Ricardo J. Caballero

Bio: Ricardo J. Caballero is an academic researcher from Massachusetts Institute of Technology. The author has contributed to research in topics: Asset (economics) & Emerging markets. The author has an hindex of 84, co-authored 300 publications receiving 25557 citations. Previous affiliations of Ricardo J. Caballero include University of Texas at Austin & Columbia University.

Zombie Lending and Depressed Restructuring in Japan

Abstract: In this paper, we propose a bank-based explanation for the decade-long Japanese slowdown following the asset price collapse in the early 1990s. We start with the well-known observation that most large Japanese banks were only able to comply with capital standards because regulators were lax in their inspections. To facilitate this forbearance the banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (that we call zombies). Thus, the normal competitive outcome whereby the zombies would shed workers and lose market share was thwarted. Our model highlights the restructuring implications of the zombie problem. The counterpart of the congestion created by the zombies is a reduction of the profits for healthy firms, which discourages their entry and investment. In this context, even solvent banks do not find good lending opportunities. We confirm our story's key predictions that zombie-dominated industries exhibit more depressed job creation and destruction, and lower productivity. We present firm-level regressions showing that the increase in zombies depressed the investment and employment growth of non-zombies and widened the productivity gap between zombies and non-zombies.

The Cleansing Effect of Recessions

Abstract: The authors investigate industry response to cyclical variations in demand. Production units that embody the newest process and product innovations are continuously being created and outdated units are being destroyed. Although outdated units are the most likely to turn unprofitable and be scrapped in a recession, they can be 'insulated' from the fall in demand by a reduction in creation. The structure of adjustment costs plays a determinant role in the responsiveness of those two margins. The calibrated model matches the relative volatilities of the observed manufacturing job creation and destruction series, and their asymmetries over the cycle. Copyright 1994 by American Economic Association.

Zombie Lending and Depressed Restructuring in Japan

Abstract: This paper explores the role that misdirected bank lending played in prolonging the Japanese macroeconomic stagnation that began in the early 1990s. The investigation focuses on the wide spread practice of Japanese banks of continuing to lend to otherwise insolvent firms. We docu ment the prevalence of this forbearance lending and show its distorting effects on healthy firms that were competing with the impaired firms. The paper by Hoshi (2000) was the first to call attention to this phenomenon, and its ramifi

An Equilibrium Model of "Global Imbalances" and Low Interest Rates

Abstract: The sustained rise in US current account deficits, the stubborn decline in long- run real rates, and the rise in US assets in global portfolios appear as anoma - lies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The frame - work is flexible enough to shed light on a range of scenarios in a global equilib - rium environment. (JEL: E44, F21, F31, F32)

