Project acronym CHANGING FAMILIES
Project Changing Families: Causes, Consequences and Challenges for Public Policy
Researcher (PI) Nezih Guner
Host Institution (HI) FUNDACIÓ MARKETS, ORGANIZATIONS AND VOTES IN ECONOMICS
Call Details Starting Grant (StG), SH1, ERC-2010-StG_20091209
Summary The household and family structure in every major industrialized country changed in a fundamental way during the last couple of decades. First, marriage is less important today, as divorce, cohabitation, and single-motherhood are much more common. Second, female labor force participation has increased dramatically. As a result of these changes, today s households are very far from traditional breadwinner husband and housekeeper wife paradigm. These dramatic changes generated significant public interest and a large body of literature that tries to understand causes and consequences of these changes.
This project has two main goals. First, it studies changes in household and family structure. The particular questions that it tries to answer are: 1) What are economic factors behind the rise in premarital sex and its destigmatization? What determines parents incentives to socialize their children and affect their attitudes? 2) What are the causes and consequences of the recent rise in assortative mating and diverging marriage patterns by different educational groups? 3) Why are marriage patterns among blacks so different than whites in the U.S.?
The second aim of this project is to improve our understanding of income risk, the role of social insurance policies and labor market dynamics by building models that explicitly considers two-earner households. In particular, we ask the following set of questions: 1) What is the role of social insurance policies (income maintenance programs or progressive taxation) in an economy populated by two-earner households facing uninsurable idiosyncratic risk? 2) How does marriage and labor market dynamics interact and how important this interaction for our understanding of labor supply and marriage decisions?
Summary
The household and family structure in every major industrialized country changed in a fundamental way during the last couple of decades. First, marriage is less important today, as divorce, cohabitation, and single-motherhood are much more common. Second, female labor force participation has increased dramatically. As a result of these changes, today s households are very far from traditional breadwinner husband and housekeeper wife paradigm. These dramatic changes generated significant public interest and a large body of literature that tries to understand causes and consequences of these changes.
This project has two main goals. First, it studies changes in household and family structure. The particular questions that it tries to answer are: 1) What are economic factors behind the rise in premarital sex and its destigmatization? What determines parents incentives to socialize their children and affect their attitudes? 2) What are the causes and consequences of the recent rise in assortative mating and diverging marriage patterns by different educational groups? 3) Why are marriage patterns among blacks so different than whites in the U.S.?
The second aim of this project is to improve our understanding of income risk, the role of social insurance policies and labor market dynamics by building models that explicitly considers two-earner households. In particular, we ask the following set of questions: 1) What is the role of social insurance policies (income maintenance programs or progressive taxation) in an economy populated by two-earner households facing uninsurable idiosyncratic risk? 2) How does marriage and labor market dynamics interact and how important this interaction for our understanding of labor supply and marriage decisions?
Max ERC Funding
1 037 000 €
Duration
Start date: 2010-11-01, End date: 2015-10-31
Project acronym DEVHEALTH
Project UNDERSTANDING HEALTH ACROSS THE LIFECOURSE:
AN INTEGRATED DEVELOPMENTAL APPROACH
Researcher (PI) James Joseph Heckman
Host Institution (HI) UNIVERSITY COLLEGE DUBLIN, NATIONAL UNIVERSITY OF IRELAND, DUBLIN
Call Details Advanced Grant (AdG), SH1, ERC-2010-AdG_20100407
Summary This proposal seeks support for a research group led by James Heckman of the Geary Institute at University College Dublin to produce an integrated developmental approach to health that studies the origins and the evolution of health inequalities over the lifecourse and across generations, and the role played by cognition, personality, genes, and environments. Major experimental and nonexperimental international datasets will be analyzed. A practical guide to implementing related policy will be produced. We will build a science of human development that draws on, extends, and unites research on the biology and epidemiology of health disparities with medical economics and the economics of skill formation. The goal is to develop an integrated framework to jointly model the economic, social and biological mechanisms that produce the evolution and the intergenerational transmission of health and of the capabilities that foster health. The following tasks will be undertaken: (1) We will quantify the importance of early-life conditions in explaining the existence of health disparities across the lifecourse. (2) We will understand how health inequalities are transmitted across generations. (3) We will assess the health benefits from early childhood interventions. (4) We will examine the role of genes and environments in the aetiology and evolution of disease. (5) We will analyze how health inequalities emerge and evolve across the lifecourse. (6) We will give biological foundations to both our models and the health measures we will use. The proposed research will investigate causal channels for promoting health. It will compare the relative effectiveness of interventions at various stages of the life cycle and the benefits and costs of later remediation if early adversity is not adequately eliminated. It will guide the design of current and prospective experimental and longitudinal studies and policy formulation, and will train young scholars in frontier methods of research
