Showing papers by "Peter Howitt published in 2016"

Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis

Abstract: This paper is an exploratory analysis of the role that banks play in supporting what Jevons called the "mechanism of exchange.'' It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to reach prices at which peoples' trading plans are mutually compatible. Banks affect macroeconomic performance in this economy because their lending activities facilitate the entry and influence the exit decisions of trading firms. Both entry and exit have ambiguous effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis draws an important distinction between normal and worst-case scenarios, with the economy experiencing systemic breakdowns in the latter. We show that banks can provide a "financial stabilizer'' that more than counteracts the familiar financial accelerator, and that the stabilizing role of the banking system is particularly apparent in worst-case scenarios. In line with this result, we also find that under less restrictive lending standards banks are able to more effectively improve macroeconomic performance in the worst-case scenarios.

When Does Domestic Savings Matter for Economic Growth

Abstract: Can a country grow faster by saving more? The paper addresses this question both theoretically and empirically. In the theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic savings matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic savings does not matter for growth. A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries.

How inflation affects macroeconomic performance: an agent-based computational investigation

Abstract: We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.

When Does Domestic Savings Matter for Economic Growth

Abstract: Can a country grow faster by saving more? The paper addresses this question both theoretically and empirically. In the theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic savings matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic savings does not matter for growth. A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries.

Learning, Expectations, and the Financial Instability Hypothesis

Abstract: Expectations matter. Many economic and financial decisions depend on the perception of future incomes and prices. The evolution of expectations, and how correct they are over time, determines the stability of the system.

Intertemporal Utility Maximization and the Timing of Transactions

Abstract: This paper addresses the problem of explaining a household's choice of consumption and purchasing plans on the basis of a model of intertemporal utility maximization. Until recently the intertemporal choice models that have been developed by economists have simply not distinguished between purchasing, a market activity, and consumption, a nonmarket activity.' The importance of this distinction, and of incorporating it into a model of intertemporal choice, can be seen from the point of view of three separate areas of current research. First, recent work on the microfoundations of monetary theory2 has shown the importance of transaction costs in explaining the role of money in economic activity. The absence of these costs from standard general equilibrium theory makes it difficult to account for the special characteristics, and even the existence, of money within that framework. This research has underlined the need to develop a theory of transactions on the same level of sophistication as our theories of production and consumption. The present problem may be viewed as one part of the larger problem of developing such a theory of transactions. Second, in the area of short-run aggregate analysis, purchasing decisions are of more interest than consumption decisions because they are more closely related to the level of aggregate demand. Recent empirical investigations by Michael Darby have supported Milton Friedman's conjecture that the aggregate rate of purchase of consumer durables can undergo large fluctuations even when the aggregate rate of consumption is relatively constant. It would clearly further our understanding of short-run fluctuations in aggregate demand if both of these rates could be explained on the basis of intertemporal choice. Third, the area most closely related to the present problem is the inventory theory of the demand for money. This theory has been extended in recent years by several authors into a generalized theory of the size and timing of all sorts of transactions, including wage payments, commodity purchases and sales, and various