Recent iber_cider_rw items

The Case for Open-Market Purchases in a Liquidity Trap

Mon, 23 Jan 2012 00:00:00 +0000

Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. We show that even were this the case, there remains a powerful argument for large-scale open market operations as a fiscal policy tool. As we also demonstrate, however, this same reasoning implies that open-market operations will be beneficial for stabilization as well, even when the economy is expected to remain mired in a liquidity trap for some time. Thus, the microeconomic fiscal benefits of open-market operations in a liquidity trap go hand in hand with standard macroeconomic objectives. Motivated by Japan’s recent economic experience, we use a dynamic general-equilibrium model to assess the welfare impact of open-market operations for an economy in Japan’s predicament. We argue Japan can achieve a substantial welfare improvement through...

The Case for Open-Market Purchases in a Liquidity Trap

Mon, 23 Jan 2012 00:00:00 +0000

ASEAN in a Regional Perspective

Wed, 13 Jul 2011 00:00:00 +0000

ASEAN in a Regional Perspective

REcent Exchange Rate Experience and Proposals for Reform

Wed, 13 Jul 2011 00:00:00 +0000

REcent Exchange Rate Experience and Proposals for Reform

Intertemporal Price Speculation and the Optimal Current-Account Deficit: Reply and Clarification

Wed, 13 Jul 2011 00:00:00 +0000

Intertemporal Price Speculation and the Optimal Current-Account Deficit: Reply and Clarification

Regional Trading Arrangements

Wed, 13 Jul 2011 00:00:00 +0000

Regional Trading Arrangements

Efficiency, Equity and Poverty Alleviation: Policy Issues in Less Developed Countries

Wed, 13 Jul 2011 00:00:00 +0000

Efficiency, Equity and Poverty Alleviation: Policy Issues in Less Developed Countries

Endogenous Growth Theory in a Vintage Capital Model

Wed, 13 Jul 2011 00:00:00 +0000

Endogenous Growth Theory in a Vintage Capital Model

Economic Structure and the Decision to Adopt a Common Currency

Wed, 13 Jul 2011 00:00:00 +0000

Economic Structure and the Decision to Adopt a Common Currency

The Price of Political Opposition: Evidence from Venezuela's Maisanta

Mon, 4 May 2009 00:00:00 +0000

In 2004, the Chávez regime in Venezuela distributed the list of several million voters whom had attempted to remove him from office throughout the government bureaucracy, allegedly to identify and punish these voters. We match the list of petition signers distributed by the government to household survey respondents to measure the economic effects of being identified as a Chavez political opponent. We find that voters who were identified as Chavez opponents experienced a 5 percent drop in earnings and a 1.5 percentage point drop in employment rates after the voter list was released. A back-of-the envelope calculation suggests that the loss aggregate TFP from the misallocation of workers across jobs was substantial, on the order of 3 percent of GDP.

Civil War

Mon, 9 Mar 2009 00:00:00 +0000

Most nations have experienced an internal armed conflict since 1960. The past decade has witnessed an explosion of research into the causes and consequences of civil wars, belatedly bringing the topic into the economics mainstream. This article critically reviews this interdisciplinary literature and charts productive paths forward. Formal theory has focused on a central puzzle: why do civil wars occur at all when, given the high costs of war, groups have every incentive to reach an agreement that avoids fighting? Explanations have focused on information asymmetries and the inability to sign binding contracts in the absence of the rule of law. Economic theory has made less progress, however, on the thornier (but equally important) problems of why armed groups form and cohere, and why individuals decide to fight. Likewise, the actual behavior of armed organizations and their leaders is poorly understood. On the empirical side, a vast cross-country econometric literature has...

Government Transfers and Political Support

Tue, 27 Jan 2009 00:00:00 +0000

We estimate the impact of a large anti-poverty program – the Uruguayan PANES – on political support for the government that implemented it. The program mainly consisted of a monthly cash transfer for a period of roughly two and half years. Using the discontinuity in program assignment based on a pre-treatment score, we find that beneficiary households are 21 to 28 percentage points more likely to favor the current government (relative to the previous government). Impacts on political support are larger among poorer households and for those near the center of the political spectrum, consistent with the probabilistic voting model in political economy. Effects persist after the cash transfer program ends. We estimate that the annual cost of increasing government political support by 1 percentage point is roughly 0.9% of annual government social expenditures.

