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Exogenous shifts in international food commodity prices, which are identified using an SVAR model with global harvest shocks as an external instrument, explain almost 30% of euro-area inflation volatility over the medium term and contributed significantly to the twin puzzle of missing (dis)inflation in the era after the Great Recession. International food price shocks have an impact on food retail prices through the food production chain, but also trigger indirect inflationary effects via a depreciation of the euro and, most important, rising wages. Finally, due to asymmetric wage responses, the inflationary effects are very different across member states.

We mailed brochures to 10,000 randomly chosen employed German workers who were eligible for a subsidized occupational training program called WeGebAU, informing them about the importance of skills‐upgrading training in general and about WeGebAU in particular. Using survey and register data, we estimate effects of the informational brochure on awareness of the program, on take‐up of WeGebAU and other training, and on subsequent employment. The brochure more than doubles awareness of the program. There are no effects on WeGebAU take‐up, but participation in other (unsubsidized) training increases among employees aged under 45. Short‐term labor market outcomes are not affected.

© 2018 Elsevier B.V. The behavioural model of De Grauwe and Macchiarelli (2015) is extended to include financial frictions on the (aggregate) supply side. The result is a tight and sustained feedback loop between animal spirits on one hand, and supply of credit, capital purchase and production on the other. During phases of optimism, credit is abundant, access to production capital is easy, the cash-in-advance constraint is lax, risks are undervalued, and production is booming. Upon reversal in market sentiment, the contraction is quick and deep. Moreover, the model is capable of replicating the stylized fact of a long and sustained simultaneous growth in credit, production and asset prices observed in the US since mid1990's. Lastly, the behavioural model does a decent job in matching US data including multiple supply-side relations including capital-firm credit and inflation-interest rate. ispartof: JOURNAL OF ECONOMIC DYNAMICS & CONTROL vol:91 pages:206-236 status: published

We show how frictions and continuous transfers jointly affect equilibria in a model of matching in trading networks. Our model incorporates distortionary frictions such as transaction taxes, bargaining costs, and incomplete markets. When contracts are fully substitutable for firms, competitive equilibria exist and coincide with outcomes that satisfy a cooperative stability property called trail stability. In the presence of frictions, competitive equilibria might be neither stable nor (constrained) Pareto-efficient. In the absence of frictions, on the other hand, competitive equilibria are stable and in the core, even if utility is imperfectly transferable.

A classic result by Merton (1973) is that, except just before expiration or dividend payments, one should never exercise a call option and never convert a convertible bond. We show theoretically that this result is overturned when investors face frictions. Early option exercise can be optimal when it reduces short-sale costs, transaction costs, or funding costs. We provide consistent empirical evidence, documenting billions of dollars of early exercise for options and convertible bonds using unique data on actual exercise decisions and frictions. Our model can explain as much as 98% of early exercises by market makers and 67% by customers.

This paper investigates the properties of distortions that manifest themselves as wedges in the equilibrium conditions of the neoclassical growth model across a sample of 22 OECD countries for the 1970–2011 period. The quantitative relevance of each wedge and its robustness in generating fluctuations in macroeconomic aggregates is assessed. The efficiency wedge proves to be determinant in enabling models to replicate movements in output and investment, while the labor wedge is important to predict fluctuations in hours worked. Modeling distortions to the savings decision holds little quantitative or qualitative relevance. Also, investment seems to be the hardest aggregate to replicate, as prediction errors concerning output and hours worked are typically one order of magnitude smaller. These conclusions are statistically significant across the countries in the sample and are not limited to output drops. Finally, the geographical distance between countries and their degree of openness to trade are shown to contain information with regard to the wedges, stressing the importance of international mechanisms of transmission between distortions to the equilibrium conditions of the neoclassical growth model.

This article provides a counterpoint to Hashai and Buckley's article ‘Is competitive advantage a necessary condition for the emergence of the multinational enterprise?’ We agree with their conclusion that it is, in fact, not a necessary condition, but argue that the theoretical reasons behind this are different and more diverse than the ones they propose. We suggest that much extant economic theory is, in fact, consistent with their view that firms may internationalize without owning or achieving competitive advantages, and we model various other ways in which imperfections can drive their overall result. We strongly applaud Hashai and Buckley's attempt to add more rigor to international business theory and call for future work to extend this debate.

