George Vachadze

Homoclinic and Heteroclinic Bifurcations in an Overlapping Generations Model with Credit Market Imperfection

We investigate Matsuyamas (Econometrica, 72, pp. 853-84, 2004) model modi- fied only to include endogenous and forward looking labor supply decision. Young agents supply one unit of labor endowment elastically to a competitive labor market. While, old agents of ex-ante identical individuals are divided in equi- librium into depositors and entrepreneurs. Depositors lend funds in the form of interest bearing loans, while entrepreneurs borrow funds in the competitive credit market. We emphasize the interaction between credit and labor markets and show the possibility of occurrence of multiple steady states, local and global indeterminacy, and endogenous fluctuations. When young agents become optimistic about the future deposit rate then they decide to work harder and invest more. Countercyclical borrowing constraint will help agents to fulfill their initial optimistic expectations, because the next period credit volume and deposit rate can increase simultaneously. By conducting global bifurcation analysis, we show that credit cycles can occur through a self- fulfilling expectation mechanism. History-versus-expectations considerations can exist and escape from underdevelopment as well as fall into poverty can to be a self-fulfilling prophecy.

Credit market imperfection, financial market globalization, and catastrophic transition

We analyze a two-country overlapping generations model with integrated financial markets. We assume heterogeneous countries with respect to the population size, to the technology and to the level of credit market imperfection. We show that a subcritical Neimark-Sacker bifurcation may occur and that, before its destabilization, a stable steady state coexists with two invariant closed curves - one attracting and one repelling. In this way we reinforce existing results on the implications of the credit market imperfection that not only causes amplification and persistence of macroeconomic shocks, but also leads to significant changes in the long run behavior of the economy (i.e., catastrophic transition).

Capital accumulation with and without land market liberalization: beyond the “Win‐Win” situation

This paper examines the effect of land market liberalization on the dynamics of capital accumulation. It is shown that the land market liberalization, which is accompanied with the transfer of agricultural technology, may not always offer a “win‐win” outcome for developed and developing countries. Improved agricultural productivity generates a growth enhancing externality. However, land market liberalization affects the balance between the equalizing force of the diminishing returns technology and the un‐equalizing force of the low income elasticity of the agricultural commodity demand. As a result, land market liberalization accompanied with the transfer of agricultural productivity, may not always guarantee a “win‐win” outcome for developed and developing countries. If improvement of agricultural productivity is insignificant then land market liberalization can cause “win‐lose” situation for developed and developing countries. This result suggests that one should be very careful in a policy proposal designed to foster the process of development through foreign land ownership. It is important to recognize that apart from benefits, foreign land ownership also creates a disadvantage for capital accumulation and causes the magnification of the world income inequality.JEL classificationF43, O11, R14

Endogenous labor supply, borrowing constraint, and credit cycles

We investigate Matsuyamas (Econometrica, 72, pp. 853-84, 2004) model modi- fied only to include endogenous and forward looking labor supply decision. Young agents supply one unit of labor endowment elastically to a competitive labor market. While, old agents of ex-ante identical individuals are divided in equi- librium into depositors and entrepreneurs. Depositors lend funds in the form of interest bearing loans, while entrepreneurs borrow funds in the competitive credit market. We emphasize the interaction between credit and labor markets and show the possibility of occurrence of multiple steady states, local and global indeterminacy, and endogenous fluctuations. When young agents become optimistic about the future deposit rate then they decide to work harder and invest more. Countercyclical borrowing constraint will help agents to fulfill their initial optimistic expectations, because the next period credit volume and deposit rate can increase simultaneously. By conducting global bifurcation analysis, we show that credit cycles can occur through a self- fulfilling expectation mechanism. History-versus-expectations considerations can exist and escape from underdevelopment as well as fall into poverty can to be a self-fulfilling prophecy.

Recovery of Hidden Information from Stock Price Data: A Semiparametric Approach

This paper proposes a new methodology for measuring announcement effect on stock returns. This methodology requires no prior specification of the event day, event, and estimation windows, and therefore is a generalization of the traditional event study methodology. The dummy variable, which indicates whether the event occurred or not, is treated as missing. The unconditional probability of abnormal return is estimated by the EM algorithm. The probability that announcement is effective and the average announcement effect are estimated by the Gibbs sampler. How the method works is demonstrated on simulated data and IBM stock price returns.

Volatile capital flows and financial integration: The role of moral hazard

We study a model in which income and capital flows between countries are jointly determined in a world economy with integrated financial markets. In a setting that combines risky entrepreneurial activity with moral hazard, we find that a shift from autarky to financial integration leads to boom-bust cycles in capital flows, output and consumption. Moral hazard causes cycles because financial intermediaries incentivize effort by insisting entrepreneurs take an equity share in their own projects. The size of this stake rises with wealth, discouraging entrepreneurship and inhibiting capital formation. The reverse is true when wealth falls, generating cycles.

ENDOGENOUS INEQUALITY OF NATIONS THROUGH FINANCIAL ASSET MARKET INTEGRATION

The paper analyzes an endogenous mechanism leading perfectly symmetric economies to diverge in the long run after unifying their financial asset markets. The standard growth model with overlapping generations of consumers (OLG) is extended to include uncertainty and a financial asset. In the absence of an international asset market, the two autarkic economies converge to the same globally attracting steady state under rational expectations dynamics. When the two asset markets are unified internationally, additional asymmetric steady states appear, implying that the steady state with equal levels of capital becomes unstable, causing symmetry breaking. The paper derives general sufficient conditions for a saddle node bifurcation of the symmetric steady state. A numerical example shows that these effects occur, in particular when the production function and the function of absolute risk aversion are isoelastic.