-averse party subject to endowment shocks. The surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties, including any other competitive agents who are potential lenders to the sovereign. The sole punishments consist of renegotiation-proof changes in the path of future payments. We show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever. That is, borrowing and lending are possible under anarchy, and are supported by punishments that consist of cheating any cheater. Long-term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short-term loans. The analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved.

Stock market dynamics with rational liquidity traders

In the Kyle (1985) finite horizon model of stock market dynamics with a trader who holds long-lived information, informed trading intensities rise with time, and the slopes of the equilibrium price schedules fall. This paper shows that this result depends crucially on the irrational liquidity trader assumption. We replace the irrational noise traders with a sequence of rational, risk averse, liquidity traders who receive endowment shocks to their holdings of the risky asset. We demonstrate that unless liquidity traders are sufficiently risk averse, the slope of equilibrium price schedule rises over time, while informed trading intensities fall. In particular, Kyle's result holds only when liquidity traders are so risk averse that they ‘over-rebalance’ their portfolio's holdings of the risky asset, so that their final holdings of the risky asset have the opposite sign of their initial position.

The one-sector growth model with idiosyncratic shocks: Steady states and dynamics

Abstract This paper investigates the one-sector growth model where agents receive idiosyncratic labor endowment shocks and face a borrowing constraint. It is shown that any steady-state capital stock lies strictly above the steady state in the model without idiosyncratic shocks. In addition, the capital stock increases monotonically when it is sufficiently far below a steady state. However, near a steady state there can be non-monotonic economic dynamics.

A note on short-term intersectoral factor immobility

Abstract The dynamic trade literature has identified two important aspects of the adjustment process to real shocks contributed to short-term intersectoral factor immobilities. Real income rises over time as the production factors reallocate, while the presence of nontradeable goods leads to a dynamic relative price effect. While these effects are usually studied separately in the literature, this paper presents a simple multi-period model with optimizing agents in which both effects operate simultaneously. As an illustration of the model, the current account response to a favorable endowment shock is studied. The two effects have an opposite impact on the direction of the current account response. The relationship between model parameters and the response to the shock is studied.

The risk-free rate in heterogeneous-agent incomplete-insurance economies

Why has the average real risk-free interest rate been less than one percent? The question is motivated by the failure of a class of calibrated representative-agent economies to explain the average return to equity and risk-free debt. I construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk-free asset. I calibrate the economy and characterize equilibria computationally. With a borrowing constraint of one year's income, the resulting risk-free rate is more than one percent below the rate in the comparable representative-agent economy.

Externalities and Dynamics in Models of "Learning or Doing"

This paper analyzes the dynamics of general equilibrium models with externalities in human capital accumulation which extends that of Uzawa-Lucas. Multiple balanced growth paths, with different growth rates, and a continuum of equilibria (with a unique balanced growth path) may exist. In general, endowment shocks can be followed by higher or lower growth rates. A simple necessary and sufficient condition which depends only on the physical production technology, is established for a positive impact of physical capital on productivity growth. Under the same condition, a sudden removal of capital income taxation lowers welfare. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Precautionary Money Balances with Aggregate Uncertainty

This paper studies the dependence of velocity on stochastic monetary growth in a model where households demand money for both its transactions and precautionary services. The setup consists of a cash-in-advance economy in which individual uncertainty leads households to value money for its insurance against adverse endowment shocks. With stochastic monetary growth the distribution of money balances across households does not settle down to a time invariant distribution, so one aim of this paper is to model this distribution as an endogenous state variable.

Why Do Universities Have Endowments?

Why Do Universities Have Endowments?

Currency, Trade, and Capital Flows in General Equilibrium

This paper studies currency, trade, and capital flows in a one-good general equilibrium exchange model with utility-maximizing individuals. The effects of both monetary and endowment shocks are examined. It is shown that both can cause trade and capital flows. The model is a two-country version of the twostate optimizing model used recently by LeRoy (1984a, 1984b) to study the effects of monetary and endowment shocks in a closed economy. Each country issues its own currency, real and nominal bonds, and equity shares. Each receives an endowment of a perishable consumption good. The demand for money is generated by entering real balances into the utility function as in Dornbusch and Mussa (1975), Calvo (1981), Liviatan (1981), Obstfeld (1981a, 1981b, 1982), Razin (1981), Stockman (1983), and Michener (1984). Each country holds both currencies, an assumption made only by Liviatan. Both monetary growth and endowments of the consumption

The Rybczynski Theorem: Short-Run Adjustment

The modern, open economy must constantly re-allocate factors of production during the process of adjusting to external shocks. Few issues present us with greater economic and political problems due to the ensuing re-distribution of the national income and power. Terms of trade variations constitute a very important source of change, and the literature provides us with a number of recent contributions dealing with the issue of mobility after an exogenous shift in relative prices.' Less attention has been devoted to changes in the factor endowments.2 This is understandable since significant, one-time shifts in factor supplies are not as common as price shocks. Yet they do occur. Regime changes which lead to alterations in immigration policy or foreign investment policy may provoke sudden increases in labor or capital endowments. Foreign assistance may increase discontinuously, or technical change may occur rapidly, increasing the stock of effective capital in a onetime manner. Moreover, these endowment shocks may immediately affect one industry more heavily than the other. We know how the open economy must eventually adjust to such changes. The answer is given by the Rybczynski Theorem [15] in the event that both factors of production are completely mobile in the long run. One industry will expand and the other will contract. The industry which experiences growth will be the one that uses intensively the factor which has become more plentiful. In the new equilibrium, factor prices and factor ratios are unchanged from their original values, and the growing industry has received some of both factors from the other sector in addition to all of the initial inflow.

Nominal Prices and Interest Rates in General Equilibrium: Endowment Shocks

Nominal Prices and Interest Rates in General Equilibrium: Endowment Shocks

Interest rates and currency prices in a two-country world

This paper is a theoretical study of the determination of prices, interest rates and currency exchange rates, set in an infinitely-lived two-country world which is subject both to stochastic endowment shocks and to monetary instability. Formulas are obtained for pricing all equity claims, nominally-denominated bonds, and currencies, and these formulas are related to earlier, closely related results in the theories of money, finance international trade.