Harold L. Cole

Bio: Harold L. Cole is an academic researcher from University of Pennsylvania. The author has contributed to research in topics: Debt & Productivity. The author has an hindex of 36, co-authored 128 publications receiving 6955 citations. Previous affiliations of Harold L. Cole include Federal Reserve Bank of Minneapolis & University of California, Los Angeles.

Social Norms, Savings Behavior, and Growth

Abstract: We argue that many goods and decisions are not allocated or made through markets. We interpret an agent's status as a ranking device that determines how well he or she fares in the nonmarket sector. The existence of a nonmarket sector can endogenously generate a concern for relative position in, for example, the income distribution so that higher income implies higher status. Moreover, it can naturally yield multiple equilibria. It is thus possible to explain differences in growth rates across countries without recourse to differences in underlying preferences, technologies, or endowments. Different social organizations lead to different reduced-form preferences, which lead to different growth rates.

New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis

Abstract: There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak, and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution to the persistence of the Depression of New Deal cartelization policies designed to limit competition and increase labor bargaining power. We develop a model of the bargaining process between labor and firms that occurred with these policies and embed that model within a multisector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the failure of the economy to recover back to trend.

Self-Fulfilling Debt Crises

Abstract: We characterize the values of government debt and the debt's maturity structure under which financial crises brought on by a loss of confidence in the government can arise within a dynamic, stochastic general equilibrium model. We also characterize the optimal policy response of the government to the threat of such a crisis. We show that when the country's fundamentals place it inside the crisis zone, the government may be motivated to reduce its debt and exit the crisis zone because this leads to an economic boom and a reduction in the interest rate on the government's debt. We show that this reduction can be gradual if debt is high or the probability of a crisis is low. We also show that, while lengthening the maturity of the debt can shrink the crisis zone, credibility-inducing policies can have perverse effects. Financial crises brought on by a loss of confidence in the government can arise suddenly and threaten countries with huge losses. We analyse the conditions that make these crises possible and what policy makers should do in the face of this kind of risk. To address these issues, we examine optimal government policy in a dynamic, stochastic general equilibrium model in which self-fulfilling crises can arise. Because of the government's need to roll over its debt, a liquidity crunch induced by the inability to sell new debt can lead to a self-fulfilling default. We show that, if fundamentals like the level of the government's debt, its maturity structure, and the private capital stock, lie within a particular range (the crisis zone), then the probability of default is determined by the beliefs of market participants. We show that a government is motivated to reduce its debt and exit the crisis zone because doing so leads to an economic boom and a reduction in the interest rate on the government's debt. The distinguishing feature of this paper is that it examines optimal policy within an environment in which not only can crises occur in the first period, but crises can occur in subsequent periods with positive probability. This is important since we show that previously proposed policies that seek to avert a crisis by reacting contemporaneously, such as pegging the interest rate on the government debt or lengthening the maturity of the debt being sold once a crisis has started, are ineffectual in our model. Instead, it is only preemptive policies, which seek to remove the conditions that make future crises possible, that can be effective. To examine optimal debt policy, we construct a time-consistent equilibrium of our model with a (relatively) easy-to-characterize Markov structure in which a crisis can occur with a positive probability whenever the level and maturity structure of the government's debt and the capital stock are in the crisis zone. We show that within the crisis zone, the

Economics and Identity

Abstract: This paper considers how identity, a person's sense of self, affects economic outcomes. We incorporate the psychology and sociology of identity into an economic model of behavior. In the utility function we propose, identity is associated with different social categories and how people in these categories should behave. We then construct a simple game-theoretic model showing how identity can affect individual interactions. The paper adapts these models to gender discrimination in the workplace, the economics of poverty and social exclusion, and the household division of labor. In each case, the inclusion of identity substantively changes conclusions of previous economic analysis.

The Cyclical Behavior of Equilibrium Unemployment and Vacancies

Abstract: This paper argues that the textbook search and matching model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the United States, the standard deviation of the vacancy-unemployment ratio is almost 20 times as large as the standard deviation of average labor productivity, while the search model predicts that the two variables should have nearly the same volatility. A shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward-sloping Beveridge curve (unemploymentvacancy locus). A shock to the separation rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the model exhibits virtually no propagation. (JEL E24, E32, J41, J63, J64)

House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle

Abstract: I develop a general equilibrium model with sticky prices, credit constraints, nominal loans and asset prices. Changes in asset prices modify agents’ borrowing capacity through collateral value; changes in nominal prices affect real repayments through debt deflation. Monetary policy shocks move asset and nominal prices in the same direction, and are amplified and propagated over time. The “financial accelerator” is not constant across shocks: nominal debt stabilises supply shocks, making the economy less volatile when the central bank controls the interest rate. I discuss the role of equity, debt indexation and household and firm leverage in the propagation mechanism. Finally, I find that monetary policy should not target asset prices as a means of reducing output and inflation volatility.

Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies

Abstract: Lacking an appropriate theoretical framework, economists and economic historians have paid little attention to the relations between culture and institutional structure. This limits the ability to address a question that seems to be at the heart of developmental failures: Why do societies fail to adopt the institutional structure of more economically successful ones? This paper integrates game-theoretical and sociological concepts to conduct a comparative historical analysis of the relations between culture and institutional structure. It examines cultural factors that have led two premodern societies--one from the Muslim world and the other from the Latin world--to evolve along distinct trajectories of institutional structure. It indicates the theoretical importance of culture in determining institutional structures, in leading to their path dependence, and in forestalling successful intersociety adoption of institutions. Since the distinct institutional structures found in the late medieval period resem...