This paper develops a simple accounting framework that measures the effect of resource misallocation on aggregate productivity. This framework is based on a multi-sector equilibrium model with sector-specific frictions in the form of taxes on sectoral factor inputs. Our framework is flexible for the assumption on preferences or aggregate production functions. Moreover, this framework is consistent with that commonly used in productivity analysis. I apply this framework to measure the extent to which resource misallocation explains the difference in aggregate productivity across developed countries. I find that around 9 percentage points of the difference in the measured aggregate productivity between Japan and the US can be accounted for by resource misallocation. Using the framework, I also decompose the causes of the misallocation effect.

Peters and Severinov (2006) (PS henceforth) characterize a perfect Bayesian equilibrium (PBE) in a competing auctions environment, where all buyers are linked to all the sellers. PS characterize a PBE using a simple bidding rule, whereby buyers select in which auction to bid. In this note we show that when buyers are linked with a subset of the sellers (i.e. when there are search frictions), the PS bidding rule is no longer guaranteed to be efficient nor a PBE of the competing auctions game of PS. Our results indicate that researchers should be cautious when using the PS bidding rule to make inference about the behavior of buyers and sellers in a market where frictions are present such as eBay.

In a continuous-time model with multiple assets described by c\`{a}dl\`{a}g processes, this paper characterizes superhedging prices, absence of arbitrage, and utility maximizing strategies, under general frictions that make execution prices arbitrarily unfavorable for high trading intensity. Such frictions induce a duality between feasible trading strategies and shadow execution prices with a martingale measure. Utility maximizing strategies exist even if arbitrage is present, because it is not scalable at will., Comment: Published at http://dx.doi.org/10.1214/14-AAP1043 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org)

We build an equilibrium job search model, where workers engage in both off- and on-the-job search over a set of cities, to quantify the impact of spatial matching frictions and mobility costs on the job search process. Migration decisions, based on a dynamic utility trade-off between locations, can rationalize diverse wage dynamics as part of forward-looking spatial strategies. Our estimation results allow us to characterize each of the largest 200 French cities by a set of city-specific matching and amenity parameters and to measure the impact of distance on spatial constraints. We find that after controlling for frictions, mobility cost parameters are significantly lower than previously reported in the literature. Additional results include a robust positive correlation between on-the-job arrival rates and local wage dispersion, which provides new empirical support to the wage-posting framework and suggests an alternative explanation for the city size wage gap.

This paper uses networks to study price dispersion in seller-buyer markets where buyers with unit demand interact with multiple, but not all, sellers; and buyers and sellers compete on prices after they meet. Our approach allows for ex post indirect competition, where a buyer who is not directly linked with a seller affects the price obtained by that seller. Indirect competition generates the central finding of our paper: price dispersion depends on both the number of links in the network, and how these links are distributed. Networks with very few links can have no price dispersion, while networks with many links can still support significant price dispersion. We present three main theoretical results. First, for any given network we characterize the pairwise stable matchings and the prices that support them. Second, we characterize the set of all graphs where price dispersion is precluded. Third, we use a theorem from Frieze (1985) to show that the graphs where price dispersion is precluded arise asymptotically with probability one in random Poisson networks, even as the probability of each individual link goes to zero. We also provide quantitative results on the finite sample properties of price dispersion in random networks. Finally, we present an application to eBay to show that: (i) a calibration of our model reproduces the price dispersion documented in eBay quite well, and (ii) the amount of price dispersion in eBay would decrease substantially (35-45 percent as measured by the coefficient of variation) in a counterfactual analysis, where we change eBay’s network structure so that links are drawn with equal probability for all sellers and buyers.

Over the one and a half decades prior to the global financial crisis, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This is a highly robust prediction of open economy macro models with endogenous portfolio choice. It holds across many different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions.