Tracking, Attrition and Data Quality in the Kenyan Life Panel Survey Round 1 (KLPS-1)

Mon, 4 Aug 2008 00:00:00 +0000

Understanding the possible pitfalls of survey data is critical for empirical research. Among other things, poor data quality can lead to biased regression estimates, potentially resulting in incorrect interpretations that mislead researchers and policymakers alike. Common data problems include difficulties in tracking respondents and high survey attrition, enumerator error and bias, and respondent reporting error. This paper describes and analyzes these issues in Round 1 of the Kenyan Life Panel Survey (KLPS-1), collected in 2003-2005. The KLPS-1 is an innovative longitudinal dataset documenting a wide range of outcomes for Kenyan youths who had originally attended schools participating in a deworming treatment program starting in 1998. The careful design of this survey allows for examination of an array of data quality issues. First, we explore the existence and implications of sample attrition bias. Basic residential, educational, and mortality information was obtained for...

An Equilibrium Model of "Global Imbalances" and Low Interest Rates

Wed, 26 Jul 2006 00:00:00 +0000

Three of the most important recent facts in global macroeconomics — the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio — appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions’ capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

The Renminbi’s Dollar Peg at the Crossroads

Tue, 11 Jul 2006 00:00:00 +0000

In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its dollar currency peg. Over the longer term, China’s large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capital markets. A feasible and attractive exit strategy from the essentially fixed RMB exchange rate would be a two-stage approach, consistent with the steps already taken since July 2005, but going beyond them. First, establish a limited trading band for the RMB relative to a basket of major trading partner currencies. Set the band so that it allows some initial revaluation of the RMB against the dollar, manage the basket rate within the band if necessary, and widen the band over time as domestic foreign exchange markets develop. Second, put on hold ad hoc measures of financial account liberalization. They will be less helpful for relieving...

Implications for the Yen of Japanese Current Account Adjustment

Tue, 11 Jul 2006 00:00:00 +0000

This paper presents a quantitative evaluation of the effect on the yen of some alternative scenarios under which Japan reaches current account balance. The analytical framework is a global general-equilibrium model, based closely on Obstfeld and Rogoff (2005a, 2005b), within which relative prices clear the world markets for traded goods as well as the domestic markets for nontraded goods. Depending on assumptions about the critical substitution elasticities underlying the model, the yen could appreciate by as much as 10 per cent for each 1 percent of GDP reduction in its current account surplus. The effect would be smaller if substitution elasticities are larger, or if adjustment is accompanied by an expansion of Japanese nontradable output, the latter presumably implied by a return to a more efficient level of labor utilization.

The Colonial Origins of Comparative Development: An Investigation of the Settler Mortality Data

Mon, 1 May 2006 00:00:00 +0000

In a seminal contribution, Acemoglu, Johnson, and Robinson (2001) evaluate the effect of property rights institutions on national income using estimated mortality rates of early European settlers as an instrument for the risk of capital expropriation. Returning to their original sources, I find the settler mortality data suffer from a number of inconsistencies, comparability problems, and questionable geographic assignments. When various methods are used to deal with these issues, the first-stage relationship between mortality and expropriation risk is no longer robust and typically insignificant. Consequently instrumental variable estimates are unreliable and suffer from weak instrument pathologies.

Financial Constraints on Investment in an Emerging Market Crisis: An Empirical Investigation of Foreign Ownership

Tue, 28 Mar 2006 00:00:00 +0000

JEL classification codes: O16, F23, E32, O12

Abstract:

We investigate whether capital market imperfections constrain investment during an emerging market financial crisis. Both large currency devaluations and widespread collapse of the banking sector characterize recent crises. Although a currency devaluation should increase exporters’ competitiveness and investment, a failing banking system may limit credit to these firms. Foreign-owned firms, which have greater access to overseas financing but otherwise face the same investment prospects, provide an ideal control group for determining the effect of liquidity constraints. We test for liquidity constraints in Indonesia following the 1997 East Asian financial crisis, a period when the issuance of new domestic credit declined rapidly. Exporters’ value added and employment increased after the crisis, suggesting that they profited from the devaluation and had sufficient cash flow to finance more workers. However, only...

