Following the seminal contributions of Cecchetti (1986) on newspaper prices, Kashyap (1995) on catalog prices (both using US data), and Lach and Tsiddon (1992) on meat and wine prices in Israel, a recent wave of empirical research has provided new evidence on consumer and producer price stickiness at the micro level. Bils and Klenow (2004) and Klenow and Kryvstov (2005) provide studies on consumer prices in the US and Dhyne et al. (2006) give a synthesis of the recent studies carried out for the euro area countries. Studies of producer prices include Alvarez et al. (2006), Cornille and Dossche (2006), Loupias, Heckel and Sevestre (2007) and Sabbatini et al. (2005) among many others.
Consider a number of moving points, where each point is attached to a joint of the human body and projected onto an image plane. Johannson showed that humans can effortlessly detect and recognize the presence of other humans from such displays. This is true even when some of the body points are missing (e.g. because of occlusion) and unrelated clutter points are added to the display. We are interested in replicating this ability in a machine.
The sequels to the East Asia crisis of 1997 have demonstrated, once again, how strongly financial variables affect the business cycle. In spite of the recent advances in the area (see literature review below), there still exists a wide gap between the complex facts and abstract theory. This paper aims to narrow this gap by exploring the business cycle implications of default, liquidations, and bankruptcy law in a dynamic general equilibrium setting. Our analysis builds on elements taken from the corporate finance literature. We find that in the presence of financial imperfections the effect of liquidations on the price of capital goods first highlighted by Shleifer and Vishny (1992) and recently supported by some empirical studies can generate endogenous fluctuations in output, investment, and indicators of financial distress that reproduce some important aspects of actual business cycles.
Our model has overlapping cohorts of entrepreneurs. Each entrepreneur has a project that is active across a start0up period and a production period. All projects yield income with the same present value, but some may suffer a shortage of cash as revenue is delayed until the end of the production period. Yet, should contracts be complete, no project would ever be liquidated and the economy would converge to a stationary equilibrium right away. This result changes dramatically in the presence of capital markets imperfections: both liquidity and the market price of the capital goods (henceforth, machines", for brevity) become relevant to the relationship between entrepreneurs and financiers. In this respect, we incorporate the insights of Hart and Moore (1998) whereby, if income flows are observable but not verifiable, payments to financiers are enforced by providing them with the right to foreclose a project in default. In particular, we follow Bolton and Scharfstein (1996) to model the link between external financing and the extent to which liquidation threats are necessary for enforcement: the higher the need for external financing, the higher the probability of liquidation conditional upon default. Hence, some of the projects which suffer a liquidity shortage will be liquidated, which will entail a significant dead weight loss at project level and a negative impact on the price of machines at market level.
