The Size Distribution of Firms and Industrial Water Pollution: A Quantitative Analysis of China

We argue that misallocation across firms amplifies industrial water pollution by distorting the firm size distribution in China. Firm-level data indicate that larger firms are more likely to use clean technology but face higher distortions. In a heterogeneous firms model with an endogenous choice of pollution treatment technologies, we show that distortions that increase with firm-level TFP lower the adoption of clean technology, amplify aggregate pollution intensity, and lower aggregate output. Quantitatively, eliminating these correlated distortions would increase output by 30 percent and decrease pollution by 20 percent. Meanwhile, environmental regulations have sizable impact on pollution but limited effects on aggregate output. (JEL O13, O14, P28, P31, Q52, Q53, Q58)

Macro‐financial volatility under dispersed information

We provide a production‐based asset pricing model with dispersed information and small deviations from full rational expectations. In the model, aggregate output and equity prices depend on the higher‐order beliefs about aggregate demand and individual stochastic discount factors. We prove that equity price volatility becomes arbitrarily large as the volatility of idiosyncratic shocks diverges to infinity due to the interaction of signal extraction with idiosyncratic trading decisions, while aggregate output volatility falls. We propose a two‐step spectral factorization method that permits closed‐form solutions in the frequency domain applicable to a wide range of models with more hidden states than signals. Our model can quantitatively match output and equity volatilities observed in U.S. data.

Dynamics of Public Policy on Economic Activity: The Case of Pakistan

The unanticipated domestic and international changes in conjunction with policy discretion become reason for shocks to overall economy that affect overall economic growth. Based on methodology by Blanchard and Perotti (2002) the study used timing of fiscal decisions in a Structural Vector Auto-Regression (SVAR) to map dynamics of shocks due to tax revenue, government expenditures and aggregate output in Pakistan. When tax decisions precede expenditure decision, the tax shocks have a volatile short run impact causing expenditures to sharply adjust. Expenditure shocks persistently increase tax revenues and government expenditures. But in the second specification, expenditure shocks reduce the tax revenue and aggregate output that reverts to equilibrium only in the long run. The response of output shocks is almost identical for both the scenarios. Therefore, growth in output increases taxes collection in Pakistan enabling better management of burden of debt and deficit.

SHOCKS AND FRICTIONS IN THAI ECONOMY: THROUGH THE LENS OF BUSINESS CYCLE ACCOUNTING

This paper applies business cycle accounting methodology to analyze the sources of aggregate fluctuations in Thai economy, especially during the recent severe recessions in 1997–1998 and 2008–2009. This exploration helps researchers uncover possible shocks and frictions that drive business cycle in a small and open economy within a minimal model set-up. Under this methodology, a fluctuation in aggregate output can be accounted for by exogenous time-varying wedges, namely efficiency wedge, investment wedge, labor wedge, government wedge, etc. This study found that the efficiency wedge is essential in accounting for aggregate output, consumption and investment fluctuation, while the bond wedge, which only present in an open economy setting, is a prime factor in accounting for movement in current accounts. I conducted counterfactual experiments to see what accounts for the output drop during recent recessions. I find that the efficiency wedge played a key role in recent recessions in Thailand, while the investment wedge was accounted for slow economic recovery after the recessions.