Demandable-debt finance by banks warrants explanation because it entails costs of bank suspension, liquidation, and idle reserve holdings. An explanation is developed in which demandable debt provides incentive-compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uniformed depositors. Demandable debt attracts funds by giving depositors an option to force liquidation. Its usefulness in transacting follows from information-sharing between monitors and nonmonitors.

A number of studies (e.g., Robert J. Shiller, 1981; Olivier J. Blanchard and Mark Watson, 1982; Kenneth D. West, 1988) have argued that dividend and stock price data are not consistent with hypothesis, in which prices are given by present discounted values of expected dividends. These results have often been construed as evidence for existence of bubbles or fads. (Related arguments have been made with respect to gold, bonds, and foreign exchange). A major problem with such arguments (e.g., James Hamilton and Charles Whiteman, 1985) is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by researcher. Behzad T. Diba and Herschel I. Grossman (1984, 1988b) and Hamilton and Whiteman (1985) have recommended alternative strategy of testing for rational bubbles by investigating stationarity properties of asset prices and observable fundamentals.1 In essence, argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present, since they would generate an explosive component to stock prices.2 Using unit-root tests, autocorrelation patterns, and cointegration tests to implement this procedure, Diba and Grossman (1988b p. 529) state that the analysis supports conclusion that stock prices do not contain explosive rational This paper shows that above battery of tests is in fact unable to detect an important class of rational bubbles. The point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied, even though they are explosive in relevant sense. Simulations show that, when such bubbles are present, stock prices will not appear to be more explosive than dividends on basis of these tests, even though bubbles are substantial in magnitude and volatility. The presence of rational bubbles in actual stock prices thus remains an open question.

Are business cycles mainly the result of permanent shocks to productivity? This paper uses a long-run restriction implied by a large class of real-business-cycle models--identifying permanent productivity shocks as shocks to the common stochastic trend in output, consumption, and investment--to provide new evidence on this question. Econometric test indicate that this common-stochastic-trend / cointegration implication is consistent with postwar U.S. data. However, in systems with nominal variables, the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business-cycle variability in output, consumption, and investment.

This paper provides experimental evidence on forward induction as a refinement criterion. In the basic extensive form, one of the two players chooses to play a battle-of-the-sexes game or to receive a certain payoff. According to forward induction, choosing to play the game is a signal about intended action. Though the presence of the outside option changes play, the authors find only limited support for the forward-induction hypothesis. The effects of the outside option also reflect the creation of a focal point through the asymmetry created by offering the outside option to one of the two players.