Wealth Inequality, Network Topology and Financial Instability

This paper asks if two, otherwise identical, economies were distinguished only by their distributions of wealth, are they equally stable in response to a random shock? A theoretical financial network model is proposed to understand the relationship between wealth inequality and financial crises. In a financial network, financial assets link individual asset and liability holders to form a web of economic connections. The total connectivity of an individual is described by their degree, and the overall distribution of connections in the network is imposed through a degree distribution--equivalent to the wealth distribution as incoming connections represent assets and outgoing connections liabilities. A network's topology varies with the level of wealth inequality and total wealth and together, simulations show, they determine network contagion in the event of a random negative income shock to some individual. Random network simulations, whereby each financial connection is randomly placed, reveal that increasing wealth inequality makes a wealthy network less stable--as measured by the share of individuals failing financially or the decline in financial asset values. These results suggest a unique architectural role for accumulated assets and their distribution in macro-financial stability.

Negative Economic Shocks and the Compliance to Social Norms

This paper is about why suffering a Negative Economic Shock, i.e. a large loss, may trigger a change in behavior. We conjecture that people trade off a concern for money with a conditional preference to follow social norms, and that suffering a shock makes the first motivation more salient, leading to more norm violation. We study this question experimentally: After administering losses on the earnings from a Real Effort Task, we elicit decisions in set of pro-social and anti-social settings. To derive our predictions, we elicit social norms separately from behavior. We find that a shock increases deviations from norms in antisocial settings — more subjects cheat, steal, and avoid retaliation, with changes that are economically large. This is in line with our prediction. The effect on trust and cooperation is instead more ambiguous. Finally, we conducted an additional experiment to study the difference between an intentional shock and a random shock in a trust game. We found that the two induce partially different effects and that victims of intentional losses are more sensible to the in-group belief. This may explain why part of the literature studying shocks in natural settings found an increase in pro-social behavior, contrary to our prediction.

Optimal Age-Based Preventive Maintenance Policy for a System Subject to Cumulative Damage Degradation and Random Shocks

This research investigates the problem of cumulative degradation and random shocks a system like a centrifugal pump may experience during normal and adverse operating conditions. An accelerated life testing method was employed to determine the degradation of the pump under cumulative damage degradation and random shocks conditions. An age- Based policy was used to determine the optimum time interval that will minimize the total expected cost of the system. The random shock increases the number of failures and hence reduces the reliability of the system. The total expected preventive maintenance cost obtained varies from N1700.00 (One thousand seven hundred naira) to N16,000.00 (sixteen thousand naira), depending on the shock and shock duration. The methodology presented is useful and thus recommended for use to study cumulative damage degradation and random shocks for similar systems.

When the rich do (not) trust the (newly) rich: Experimental evidence on the effects of positive random shocks in the trust game

We study behavior in a trust game where first-movers initially have a higher endowment than second-movers but the occurrence of a positive random shock can eliminate this inequality by increasing the endowment of the second-mover before the decision of the first-mover. We find that second-movers return less (i.e., they are less trustworthy) when they have a lower endowment than first-movers, compared with the case in which first and second-movers have the same endowment. Second-movers who received the positive shock return more than those who did not; in fact, second-movers who received the positive shock return more than second-movers who had the same endowment as the first-mover from the outset. First-movers do not seem to anticipate this behavior from second-movers. They send less to second-movers who benefited from a shock. These findings suggest that in addition to the distribution of the endowments the source of this distribution plays an important role in determining the levels of trust and trustworthiness. This, in turn, implies that current models of inequality aversion should be extended to accommodate for reference points if random positive shocks are possible in the trust game.

Testing for asymmetric adjustment in weekly Brazilian inflation

This study analyses the nature of weekly inflation response to shocks in the Brazilian economy by adopting a generalized quantile autoregression model in which the autoregressive parameter is allowed to be quantile-dependent. We test for unit root at different conditional quantiles of the response variable, by characterizing its asymmetric dynamics along the business cycle. The method allows us to estimate the magnitude, sign, and the significance of actual shocks that affect Brazilian inflation. We evaluate the robustness of results by adopting a bootstrap procedure. Concerning previous studies, we find evidence of stronger asymmetric persistence in inflationary dynamics in which an inflationary shock below the average dissipates very fast when compared to an inflationary impulse occurring above the average. Location, size, and the sign of a random shock might be essential for inflation adjustment towards long-run equilibrium. The results do not support the full inertia hypothesis.

Trust and trustworthiness after negative random shocks

We investigate experimentally the effect of a negative endowment shock in a trust game to assess whether different causes of inequality have different effects on trust and trustworthiness. In our trust game there may be inequality in favor of the second mover and this may (or may not) be the result of a negative random shock (i.e., the outcome of a die roll) that decreases the endowment of the first-mover. Our findings suggest that inequality leads to differences in behavior. First-movers send more of their endowment and second-movers return more when there is inequality. However, we do not find support for the hypothesis that the cause of the inequality matters. Behavior after the occurrence of a random shock is not significantly different from the behavior when the inequality exists from the outset. Our results highlight that we have to be cautious when interpreting the effects on trust and trustworthiness of negative random shocks that occur in the field (e.g., natural disasters). Our results suggest that these effects are largely driven by the inequality caused by the shock and not by any of the additional characteristics of the shock like saliency or uncertainty.

ANALISIS INTERDEPENDENSI NILAI TUKAR, INFLASI, PRODUK DOMESTIK BRUTO, SUKU BUNGA DAN NERACA TRANSAKSI BERJALAN DI INDONESIA

Depreciation of the rupiah prompted Bank Indonesia raised SBI to strengthen the rupiah, inflation has a downward trend when the appreciation of the rupiah, and the movement of the exchange rate also change the position of the current account of Indonesia. This study aimed to determine the role and effects of changes in exchange rates, inflation, gross domestic product, interest rates and the current account balance for each variable. Data obtained from secondary data is exchange rate, inflation, GDP, interest rates and the current account data from 2000:1 up to 2010:4. The model used in this study is the econometric model by the method of Vector Autoregressive (VAR) that in their analysis the instrument has Impulse Response Function (IRF) and Variance Decomposition (VD). The results of this study concluded that (1) All variable giving each other random shock to other variables and response by each variable so as to achieve long-term equilibrium. This is shown on the estimation IRF test on each variable; (2) All variables are mutually contribute to other variables. It is shown by the results of estimation VD test, in which each variable contributed to other variables.