Zsolt Becsi

Costly intermediation, the big push and the big crash

Abstract Why does financial activity generate large real effects? We argue that this may reflect a multiplicity of equilibria, due to dynamic interactions between workers saving decisions and banks monopolistic competition. We show that the equilibrium-responses of key aggregates to changes in investment uncertainty and intermediation costs depend crucially on intertemporal substitutability and aggregate employment. Small financial disturbances may cause the economy to shift between low and high-employment equilibria, thus providing explanation for the big push and the big crash. The high-employment, high-real-interest-rate equilibrium is consistent with the development experience of the financially repressed East Asian economies prior to July 1997.

Bilateral War in a Multilateral World Carrots and Sticks for Conflict Resolution

This paper constructs a three-country, specific-factor, trade-theoretic model in which two of the countries are in conflict and where war effort is determined endogenously in a Nash equilibrium. The third country does not take part in the war, but trades with the warring countries. In the framework, we examine, inter alia, how war and welfare are affected by globalization and by two instruments available to the third country - one carrot and one stick. Our overall conclusion is that the third parties do have the incentives for, and can play an effective role in, conflict resolution.

Endogenous Market Structures and Financial Development

Existing theories that emphasize the significance of financial intermediation for economic development have not addressed two important empirical facts: (i) the relationship between financial and real activities depends crucially on the stage of development, and (ii) financial and industrial market structures vary widely across otherwise similar countries. To explain these observations, we develop a dynamic general equilibrium model allowing for endogenous market structures in which financial deepening spurs real activity through intermediate product broadening. We show the possibility of multiple steady-state equilibria and characterize how these equilibria respond to various shocks. In particular, we examine the determinants of financial deepening, product broadening, the saving rate, the loan-deposit interest rate spread, and the degree of competitiveness of financial and product markets. We find that the dynamic interactions between financial and real activities depend critically on the synergy of financial and industrial competitiveness.

Financial Matchmakers in Credit Markets with Heterogeneous Borrowers

What happens when liquidity increases in credit markets and more funds are channeled from borrowers to lenders? We examine this question in a general equilibrium model where financial matchmakers help borrowers (firms) and lenders (households) search out and negotiate profitable matches and where the composition of heterogeneous borrowers adjusts to satisfy equilibrium entry conditions. We find that enhanced liquidity causes entry by all borrowers and tends to benefit low-quality borrowers disproportionately. However, liquid credit markets may or may not be associated with higher output and welfare. The result is determined by whether the effect of higher market participation outweighs that of lower average quality. The net effect depends crucially on the source of the liquidity shock (financial matching efficacy, productivity, or entry barriers).

Chapter 1 Conflict in the Presence of Arms Trade: Can Foreign Aid Reduce Conflict?

We construct a specific-factor trade-theoretic model for two small open economies that are in conflict with each other and where war efforts are determined endogenously. War efforts involve the use of soldiers and imported military hardware. The purpose of war is to capture disputed land or some other resource, but with war lives are lost and production is sacrificed. In this framework, we examine the effect of foreign aid on the war efforts in the warring countries. We find, inter alia, that an increase foreign aid to the warring countries may increase war efforts when arms protect lives in a significant way.

Fiscal Competition and Reality: A Time Series Approach

Strategic interjurisdictional behavior and the interaction over time of the mean and dispersion of average tax rates across states are analyzed in a vector autoregression model. Variance decompositions reveal that fiscal competition explains roughly one-third of the time variation of state and local taxes. Impulse response functions identify the type of fiscal competition and the characteristics of leaders and followers. Local tax dynamics agree with Wildasins (1988) results on expenditure competition with significant short- and medium-run effects but insignificant long-run effects. State tax dynamics conform to tax export competition with significant effects occurring over a relatively short time.