The Unsustainable US Current Account Position Revisited*

Tue, 6 Dec 2005 00:00:00 +0000

Keywords: US current account deficit, external imbalance, net foreign assets, real exchange rate, sustainability

JEL Codes: F21, F32, F36, F41

ABSTRACT:We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently running at more than 6% of GDP, the potential collapse of the dollar becomes considerably larger than our previous estimates (Obstfeld and Rogoff 2000a)—as much as 30% or even higher. It is true that global capital market deepening appears to have accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti (2003, 2004) and recently emphasized by outgoing US Federal Reserve Chairman Alan Greenspan), and that this deepening may have helped allowed the United States to a recordbreaking string of deficits. Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably...

America’s Deficit, the World’s Problem

Mon, 1 Aug 2005 00:00:00 +0000

The United States deficit on current account, now running at an annual rate of over $700 billion, has reached levels (as a percent of U.S. GDP) not seen since the first decades of the nineteenth century. The deficit is soaking up roughly three-quarters of the world's available external surpluses. Were the deficit to continue at this pace, the U.S. could ultimately converge to an external debt/GDP ratio around 1. Several analyses suggest that a rapid adjustment of the deficit toward balance would require a very sharp real depreciation of the U.S. dollar. This paper reviews the limitations of some optimistic arguments that predict instead a "soft landing" for the dollar. I focus in particular on the view that greater financial globalization allows the U.S. easily to run much bigger deficits for much longer periods. Some simple calculations based on real interest rate differentials suggest that markets could be underestimating the extent of necessary dollar depreciation.

Incentives to Learn

Thu, 28 Apr 2005 00:00:00 +0000

We report results from a randomized evaluation of a merit scholarship program for adolescent girls in Kenya. Girls who scored well on academic exams had their school fees paid and received a cash grant for school supplies. Girls eligible for the scholarship showed significant gains in academic exam scores (average gain 0.12-0.19 standard deviations) and these gains persisted following the competition. There is also evidence of positive program externalities on learning: boys, who were ineligible for the awards, also showed sizeable average test gains, as did girls with low pretest scores, who were unlikely to win. Both student and teacher school attendance increased in the program schools. We discuss implications both for understanding the nature of educational production functions and for the policy debate surrounding merit scholarships.

The Illusion of Sustainability

Thu, 28 Apr 2005 00:00:00 +0000

Rather than provide development assistance indefinitely, foreign aid donors increasingly seek to help communities sustainably provide local public goods themselves. We examine various strategies for sustainably fighting intestinal worms through voluntary local mobilization. Intestinal worms affect one in four people worldwide, but can be controlled by taking medicine twice annually. Since much of the resulting treatment benefit comes through reduced disease transmission, standard public finance analysis provides a rationale for subsidized treatment. Randomized evaluations suggest several efforts to replace subsidies with sustainable worm control measures were ineffective. A drug cost recovery program reduced take-up by 80%. A mobilization intervention designed to boost drug take up failed. Health education did not affect behavior. People were less likely to take drugs if randomly exposed to more information through their social network. In this context, using external interventions...

Orphans and Schooling in Africa: A Longitudinal Analysis

Thu, 28 Apr 2005 00:00:00 +0000

AIDS deaths could have a major impact on economic development by affecting the human capital accumulation of the next generation. We estimate the impact of parent death on primary school participation using an unusual five-year panel data set of over 20,000 Kenyan children. There is a substantial decrease in school participation following a parent death, and a smaller drop before the death (presumably due to pre-death morbidity). Estimated impacts are smaller in specifications without individual fixed effects, suggesting that estimates based on cross-sectional data are biased toward zero. Effects are largest for children whose mothers died, and those with low baseline academic performance.

