Erasmus K. Kersting

Economies of Scale in Banking, Confidence Shocks, and Business Cycles

This paper quantitatively investigates equilibrium indeterminacy due to economies of scale (ES) in financial intermediation. Financial intermediation provides deposits (inside money) which can substitute with currency to purchase consumption, and depositing decisions are susceptible to non-fundamental confidence (sunspot) shocks. With the intermediation sector calibrated to match US data: (i) indeterminacy arises for small degrees of ES; (ii) sunspot shocks qualitatively resemble monetary shocks; and (iii) monetary policies can stabilize the real impact of sunspot shocks, but only under complete information. The analysis also assesses the removal of these shocks on the volatility decline observed during the US Great Moderation.

FISCAL STABILIZATION WITH PARTIAL EXCHANGE RATE PASS-THROUGH

This paper examines the role of fiscal stabilization policy in a two-country framework that allows for a general degree of exchange rate pass-through. I derive analytical solutions for optimal monetary and fiscal policy which are shown to depend on the degree of pass-through. In the case of partial pass-through, an optimizing policy maker uses countercyclical fiscal stabilization in addition to monetary stabilization. However, in the extreme cases of complete or zero pass-through, the fiscal stabilization instrument is not employed. There is also no additional gain from the fiscal instrument in the case of coordination between the two countries. These results are due to the specific way the optimal fiscal policy rule affects marginal costs: Rather than being a substitute for monetary policy, fiscal policy complements it by increasing the correlation of the marginal cost terms within and across countries. This in turn makes monetary policy more effective at stabilizing them.

International Organization of Production with Heterogeneous Firms

This paper presents a North-South model with differentiated goods being produced in the North. Each differentiated final good requires both management and manufacturing services as inputs, and firms are heterogeneous with regard to their productivity levels in providing these inputs. Moving manufacturing to the South lowers part of a firms variable costs. Two scenarios, which are interpreted to correspond to vertical FDI and offshoring, are investigated. In both cases there is a minimum level of management productivity required for firms to benefit from relocation of manufacturing to the South. In the case of offshoring, productivity and profit gains are relatively larger for firms with low initial manufacturing productivity. In addition, firms with very high initial productivity in both aspects choose not to offshore due to the presence of fixed costs. The model is subsequently used to examine the implications of changes in economic integration on the type of firms that exit an industry, change production location or keep manufacturing domestically.