Summary
This proposal seeks support for a research group led by James Heckman of the Geary Institute at University College Dublin to produce an integrated developmental approach to health that studies the origins and the evolution of health inequalities over the lifecourse and across generations, and the role played by cognition, personality, genes, and environments. Major experimental and nonexperimental international datasets will be analyzed. A practical guide to implementing related policy will be produced. We will build a science of human development that draws on, extends, and unites research on the biology and epidemiology of health disparities with medical economics and the economics of skill formation. The goal is to develop an integrated framework to jointly model the economic, social and biological mechanisms that produce the evolution and the intergenerational transmission of health and of the capabilities that foster health. The following tasks will be undertaken: (1) We will quantify the importance of early-life conditions in explaining the existence of health disparities across the lifecourse. (2) We will understand how health inequalities are transmitted across generations. (3) We will assess the health benefits from early childhood interventions. (4) We will examine the role of genes and environments in the aetiology and evolution of disease. (5) We will analyze how health inequalities emerge and evolve across the lifecourse. (6) We will give biological foundations to both our models and the health measures we will use. The proposed research will investigate causal channels for promoting health. It will compare the relative effectiveness of interventions at various stages of the life cycle and the benefits and costs of later remediation if early adversity is not adequately eliminated. It will guide the design of current and prospective experimental and longitudinal studies and policy formulation, and will train young scholars in frontier methods of research
Max ERC Funding
2 505 222 €
Duration
Start date: 2011-05-01, End date: 2016-04-30
Project acronym ENMUH
Project Estimation of Nonlinear Models with Unobserved Heterogeneity
Researcher (PI) Stephane Olivier Bonhomme
Host Institution (HI) FUNDACION CENTRO DE ESTUDIOS MONETARIOS Y FINANCIEROS
Call Details Starting Grant (StG), SH1, ERC-2010-StG_20091209
Summary Modern economic research emphasizes heterogeneity in various dimensions, such as individual preferences or firms’ technology. From an empirical perspective, the presence of unobserved heterogeneity (to the econometrician) creates challenging identification and estimation problems. In this proposal we explore these issues in a context where repeated observations are available for the same individual, and the researcher disposes of panel data. Most research to date adopts either of three approaches. One approach consists in modeling the distribution of unobserved heterogeneity, following a random-effects perspective (Chamberlain, 1984). Another approach looks for clever model-specific ways of differencing out the unobserved heterogeneity (Andersen, 1970, Honore and Kyriazidou, 2000). A more recent line of research relies on approximations that become more accurate when the number of observations per individual T gets large (Arellano and Hahn, 2006). Here we consider situations where T may be small, and the researcher does not restrict the distribution of the unobserved fixed effects. We will propose a new functional differencing approach which differences out the probability distribution of unobserved heterogeneity. This approach will generally be applicable in models with continuous dependent variables, emphasizing a possibility of point-identification of the structural parameters in those models. When outcomes are discrete, we will propose a nonlinear differencing strategy that delivers useful bounds on parameters in the presence of partial identification (Honore and Tamer, 2006).
Summary
Modern economic research emphasizes heterogeneity in various dimensions, such as individual preferences or firms’ technology. From an empirical perspective, the presence of unobserved heterogeneity (to the econometrician) creates challenging identification and estimation problems. In this proposal we explore these issues in a context where repeated observations are available for the same individual, and the researcher disposes of panel data. Most research to date adopts either of three approaches. One approach consists in modeling the distribution of unobserved heterogeneity, following a random-effects perspective (Chamberlain, 1984). Another approach looks for clever model-specific ways of differencing out the unobserved heterogeneity (Andersen, 1970, Honore and Kyriazidou, 2000). A more recent line of research relies on approximations that become more accurate when the number of observations per individual T gets large (Arellano and Hahn, 2006). Here we consider situations where T may be small, and the researcher does not restrict the distribution of the unobserved fixed effects. We will propose a new functional differencing approach which differences out the probability distribution of unobserved heterogeneity. This approach will generally be applicable in models with continuous dependent variables, emphasizing a possibility of point-identification of the structural parameters in those models. When outcomes are discrete, we will propose a nonlinear differencing strategy that delivers useful bounds on parameters in the presence of partial identification (Honore and Tamer, 2006).
