Andrew Atkeson

Innovation, Firm Dynamics, and international Trade

We present a general equilibrium model of the response of firms’ decisions to operate, innovate, and engage in international trade to a change in the marginal cost of international trade. We find that, although a change in trade costs can have a substantial impact on heterogeneous firms’ exit, export, and process innovation decisions, the impact of changes in these decisions on welfare is largely offset by the response of product innovation. Our results suggest that microeconomic evidence on firms’ responses to changes in international trade costs may not be informative about the implications of changes in these trade costs for aggregate welfare.

International lending with moral hazard and risk of repudiation

The author examines the optimal pattern of lending in an environment in which there are two impediments to contracting. The first impediment is that lenders cannot observe whether borrowers invest or consume borrowed funds. This impediment leads to a moral hazard problem in investment. The second impediment is that the borrower may choose to repudiate his debts. The optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of output occur. This seemingly perverse pattern of capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment. Copyright 1991 by The Econometric Society.

Modeling and measuring organization capital

Manufacturing plants have a clear life cycle: they are born small, grow substantially with age, and eventually die. Economists have long thought that this life cycle is driven by organization capital, the accumulation of plant‐specific knowledge. The location of plants in the life cycle determines the size of the payments, or organization rents, plant owners receive from organization capital. These payments are compensation for the interest cost to plant owners of waiting for their plants to grow. We use a quantitative growth model of the life cycle of plants, along with U.S. data, to infer the overall size of these payments.

Money, interest rates, and exchange rates with endogenously segmented markets

We analyze the effects of money injections on interest rates and exchange rates when agents must pay a Baumol‐Tobin‐style fixed cost to exchange bonds and money. Asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money infrequently. When the government injects money through an open market operation, only those agents that are currently trading absorb these injections. Through their impact on these agents’ consumption, these money injections affect real interest rates and real exchange rates. The model generates the observed negative relation between expected inflation and real interest rates as well as persistent liquidity effects in interest rates and volatile and persistent exchange rates.

Reconsidering the Costs of Business Cycles with Incomplete Markets

We measure the potential welfare gains from countercyclical policy in an economy with incomplete markets. In the course of conducting this measurement, we focus on two questions as central to the determination of those potential gains: (1) What is the likely effect of countercyclical policy on the nature of the income risk faced by individuals in the economy, (2) What are the likely general equilibrium effects brought about as asset prices change due to the implementation of countercyclical policies? In taking up the first question, we see it as critical to distinguish whether the main effect of countercyclical policy is to reduce directly the income risk faced by each individual or is simply to reduce the correlation across individuals in the income risk that they face. We present a model of the wage and employment risk faced by individuals over the cycle in which the levels of those risks are chosen endogenously. On the basis of that model, we argue that the main effect of countercyclical policy aimed at reducing aggregate fluctuations may be simply to remove the correlation across individuals in the unemployment risk that they face. We then use asset price data to argue that in an incomplete markets framework, the potential welfare gains from countercyclical policy are close to zero.

Deflation and depression: is there an empirical link?

Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.

Social Insurance and Transition

The authors study the general equilibrium effects of social insurance on transition in a model in which the process of moving workers from matches in the state sector to new matches in the private sector takes time and involves uncertainty. As might be expected, adding social insurance to an economy without any improves welfare. Contrary to standard intuition, however, adding social insurance may slow transition. The authors show that this result depends crucially on general equilibrium interactions of interest rates and savings under alternative market structures. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

On the Need for a New Approach to Analyzing Monetary Policy

We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate in this data. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central banks policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk which threaten to push inflation off target. This model, while an improvement on standard models, is considered just a starting point for their revision. It leads to critical questions that researchers need to answer as they continue to revise their approach to monetary policy analysis.

Money and Exchange Rates in the Grossman-Weiss-Rotemberg Model

We examine the impact of monetary injections in the Grossman-Weiss-Rotemberg Model and show that monetary shocks can lead to nominal exchange rates that are more volatile than inflation, money growth or interest rate differentials. Moreover, movements in real exchange rates following monetary injections can be persistent and nearly as large as movements in nominal exchange rates nominal exchange rates.

The balance of payments and borrowing constraints: An alternative view of the Mexican crisis

In this paper we develop a model in which a country faces a balance of payments crisis if constraints on its international borrowing bind. We use the model to describe the dynamics of the trade balance, capital account, and balance of payments of a country that borrows to finance consumption following sweeping macroeconomic and structural reforms and then hits constraints on its international borrowing. We compare the predictions of this theoretical example with events in Mexico from 1987 through 1995.