This paper examines the effect of real-world, investor-level investment constraints, including several that have not been studied before, on hedge fund performance and its persistence. Using a large consolidated database, we demonstrate that hedge fund performance persistence is significantly reduced when rebalancing rules reflect fund size restrictions and liquidity constraints but remains statistically significant at higher rebalancing frequencies. Hypothetical investor portfolios that incorporate additional minimum diversification constraints, minimum investment requirements, and focus on open funds suggest that the performance and its persistence documented in earlier studies of hedge funds is not easily exploitable, especially by large investors.

We study the impact of frictions on the prevalence of systemic crises. Agents privately learn about a fixed payoff parameter, and repeatedly adjust their investments while facing transaction costs in a dynamic global game. The model has a rich structure of externalities: payoffs may depend on the volume of aggregate investment, on the concentration of investment, or on its volatility. We examine how small frictions, including those similar to the Tobin tax, affect the equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume. The analysis is driven by a robust invariance result: the volume of aggregate investment (measured in a pivotal contingency) is invariant to a large family of frictions.

International audience; Empirical evidence suggests that most firms operate in imperfectly competitive markets. We develop a search-matching model between wholesalers and retailers. Firms face search costs and form long-term relationships. Price bargain results in both wholesaler and retailer markups, which depend on firms' relative bargaining power. We simulate the general equilibrium model and explore the role of product market search frictions for business cycles. We conclude from the simulation exercise that incorporating product market search and improve the standard real business cycle model to reproduce US business cycle fluctuations.

Why do people live in particular cities? We can list many reasons, but two are undoubtedly relevant. Agents can enjoy the city or be more productive there. A combination of life amenities and productivity levels determines the size of cities, but the positive effects of these characteristics are capped by the costs and frictions arising from congestion. Depending on city governance and the flexibility of markets, these costs and frictions can be more or less important. These city characteristics are in turn enhanced and amplified by the presence of urban externalities. Understanding the different forces that determine city sizes is crucial for answering a broad set of questions. What is the relative importance of these forces in determining the size distribution of cities? How much would we gain or lose if cities had similar amenities, technology levels, or frictions? How much reallocation would this cause? More generally, what are the welfare implications of the location of agents across cities? In this paper we provide a simple way of decomposing the characteristics that lead to the size distribution of cities into three main components: efficiency, amenities, and excessive frictions. We use a simple urban theory to calculate these components and to carry out a wide set of counterfactual exercises that provide answers to the questions we asked above. The theory consists of a multi-city model with monocentric cities that produce a single good. Workers decide how much to work and where to live. Efficiency is modeled as TFP, amenities as directly affecting preferences

We study three cases in which specialized arbitrageurs lost significant amounts of capital and, as a result, became liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to fundamentals and the rebound took months. While multi-strategy hedge funds who were not capital constrained increased their positions, a large fraction of these funds actually acted as net sellers consistent with the view that information barriers within a firm (not just relative to outside investors) can lead to capital constraints for trading desks with mark-to-market losses. Our findings suggest that real world frictions impede arbitrage capital.

In an infinite-horizon economy with matching frictions, I study the efficient assignment between workers of different skill levels and machines of different quality levels. Under some restrictions I show that the efficient allocation assigns a unique machine quality and market tightness to each skill, and that the assignment is saddle-path stable. The efficient assignment is not necessarily positively assortative and efficient wages do not necessarily increase with the skill level. Nevertheless, the social value of workers always increases with the skill level. I then show that the efficient allocation can be decentralized by a market mechanism, in which the firms direct workers' search by announcing and committing to the machine quality, the skill level they intend to hire for such machines, and the time-path of wages. Finally, I calibrate the model to the US data and examine how a skill-biased technological progress affects the assignment and inequality. (Copyright: Elsevier)

We show how portfolio choice can be modeled in continuous time with transitory and persistent transaction costs, multiple assets, multiple signals predicting returns, and general signal dynamics. The objective function is derived from the limit of discrete-time models with endogenous transaction costs due to optimal dealer behavior. We solve the model explicitly and the intuitive solution is also the limit of the solutions of the corresponding discrete-time models. We show how the optimal high-frequency trading strategy depends on the nature of the trading costs, which in turn depend on dealers' inventory dynamics. Finally, we provide equilibrium implications and illustrate the model's broader applicability to micro- and macro-economics, monetary policy, and political economy.