In this study, we document two features that have made Saudi Arabia different from other oil producers. First, it has typically maintained ample spare capacity. Second, its production has been quite volatile even though it has witnessed few domestic shocks. These features can be rationalised in a general equilibrium model in which the oil market is modelled as a dominant producer with a competitive fringe. We show that the net welfare effect of oil tariffs on consumers is null. The reason is that Saudi Arabia's monopolistic rents fall entirely on fringe producers.

This paper investigates how, in a heterogeneous agents model with financial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate timevarying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be efficiently computed, despite its substantial nonlinearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with diffusions. We document, first, the strong nonlinearities created by financial frictions. Second, we report the existence of multiple stochastic steady states with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse response functions of the model are highly state-dependent. In particular, we find that the recovery after a negative aggregate shock is more sluggish when the economy is more leveraged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.

This paper investigates how, in a heterogeneous agents model with financial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate timevarying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be efficiently computed, despite its substantial nonlinearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with diffusions. We document, first, the strong nonlinearities created by financial frictions. Second, we report the existence of multiple stochastic steady states with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse response functions of the model are highly state-dependent. In particular, we find that the recovery after a negative aggregate shock is more sluggish when the economy is more leveraged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.

We propose a general equilibrium framework with financial intermediaries subject to endogenous leverage constraints, and assess its ability to explain the observed fluctuations in intermediary leverage and real economic activity. In the model, intermediaries (“banks”) borrow in the form of short-term risky debt. The presence of risk-shifting moral hazard gives rise to a leverage constraint, and creates a link between the volatility in bank asset returns and leverage. Unlike TFP or capital quality shocks, volatility shocks produce empirically plausible fluctuations in bank leverage. The model replicates well the fall in leverage, assets, and GDP during the 2007–2009 financial crisis. (JEL D82, E44, G01, G21, G32)

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We analyze optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal bonds and costly inflation. Our model features two transmission channels of monetary policy: a Fisher channel, arising from the impact of inflation on the initial price of long-term bonds, and a liquidity channel. The Fisher channel gives the central bank a reason to inflate for redistributive purposes, because debtors have a higher marginal utility than creditors. This inflationary motive fades over time as bonds mature and the central bank pursues a deflationary path to raise bond prices and thus relax borrowing limits. The result is optimal inflation front-loading. Numerically, we find that optimal policy achieves first-order consumption and welfare redistribution vis-à-vis a zero inflation policy.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 2 Terms of use: Documents in EconStor may Non-technical summaryDuring the last decades, several emerging market economies have experienced a banking crisis together with a sudden stop. In most of these cases national governments and national central banks adopted several types of interventions to fight the crisis. In this paper we analyze an early example of twin-crisis, which occurred in the 1860s in Spain. The episode is particularly interesting due to the decentralized nature of the Spanish banking system of that time.We document how, at the beginning of the 1860s, Spain experienced a large and relatively quick inflow of foreign capital followed by a sudden stop in the middle of the decade. In the following years the Spanish economy was hit by a severe banking and economic crisis with GDP falling by more than 10% in 1868 and half of the Spanish banks going bankrupt in the years between 1865 and 1870.We argue that the main reason of the stop in capital inflows is the international financial crisis of 1864-66. This was a major crisis that affected most European economies and provoked the fall of one of the largest London banks, Overend, Gurney and Co., which was followed by the 'Black Friday' of May 1866, a massive financial panic in the City of London that quickly spread to other countries in Europe. We collect new empirical evidence supporting our claim: capital inflows were abruptly interrupted from 1864 to 1867, in line with a current account correction during the same period and two recessions, a softer one in 1865 and a more severe one in 1868. We document how the two main financial shocks, those of 1864 and 1866, were coincident with large financial panicsacross Europe.We also analyze the microeconomic behavior of individual banks of issue in facing the crisis. To this end we construct a database with information about the balance sheets of the banks of issue. We regard this as a natural experiment in which all banks operating under a common regulatory and economic environment face a common aggregate financial shock represented by the twin-crisis. We find that three out of twelve banks of issue existing before the crisis were liquidated due to it. In these cases the direct exposure to unprofitable railways projects or the involvement with investment banks that were bankrupted during the crisis are the main causes of the liquidation. In contrast, a number of banks of issue experienced an improvement in their balance sheet position during the crisis...