Economic fluctuations and growth.

Members of the NBER's Program on Economic Fluctuations and Growth met on February 5 in Menlo Park, California. Robert King, NBER and the University of Virginia, and Edward C. Prescott, Federal Reserve Bank of Minneapolis, organized the following program:

Wouter J. den Haan, NBER and University of California, San Diego, and Gary Ramey and Joel Watson, University of California, San Diego, "Liquidity Flows and Fragility of Business Enterprises"

Discussant: Timothy Kehoe, Federal Reserve Bank of Minneapolis

Thomas Cooley, University of Rochester, and Vincenzo Quadrini, Duke University, "Monetary Policy and the Financial Decisions of Firms"

Discussant: Simon Gilchrist, NBER and Boston University

Julia Thomas, Carnegie Mellon University, "Lumpy Investment, Partial Adjustment, and the Business Cycle: A Reconciliation"

Discussant: John V. Leahy, NBER and Boston University

Daron Acemoglu, NBER and MIT, and Fabrizio Zilibotti, Institute for International Economic Studies, "Productivity Differences" (NBER Working Paper No. 6879)

Discussant: Charles I. Jones, NBER and Stanford University

Stephen Parente, University of Pennsylvania, and Richard Rogerson and Randall Wright, NBER and University of Pennsylvania, "Homework in Development Economics: Household Production and the Wealth of Nations"

Discussant: Mark Gersovitz, Johns Hopkins University

Robert Tamura, Clemson University, "From Agriculture to Industry: Human Capital and Specialization"

Discussant: Paul M. Romer, NBER and Stanford University

Den Haan, Ramey, and Watson consider the efficiency of financial intermediation and the propagation of business-cycle shocks in a model of long-term relationships between lenders who may be constrained in their short-run access to liquidity and entrepreneurs. The authors show that relationships are subject to breakup when liquidity is low. Surprise liquidity outflows cause persistent damage by breaking up relationships, because there exist matching frictions in the formation of new relationships. Feedback between aggregate investment and the structure of intermediation greatly magnifies the effects of shocks. For large shocks, financial collapse may become inescapable in the absence of external intervention.

Cooley and Quadrini develop a general equilibrium model with heterogeneous, long-lived firms in which financial factors play an important role in production and investment decisions. In the model, the production and investment behavior of small and large...