Max ERC Funding
1 410 000 €
Duration
Start date: 2010-12-01, End date: 2015-11-30
Project acronym GOV
Project Corporate Governance
Researcher (PI) Ayse Irem Tuna Richardson
Host Institution (HI) LONDON BUSINESS SCHOOL
Call Details Starting Grant (StG), SH1, ERC-2010-StG_20091209
Summary The objective of this proposal is to apply for an ERC Starting Grant to support a careful study of the design and implications of corporate governance. Corporate governance is the set of mechanisms that are designed to address the conflicts between the managers and owners of assets when there is a separation of ownership and control. These mechanisms are intended to monitor the person who has control over the assets so that the use of the assets does not conflict with the incentives of the owners of the assets. Boards of directors, institutional shareholders, and the market for corporate control are some examples of corporate governance mechanisms that are expected to mitigate the potential conflicts between owners and the managers. Based on the prior work of others and my own, I am convinced that an attempt to measure the role of the individual style and preferences in corporate decision making and corporate governance will be fruitful. The series of research I conducted so far developed my perspective as a researcher, making me appreciate better the importance of capturing, to the extent possible, the entirety of the construct of interest. Given my current research interests, I propose to undertake the following three categories of research to understand: (1)how the individual style; and (2) inter-group dynamics aspect of corporate governance play a role in corporate decision making and outcomes, and (3) to evaluate (and be able to make future recommendations) about the regulation of corporate governance. The overarching objective of this proposal is to expand our thinking of corporate governance to include the human element in the design of mechanisms and contracts.
Summary
The objective of this proposal is to apply for an ERC Starting Grant to support a careful study of the design and implications of corporate governance. Corporate governance is the set of mechanisms that are designed to address the conflicts between the managers and owners of assets when there is a separation of ownership and control. These mechanisms are intended to monitor the person who has control over the assets so that the use of the assets does not conflict with the incentives of the owners of the assets. Boards of directors, institutional shareholders, and the market for corporate control are some examples of corporate governance mechanisms that are expected to mitigate the potential conflicts between owners and the managers. Based on the prior work of others and my own, I am convinced that an attempt to measure the role of the individual style and preferences in corporate decision making and corporate governance will be fruitful. The series of research I conducted so far developed my perspective as a researcher, making me appreciate better the importance of capturing, to the extent possible, the entirety of the construct of interest. Given my current research interests, I propose to undertake the following three categories of research to understand: (1)how the individual style; and (2) inter-group dynamics aspect of corporate governance play a role in corporate decision making and outcomes, and (3) to evaluate (and be able to make future recommendations) about the regulation of corporate governance. The overarching objective of this proposal is to expand our thinking of corporate governance to include the human element in the design of mechanisms and contracts.
Max ERC Funding
1 110 980 €
Duration
Start date: 2011-02-01, End date: 2016-01-31
Project acronym IFAP
Project Institutional Frictions in International Finance and Asset Pricing
Researcher (PI) Anna Pavlova
Host Institution (HI) LONDON BUSINESS SCHOOL
Call Details Starting Grant (StG), SH1, ERC-2010-StG_20091209
Summary My project consists of three lines of work.
1. Incentives of Money Managers and Asset Pricing
The leading theories of asset pricing stipulate that prices in financial markets are determined by households who seek to optimise lifetime consumption (or by the so-called representative consumer ). This approach leaves no role for important institutional frictions such as, e.g., financial constraints and contract-induced incentives that played a major role in the 2008 crisis. An analysis of such frictions will add vastly to our understanding of how institutions make decisions and will also allow us to explore the implications of these decisions for asset prices. I propose to depart from the representative agent paradigm and introduce explicitly institutional investors into asset-pricing models. My goal is to understand how institutions affect financial markets and the real economy and to help develop appropriate policy responses.