Industrialization and Infant Mortality

Mon, 21 Mar 2005 00:00:00 +0000

On average, infant mortality rates are lower in more industrialized nations, yet health and mortality worsened during early industrialization in some nations. This study examines the effects of growing manufacturing employment on infant mortality across 274 Indonesian districts from 1985 to 1995, a time of rapid industrialization. Compared with cross-national studies we have a larger sample size of regions, more consistent data definitions, and better checks for causality and specification. We can also explore the causal mechanisms underlying our correlations. Overall the results suggest manufacturing employment raised living standards, housing quality, and reduced cooking with wood and coal, which helped reduce infant mortality. At the same time, pollution from factories appears quite harmful to infants. The overall effect was slightly higher infant mortality in regions that experienced greater industrialization.

International Financial Adjustment

Wed, 9 Feb 2005 00:00:00 +0000

The paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country's net exports or net foreign asset position have to be matched either by future net export growth (trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the...

Globalization, Macroeconomic Performance, and the Exchange Rates of Emerging Economies

Fri, 22 Oct 2004 00:00:00 +0000

Among the developing countries of the world, those emerging markets that have sought some degree of integration into world finance are characterized by higher per capita incomes, higher long-run growth rates, and lower output and consumption volatility. These characteristics are more likely to be causes than effects of financial integration. The measurable gains from financial integration appear to be lower for emerging markets than for higher-income countries, and appear to have been limited by recent crises. One factor limiting the gains from financial integration is the difficulty emerging economies face in resolving the open-economy trilemma. Given their structural and institutional features, many emerging economies cannot live comfortably either with fixed or with freely floating exchange rates. Most recently, the exchange rates of several emerging countries display attempts at stabilization punctuated by high volatility in periods of market stress.

External Adjustment

Wed, 13 Oct 2004 00:00:00 +0000

Gross stocks of foreign assets have increased rapidly relative to national outputs since 1990, and the short-run capital gains and losses on those assets can amount to significant fractions of GDP. These fluctuations in asset values render the national income and product account measure of the current account balance increasingly inadequate as a summary of the change in a country's net foreign assets. Nonetheless, unusually large current account imbalances, especially deficits, should remain high on policymakers' list of concerns, even for the richer and less credit-constrained countries. Extreme imbalances signal the need for large and perhaps abrupt real exchange rate changes in the future, changes that might have undesired political and financial consequences given the incompleteness of domestic and international asset markets. Furthermore, of the two sources of the change in net foreign assets -- the current account and the capital gain on the net foreign asset position...

Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period

Wed, 5 May 2004 00:00:00 +0000

The interwar period was marked by the end of the classical gold standard regime and new levels of macroeconomic disorder in the world economy. The interwar disorder often is linked to policies inconsistent with the constraint of the open-economy trilemma—the inability of policymakers simultaneously to pursue a fixed exchange rate, open capital markets, and autonomous monetary policy. The first two objectives were linchpins of the pre-1914 order. As increasingly democratic polities faced pressures to engage in domestic macroeconomic management, however, either currency pegs or freedom of capital movements had to yield. This historical analytic narrative is compelling—with significant ramifications for today’s world, if true—but empirically controversial. We apply theory and empirics to the interwar data and find strong support for the logic of the trilemma. Thus, an inability to pursue consistent policies in a rapidly changing political and economic environment appears central...

The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility

Wed, 5 May 2004 00:00:00 +0000

The exchange-rate regime is often seen as constrained by the monetary policy trilemma, which imposes a stark tradeoff among exchange stability, monetary independence, and capital market openness. Yet the trilemma has not gone without challenge. Some (e.g., Calvo and Reinhart 2001, 2002) argue that under the modern float there could be limited monetary autonomy. Others (e.g., Bordo and Flandreau 2003), that even under the classical gold standard domestic monetary autonomy was considerable. This paper studies the coherence of international interest rates over more than 130 years. The constraints implied by the trilemma are largely borne out by history.