On the Sign of the Investment-Uncertainty Relationship

Abstract: Understanding the effects of uncertainty over any decision variable has fascinated economists for a long time. Risk aversion and incomplete markets are likely to make the investment-uncertainty relationship negative (e.g., Roger Craine, 1989; Joseph Zeira, 1989). What happens in the absence of risk aversion and incomplete markets is, however, ambiguous. Richard Hartman (1972) and Andrew B. Abel (1983, 1984, 1985) found that in the presence of (symmetric) convex costs of adjustment, mean-preserving increases in price uncertainty raise investment of a competitive firm as long as the profit function is convex in prices. On the other hand, the recent literature on irreversible investment (e.g., Robert S. Pindyck, 1988; Giuseppe Bertola, 1988) has shown that increases in uncertainty lower investment. All these results have been derived under either risk neutrality or complete markets.' Intuition suggests that the explanation for such a difference lies with the asymmetric nature of adjustment costs in the irreversible-investment case, as compared with the symmetry of the adjustment-cost mechanisms proposed by Abel and Hartman. Although this intuition is confirmed in this paper, asymmetric adjustment costs are shown not to be sufficient to explain why the results differ. In fact, a more hidden but at least as important difference between these two literatures is that the former assumes perfect competition and constant returns to scale, whereas the latter assumes either imperfect competition or decreasing returns to scale (or both).2 The purpose of this paper is to highlight the role of the decreasing marginal return to capital assumption (due to either imperfect competition or decreasing returns to scale [or both]) in determining the effects of adjustment-cost asymmetries on the sign of the response of investment to changes in uncertainty (under risk neutrality). For this, the paper develops a simple model with a cost-of-adjustment mechanism general enough to consider both symmetric-convexity and irreversibility as special cases. One of the most important findings is the lack of robustness of the negative relationship between investment and uncertainty under asymmetric adjustment costs3 to changes in the degree of competition. In fact, when firms are nearly competitive, the conclusion of Hartman and of Abel holds no matter how asymmetric adjustment costs are. Studying adjustment-cost mechanisms has a central role in understanding the dynamics of investment and its business-cycle implications, but conclusive results about the sign of the instantaneous relationship between uncertainty and investment should not be *Department of Economics, Columbia University, New York, NY 10027. I am grateful to Giuseppe Bertola, Prajit Dutta, Glen Hubbard, Anil Kashyap, Richard Lyons, and the referees for their useful comments. 1The financial literature on investment has considered risk aversion through a premium in the discount rate determined by the CAPM, (capital asset pricing model), intertemporal CAPM, or consumption CAPM. However, often this discount rate is left unchanged when studying the response of investment to uncertainty changes (e.g., Pindyck, 1988 pp. 974-5), thereby omitting the effect of changes in uncertainty on investment due to risk aversion (and incomplete markets). 2In the typical version of the irreversible-investment problem, there is no cost of upward adjustments; thus, imperfect competition and (or) decreasing returns to scale are required to bound the size of the firm. 3In this paper, asymmetric adjustment cost refers to the case in which it is more expensive to adjust downward than upward. Certainly, the opposite case is a trivial extension of the case studied in this paper.

This Time Is Different: Eight Centuries of Financial Folly

Abstract: Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned. Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur. An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.

Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data

Abstract: Many panel data sets encountered in macroeconomics, international economics, regional science, and finance are characterized by cross-sectional or “spatial” dependence. Standard techniques that fail to account for this dependence will result in inconsistently estimated standard errors. In this paper we present conditions under which a simple extension of common nonparametric covariance matrix estimation techniques yields standard error estimates that are robust to very general forms of spatial and temporal dependence as the time dimension becomes large. We illustrate the relevance of this approach using Monte Carlo simulations and a number of empirical examples.

Job Creation and Job Destruction in the Theory of Unemployment

Abstract: In this paper we model a job-specific shock process in the matching model of unemployment with non-cooperative wage behaviour. We obtain endogenous job creation and job destruction processes and study their properties. We show that an aggregate shock induces negative correlation between job creation and job destruction whereas a dispersion shock induces positive correlation. The job destruction process is shown to have more volatile dynamics than the job creation process. In simulations we show that an aggregate shock process proxies reasonably well the cyclical behaviour of job creation and job destruction in the United States.

Equilibrium Unemployment Theory

Abstract: Part 1 Unemployment in the model of balanced growth: the labour market long-run equilibrium and balanced growth adjustment dynamics. Part 2 further ananlysis of the labour market: search intensity and job advertising.

The Impact of Uncertainty Shocks

Abstract: Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock and the 9/11 terrorist attack This paper offers a structural framework to analyze the impact of these uncertainty shocks I build a model with a time varying second moment, which is numerically solved and estimated using firm level data The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring Productivity growth also falls because this pause in activity freezes reallocation across units In the medium term the increased volatility from the shock induces an overshoot in output, employment and productivity Thus, second moment shocks generate short sharp recessions and recoveries This simulated impact of an uncertainty shock is compared to VAR estimations on actual data, showing a good match in both magnitude and timing The paper also jointly estimates labor and capital convex and non-convex adjustment costs Ignoring capital adjustment costs is shown to lead to substantial bias while ignoring labor adjustment costs does not