2. International macro-finance
In the past two decades, economic globalisation has produced an unprecedented rise in cross-border equity holdings. Accounting for capital gains on these equity holdings, currently disregarded both in the official statistics and in traditional international macroeconomics, may potentially overturn implications and policy recommendations of the leading theories. In this project, I seek to enrich the field by incorporating explicitly portfolio choice and capital gains on financial assets. Such a theory marries two fields of research: international economics (Economics) and asset pricing (Finance).
3. Combining the above two areas
The 2008 crisis was sparked by banks and lead to a worldwide recession. Combining the insights from the first two projects, I intend to research how the instability spreads across countries and how incentives of institutions ought to be designed to limit the consequences of their actions for asset values and the real economy.
Summary
My project consists of three lines of work.
1. Incentives of Money Managers and Asset Pricing
The leading theories of asset pricing stipulate that prices in financial markets are determined by households who seek to optimise lifetime consumption (or by the so-called representative consumer ). This approach leaves no role for important institutional frictions such as, e.g., financial constraints and contract-induced incentives that played a major role in the 2008 crisis. An analysis of such frictions will add vastly to our understanding of how institutions make decisions and will also allow us to explore the implications of these decisions for asset prices. I propose to depart from the representative agent paradigm and introduce explicitly institutional investors into asset-pricing models. My goal is to understand how institutions affect financial markets and the real economy and to help develop appropriate policy responses.
2. International macro-finance
In the past two decades, economic globalisation has produced an unprecedented rise in cross-border equity holdings. Accounting for capital gains on these equity holdings, currently disregarded both in the official statistics and in traditional international macroeconomics, may potentially overturn implications and policy recommendations of the leading theories. In this project, I seek to enrich the field by incorporating explicitly portfolio choice and capital gains on financial assets. Such a theory marries two fields of research: international economics (Economics) and asset pricing (Finance).
3. Combining the above two areas
The 2008 crisis was sparked by banks and lead to a worldwide recession. Combining the insights from the first two projects, I intend to research how the instability spreads across countries and how incentives of institutions ought to be designed to limit the consequences of their actions for asset values and the real economy.
Max ERC Funding
925 910 €
Duration
Start date: 2010-11-01, End date: 2016-10-31
Project acronym INFOMACRO
Project Information Heterogeneity and Frictions in the Macroeconomy
Researcher (PI) Christian Hellwig
Host Institution (HI) FONDATION JEAN JACQUES LAFFONT,TOULOUSE SCIENCES ECONOMIQUES
Call Details Starting Grant (StG), SH1, ERC-2010-StG_20091209
Summary This proposal seeks to analyze the effects of incomplete dispersed information for macroeconomic dynamics, broadly defined.
First, the proposal seeks to develop methods for the analysis of dynamic equilibrium models, in which different participants hold different views of the aggregate conditions. Theoretical and quantitative solution methods will be proposed that can be applied to almost arbitrary equilibrium models of financial markets or the macro-economy, integrating information with other sources of micro-level heterogeneity (such as income risk), and other sources of micro-level adjustment frictions.
Second, the proposal will apply these methods to gain a better understanding of the channels through which information heterogeneity affects aggregate dynamics. The project will develop macroeconomic models with heterogeneity in beliefs, and different important macroeconomic adjustment channels (including pricing and investment decisions by firms, consumption-savings decisions of households, port-folio choice, idiosyncratic risk) to assess the effect of information heterogeneity from a theoretical as well as a quantitative angle.
Third, our methods of analysis will be extended to study asset pricing dynamics with heterogeneous expectations. This part also aims to integrate asset pricing dynamics with corporate decision making, in order to gain a better understanding of the intraction between asset valuations (or mis-valuation) and real economic variables.
Fourth, this project will use these methods and models to gain insight into normative questions such as the welfare implications of information disclosures, optimal design of managerial incentive structures, regulation of firm behavior and firm dynamics, or macroeconomic policy.
Summary
This proposal seeks to analyze the effects of incomplete dispersed information for macroeconomic dynamics, broadly defined.
