Research
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Competing for Customers: A
Search Model of the Market for Unsecured Credit (with Lukasz
A. Drozd) JOB MARKET PAPER ABSTRACT:
This paper proposes a theory
of the unsecured credit market with explicit frictions of soliciting and
screening credit account customers. Banks in the model pay a fixed cost to
target their loan offers to a customer with afore-chosen characteristics. A
loan contract specifies a revolving line of credit and a constant interest rate
to which the bank is committed. Access to unsecured credit is endogenous in the
sense that in each instance of time households receive an endogenous number of
offers from which they select the best one. The calibrated model reproduces the
main features of the unsecured credit market in the US: high indebtedness, high
bankruptcy rate and high chargeoff rates. We use
the model to perform a disciplined exercise of reducing the cost of
soliciting and screening credit customers to account for the rise of
bankruptcy related statistics and growing indebtedness of US households. The
change in the cost is carefully chosen to account for the observed change in
credit card solicitations that occurred during this time period. JEL classification: D14,
E21, E44, G18, K35 Understanding
International Prices: Customers as Capital (with Lukasz
A. Drozd) ABSTRACT: This paper enriches the international business cycle theory with
marketing and matching frictions. The modification brings the theory closer
to the data in several important dimensions. First, it implies that producers
price to market in which they sell. Second, it implies that market shares and
import shares adjust to shocks only sluggishly, and therefore, long-run and
short-run price elasticities of trade differ. Third, it maintains a good fit
for quantities, and accounts for the excess international correlation of
output over consumption. The key theoretical innovation is that producers
enter into long-lasting matches with their customers, and facing bilateral
monopoly problem, bargain with them over the prices. Because matching and
expansion to a larger market share takes time, in the short-run
pricing-to-market occurs and the law of one price is violated. In the
parameterized economy the persistence of this effect exceeds the persistence
of the underlying shocks, and the resulting dynamics is indistinguishable
from the static models of pricing-to-market in which shocks have a permanent
effect on prices. Presented at the JEL classification: F41,
E32, F31 Long–Run Price Elasticity of Trade
and the Trade–Comovement Puzzle (with Lukasz
A. Drozd) ABSTRACT:
Recent studies have found significant support for the positive link
between bilateral trade intensity and business cycle comovement of output and
TFP in a cross-section of industrialized country pairs. Since this feature of
the data is not reproduced by the workhorse model of international business
cycle, it is referred to as the trade-comovement
puzzle. In this paper, we show that the puzzle is very
much related to the failure of the standard theory to account for the high
long-run price elasticity of trade flows. We do so by enriching the standard
theory with frictions of building market shares and establishing trade
relations which generate low short-run price elasticity of trade coexisting
with the high long-run price elasticity. We show that when the low short-run
elasticity is generated by explicitly modeled frictions of building market
shares, the theory can account for 50% and 78% of the trade-comovement
relation in the data for output and TFP, respectively. JEL classification: F41,
E32, F31 Trade Intensity and the Real Exchange
Rate Volatility (with Lukasz A. Drozd) (UNDER REVISION) ABSTRACT: Countries
which trade intensively with each other tend to have less volatile bilateral
real exchange rates. In addition, the decomposition of the real exchange rate
volatility shows that in such cases a larger portion of its volatility comes
from variations in the relative price of tradable to non-tradable goods. This
paper proposes a theory which accounts for this observation. The key
innovation is that the producers face a friction to expand to a larger
market. This feature is incorporated into a framework in which domestic and foreign
tradable goods are intrinsically close substitutes. The model implies smaller
deviations from the law of one price for tradable goods when the domestic
country producers hold a larger market share in the foreign partner country.
As a result, consistent with the data, more intensive trade relations between
countries are associated with a lower volatility of the real exchange rate
for tradable goods, lower overall real exchange rate volatility, and a higher
fraction of its volatility accounted for by the volatility of the relative
price of non-tradable goods to tradable goods. JEL classification: F41 (last revision January 2006) |
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