The Case for Open-Market Purchases in a Liquidity Trap

Wed, 5 May 2004 00:00:00 +0000

Does Industrialization = "Development"? The Effects of Industrialization on School Enrollment and Youth Employment in Indonesia

Fri, 1 Aug 2003 00:00:00 +0000

This study examines the relationship between rising manufacturing employment and school enrollment in Indonesia from 1985 to 1995, a time of rapid industrialization. In comparison with cross- national studies, this study has a larger sample size of regions, defines data more consistently, and conducts better checks for causality and specification. Overall, enrollment is slightly higher and youth labor force participation slightly lower in regions with more manufacturing. The causal links between manufacturing and enrollments remain unclear. At the household level, employment of adult females in manufacturing is associated with lower enrollment, higher labor force participation, and more household responsibilities for female youth.

Did Industrialization Destroy Social Capital in Indonesia?

Mon, 16 Jun 2003 00:00:00 +0000

This paper examines the effect of industrialization on social capital in Indonesia during 1985 to 1997 using repeated cross-sections of nationally representative surveys. We analyze a rich set of social capital measures including multiple measures of voluntary associational activity, levels of trust and informal cooperation, and family outcomes. There are three main findings. First, districts that experienced rapid industrialization showed significant increases in most social capital measures. Second, districts that neighbor rapidly industrializing areas exhibited high rates of out-migration, significantly fewer community credit cooperatives, and a reduction in "mutual cooperation" as assessed by village elders. Finally, initial social capital in a district did not predict subsequent industrial development. We present a model of social capital investment and migration consistent with these patterns. The empirical findings challenge existing results in the social capital...

Gender Bias and The Indonesian Financial Crisis: Were Girls Hit Hardest?

Thu, 13 Mar 2003 00:00:00 +0000

We analyze how the financial crisis affected a wide range of investments in Indonesian children and children’s outcomes including school enrollment, immunizations, and mortality. Our dataset is the National Socio-Economic Survey (Susenas), a large nationally representative sample. We build on past research by differentiating outcomes for boys and for girls, and by separating regions heavily affected by the financial crisis from others that were relatively unhurt. Along most dimensions, children were well protected. Contrary to some theory and press reports, girls did not fare worse than boys during the crisis.

Are Investments in Daughters Lower When Daughters Move Away?

Thu, 13 Mar 2003 00:00:00 +0000

In much of the developing world daughters receive lower education and other investments than do their brothers, and may even be so devalued as to suffer differential mortality. Daughter disadvantage may be due in part to social norms that prescribe that daughters move away from their natal family upon marriage, a practice known as virilocality. We evaluate the effects of virilocality on female disadvantage using data from the Indonesia Family Life Survey. We find little support for the hypothesis. There is no evidence that the overall pattern of rough equality in the treatment of boys and girls in Indonesia masks differences according to post-marital residential practice. Virilocal groups do not have "missing daughters." Nor is there other evidence of son preference, such as in relatively low height for- age or education for girls and women in virilocal areas. Explanations of daughter disadvantage as due to virilocality should be subject to further scrutiny and contextualization...

Do Microfinance Programs Help Families Insure Consumption Against Illness?

Thu, 13 Mar 2003 00:00:00 +0000

Families in developing countries face enormous financial risks from major illness both in terms of the cost of medical care and the loss in income associated with reduced labor supply and productivity. We test whether access to microfinancial savings and lending institutions helps Indonesian families smooth consumption after declines in adult health. In general, results support the importance of these institutions in helping families to self-insure consumption against health shocks.

Schooling and Parental Death

Thu, 13 Mar 2003 00:00:00 +0000

Loss of a parent is one of the most traumatic events a child can face. If loss of a parent reduces investments in children, it can also have long-lasting implications. This study uses parametric and semi-nonparametric matching techniques to estimate how one human capital investment, school enrollment, is affected by a parent's recent death. We analyze data from 600,000 households from Indonesia’s National Socioeconomic Survey (SUSENAS) during 1994-96. We find a parent's recent death has a large effect on a child's enrollment. We also use this shock to test several theories of intra-household allocation and find little differential treatment based on the gender of the child or the deceased parent.