First, the proposal seeks to develop methods for the analysis of dynamic equilibrium models, in which different participants hold different views of the aggregate conditions. Theoretical and quantitative solution methods will be proposed that can be applied to almost arbitrary equilibrium models of financial markets or the macro-economy, integrating information with other sources of micro-level heterogeneity (such as income risk), and other sources of micro-level adjustment frictions.
Second, the proposal will apply these methods to gain a better understanding of the channels through which information heterogeneity affects aggregate dynamics. The project will develop macroeconomic models with heterogeneity in beliefs, and different important macroeconomic adjustment channels (including pricing and investment decisions by firms, consumption-savings decisions of households, port-folio choice, idiosyncratic risk) to assess the effect of information heterogeneity from a theoretical as well as a quantitative angle.
Third, our methods of analysis will be extended to study asset pricing dynamics with heterogeneous expectations. This part also aims to integrate asset pricing dynamics with corporate decision making, in order to gain a better understanding of the intraction between asset valuations (or mis-valuation) and real economic variables.
Fourth, this project will use these methods and models to gain insight into normative questions such as the welfare implications of information disclosures, optimal design of managerial incentive structures, regulation of firm behavior and firm dynamics, or macroeconomic policy.
Max ERC Funding
1 500 000 €
Duration
Start date: 2010-11-01, End date: 2015-10-31
Project acronym INFORMATIONFLOW
Project Information Flow and Its Impact on Financial Markets
Researcher (PI) Ilan Kremer
Host Institution (HI) THE HEBREW UNIVERSITY OF JERUSALEM
Call Details Starting Grant (StG), SH1, ERC-2010-StG_20091209
Summary The importance of information asymmetry in financial markets has long been recognized in financial economics. Most existing models focus on the role of privately informed investors who influence prices through their trades. But in many cases the agents who have the biggest information advantage are insiders or the firms themselves; they are precluded from trading but can affect the information flow to the market. This endogenous information flow and its effect on financial market is the focus of the proposed project.
By the term information flow we refer to a wide range of channels through which firms can communicate. The information can be part of a mandatory disclosure or a voluntary one. It can be verifiable or non-verifiable information. In addition there can be an implicit information transmission. A firm may choose certain actions to convey its private information (i.e. signaling) without any explicit announcements.
The way firms convey this information may provide key insights into the behavior of financial markets and in particular the development of financial crises. The project combines theoretical and empirical work. In the theory part I plan to examine the channels mentioned above and develop testable implications. In the empirical part I plan to test these implications.
Summary
The importance of information asymmetry in financial markets has long been recognized in financial economics. Most existing models focus on the role of privately informed investors who influence prices through their trades. But in many cases the agents who have the biggest information advantage are insiders or the firms themselves; they are precluded from trading but can affect the information flow to the market. This endogenous information flow and its effect on financial market is the focus of the proposed project.
By the term information flow we refer to a wide range of channels through which firms can communicate. The information can be part of a mandatory disclosure or a voluntary one. It can be verifiable or non-verifiable information. In addition there can be an implicit information transmission. A firm may choose certain actions to convey its private information (i.e. signaling) without any explicit announcements.
The way firms convey this information may provide key insights into the behavior of financial markets and in particular the development of financial crises. The project combines theoretical and empirical work. In the theory part I plan to examine the channels mentioned above and develop testable implications. In the empirical part I plan to test these implications.
Max ERC Funding
1 500 000 €
Duration
Start date: 2010-10-01, End date: 2016-09-30
Project acronym INVEXPECTATIONS
Project Investors' expectations: Measuring their nature and effect
Researcher (PI) Georg Heinrich Weizsaecker
Host Institution (HI) HUMBOLDT-UNIVERSITAET ZU BERLIN
Call Details Starting Grant (StG), SH1, ERC-2010-StG_20091209
Summary The funded research investigates the role of expectations in financial decisions by asking two separate empirical questions. First, what systematic patterns appear in the expectations that the investor holds about relevant random variables? Second, can we establish that her expectations play a causal role for choices? The main tool in addressing these questions is the collection of data from laboratory experiments and large-sample household surveys. We also develop novel econometric methods and behavioral models of portfolio choice.
The majority of the planned studies add to the literature on biases in expectations. They conform to the revealed-expectations paradigm of expected utility, but ask whether the underlying expectations are suboptimal in predictable ways: (i) Are rational expectations violated systematically more in markets where agents need to make complicated inferences about fundamental information – e.g. where the inference occurs at the interim stage, before agents can observe realized prices and other agents’ choices (like in Rational Expectations Equilibrium)? (ii) Are agents able to successfully process the covariance of returns in portfolio-choice problems? (iii) Are investment herds excessively large and stable because people do not realize that other agents whom they observe also rely on others? (iv) Why do many people embark in risky gambling strategies under the false perception that they will stop after a few losses? The answers to these questions will contribute to the understanding of investment choices generally, and unnecessary risk exposure in particular.
In further studies, we ask about the causal link between expectations and choices. This will contribute to the evaluation of decision-theoretic models but can also inform economic policy, as the causal link from expectations to choices is an important component in the design of policy campaigns that work via affecting beliefs. We introduce artificially created instrumental variables into choice situations and use their exogenous influence to identify causal effects.
Summary
The funded research investigates the role of expectations in financial decisions by asking two separate empirical questions. First, what systematic patterns appear in the expectations that the investor holds about relevant random variables? Second, can we establish that her expectations play a causal role for choices? The main tool in addressing these questions is the collection of data from laboratory experiments and large-sample household surveys. We also develop novel econometric methods and behavioral models of portfolio choice.
The majority of the planned studies add to the literature on biases in expectations. They conform to the revealed-expectations paradigm of expected utility, but ask whether the underlying expectations are suboptimal in predictable ways: (i) Are rational expectations violated systematically more in markets where agents need to make complicated inferences about fundamental information – e.g. where the inference occurs at the interim stage, before agents can observe realized prices and other agents’ choices (like in Rational Expectations Equilibrium)? (ii) Are agents able to successfully process the covariance of returns in portfolio-choice problems? (iii) Are investment herds excessively large and stable because people do not realize that other agents whom they observe also rely on others? (iv) Why do many people embark in risky gambling strategies under the false perception that they will stop after a few losses? The answers to these questions will contribute to the understanding of investment choices generally, and unnecessary risk exposure in particular.
In further studies, we ask about the causal link between expectations and choices. This will contribute to the evaluation of decision-theoretic models but can also inform economic policy, as the causal link from expectations to choices is an important component in the design of policy campaigns that work via affecting beliefs. We introduce artificially created instrumental variables into choice situations and use their exogenous influence to identify causal effects.
Max ERC Funding
1 222 330 €
Duration
Start date: 2011-03-01, End date: 2016-02-29
Project acronym KF&EM
Project International Capital Flows and Emerging Markets
Researcher (PI) Fernando Ariel Broner
Host Institution (HI) Centre de Recerca en Economia Internacional (CREI)
Call Details Starting Grant (StG), SH1, ERC-2010-StG_20091209
Summary Financial liberalization in emerging markets has not produced the benefits predicted by conventional, neoclassical models. There is consensus that in reality financial frictions must play a larger role than these models anticipated. The objective of this research project is to enhance our understanding of how this happens, emphasizing the interactions between financial integration and the workings of domestic financial markets.
The project is structured around a set of related questions. (i) Can these interactions account for the macroeconomic effects of financial liberalization? (ii) How should emerging markets manage financial integration? Should they rely on financial systems that facilitate segmentation between domestic and international markets, as in the 70s and 80s? (iii) What are the implications for the global imbalances that contributed to the recent crisis? Can emerging markets export their vulnerabilities to advanced countries? (iv) Can these interactions explain the appearance of bubbles? What are their effects on the workings of international and domestic financial markets?
Gross capital flows reflect risk in domestic financial markets and also raise this risk by increasing the incentives to default. This complementarity is highly destabilizing. (v) Does the recent global financial crisis and associated collapse in gross capital flows reflect such forces? Have they been present in previous crises, particularly in emerging markets?
Emerging markets are more financially integrated than during the cold war. But the current situation has an antecedent in the late 19th century. Traditionally, integration is taken as exogenous. I will explore the forces that shape the process of integration. (vi) Is there any relationship between the existence of a hegemonic power, Britain in the late 19th century and the US since the 1980s, and financial integration? (vii) What will be the effect of the ongoing weakening of the hegemonic power of the US?
Summary
Financial liberalization in emerging markets has not produced the benefits predicted by conventional, neoclassical models. There is consensus that in reality financial frictions must play a larger role than these models anticipated. The objective of this research project is to enhance our understanding of how this happens, emphasizing the interactions between financial integration and the workings of domestic financial markets.
The project is structured around a set of related questions. (i) Can these interactions account for the macroeconomic effects of financial liberalization? (ii) How should emerging markets manage financial integration? Should they rely on financial systems that facilitate segmentation between domestic and international markets, as in the 70s and 80s? (iii) What are the implications for the global imbalances that contributed to the recent crisis? Can emerging markets export their vulnerabilities to advanced countries? (iv) Can these interactions explain the appearance of bubbles? What are their effects on the workings of international and domestic financial markets?
Gross capital flows reflect risk in domestic financial markets and also raise this risk by increasing the incentives to default. This complementarity is highly destabilizing. (v) Does the recent global financial crisis and associated collapse in gross capital flows reflect such forces? Have they been present in previous crises, particularly in emerging markets?
Emerging markets are more financially integrated than during the cold war. But the current situation has an antecedent in the late 19th century. Traditionally, integration is taken as exogenous. I will explore the forces that shape the process of integration. (vi) Is there any relationship between the existence of a hegemonic power, Britain in the late 19th century and the US since the 1980s, and financial integration? (vii) What will be the effect of the ongoing weakening of the hegemonic power of the US?
Max ERC Funding
900 000 €
Duration
Start date: 2011-01-01, End date: 2016-09-30
Project acronym LIQRISK
Project Liquidity and Risk in Macroeconomic Models
Researcher (PI) Philippe Jean Louis Bacchetta
Host Institution (HI) UNIVERSITE DE LAUSANNE
Call Details Advanced Grant (AdG), SH1, ERC-2010-AdG_20100407
Summary The proposal is motivated by the need to incorporate financial realities into macroeconomic models. The objective is to introduce leverage and liquidity in standard dynamic general equilibrium models and analyze their macroeconomic implications. The proposal is divided into two sub-projects and analyzes two different aspects of liquidity. The first deals with leverage and market liquidity in developed financial economies. The second examines the demand for liquid assets by emerging countries and its global implications. In the first sub-project, the proposal breaks new ground in the understanding of the dynamics of risk and in explaining some important features of the recent crisis. The project particularly emphasizes the role of self-fulfilling changes in expectations that can lead to sudden large shifts in risk. This can take the form of a financial panic with a big drop in asset prices. Various extensions will investigate the empirical implications as well as the implications for international capital flows, exchange rates, macroeconomic activity and policy recommendations. In the second sub-project, the objective is to formalize and analyze different degrees of liquidity in international capital flows. The project will innovate in finding ways to model liquidity in dynamic open economy models. This will allow a better understanding of the recent pattern in international capital flows, where less developed countries lend to richer economies. It will also shed light on the evolution of global imbalances before and after the crisis.
Summary
The proposal is motivated by the need to incorporate financial realities into macroeconomic models. The objective is to introduce leverage and liquidity in standard dynamic general equilibrium models and analyze their macroeconomic implications. The proposal is divided into two sub-projects and analyzes two different aspects of liquidity. The first deals with leverage and market liquidity in developed financial economies. The second examines the demand for liquid assets by emerging countries and its global implications. In the first sub-project, the proposal breaks new ground in the understanding of the dynamics of risk and in explaining some important features of the recent crisis. The project particularly emphasizes the role of self-fulfilling changes in expectations that can lead to sudden large shifts in risk. This can take the form of a financial panic with a big drop in asset prices. Various extensions will investigate the empirical implications as well as the implications for international capital flows, exchange rates, macroeconomic activity and policy recommendations. In the second sub-project, the objective is to formalize and analyze different degrees of liquidity in international capital flows. The project will innovate in finding ways to model liquidity in dynamic open economy models. This will allow a better understanding of the recent pattern in international capital flows, where less developed countries lend to richer economies. It will also shed light on the evolution of global imbalances before and after the crisis.
Max ERC Funding
2 070 570 €
Duration
Start date: 2011-08-01, End date: 2016-07-31