Changing Status of Daughters in Indonesia

Thu, 13 Mar 2003 00:00:00 +0000

In many nations, parents exhibit a variety of behaviors that favor sons over daughters. In this paper we provide evidence suggesting that in Indonesia there is no problem of “missing daughters” and that patterns of births, birth spacing and nutrition allocations do not suggest son preference during the cohorts born from 1940’s to the 1990’s. In contrast, gender differences in educational attainment and inheritance were quite prevalent in the recent past. These gaps have narrowed for secondary education and inheritance, and disappeared for primary education.

Sovereign Risk, Credibility and the Gold Standard: 1870-1913 versus 1925-31

Sat, 11 Jan 2003 00:00:00 +0000

What determines sovereign risk? We study the London bond market from the 1870s to the 1930s. Our findings support conventional wisdom concerning the low credibility of the interwar gold standard. Before 1914 gold standard adherence effectively signalled credibility and shaved up to 30 basis points from country borrowing spreads. In the 1920s, however, simply resuming prewar gold parities was insufficient to secure benefits. Countries that devalued before resumption were treated more favorably, and markets scrutinized other signals. Public debt and British Empire membership were important determinants of spreads after World War One, but not before.

Saving Europe's Automatic Stabilizers

Tue, 3 Dec 2002 00:00:00 +0000

European policy makers have repeatedly suggested that fiscal-policy coordination and fiscal federalism will play key roles in Europe's monetary union. This paper warns that this hope is misplaced. Fiscal federalism will not be available to offset recessionary shocks for the foreseeable future. The effects of coordination designed to internalize the cross-border spillovers of fiscal policies are too weak. Freeing up fiscal policy to replace national governments' loss of monetary independence requires allowing European countries' automatic stabilizers to operate. That in turn requires a flexible application of the Excessive Deficit Procedure and the Stability Pact. The solution suggested here is that the Excessive Deficit Procedure and any fines and sanctions associated with the Stability Pact be applied to the constant-employment budget balance, not the actual deficit. Applying them to actual deficits when European countries enter EMU up against the 3 per cent limit will render...

Favorable External Shocks, Sectoral Adjustment and De-industrialization in Non-Oil Producing Economies

Tue, 3 Dec 2002 00:00:00 +0000

This paper examines the extent to which a favorable external shock such as the lower price of an intermediate input affects sectoral output and employment, the real exchange rate the wage in an economy where the input has no domestic production at all. The analytical framework is a real, short-run model based on a three-sector, three-factor small open economy. The effect of the shock on the variables concerned depends on the structural characteristics of production and consumption in the economy. In the normal case, the traded sectors initially favored by the shock expand the most among sectors while the other tradables suffer. The real exchange rate may appreciate along with the upsurge of wages. The shock can produce many other possible cases, however: The nontraded sector may grow at the expense of the traded sectors including the favored sector, thus leading to de-industrialization. An extreme case is that the positive effect on output and employment may occur only...

The Nature of Institutional Impediments to Economic Development

Tue, 3 Dec 2002 00:00:00 +0000

In this paper I shall focus, to a large extent, on (a) institutional impediments as outcomes of distributive conflicts and (b) the collective action problems they exacerbate and (c), in view of the critical need for coordination, on a more complex and nuanced role of the state, which many states fail to perform, but some succeed at. Recent Indian economic history will provide the context of the discussion.

The Baring Crisis in a Mexican Mirror

Tue, 3 Dec 2002 00:00:00 +0000

Conventional wisdom has it that the Mexican crisis of 1994-95 was "the first financial crisis of the 21st century." In this paper I argue that it may be better understood as the last financial crisis of the 19th. The crisis in Mexico exhibits striking similarities to the Baring Crisis of 1890, an event that did much to shape modern opinion about the causes and consequences of financial crises and the role for official management.

Hegemonic Stability Theory and Economic Analysis: Reflections on Financial Instability and the Need for an International Lender of Last Resort

Tue, 3 Dec 2002 00:00:00 +0000

Eichengreen argues that recent developments in financial theory provide rigorous microeconomic foundations for the fragile, volatile and crisis-prone forms of market behavior identified in Charles Kindleberger’s Manias, Panics and Crashes and invoked in The World in Depression as an explanation for interwar events. It is incorrect to assert, as is often done, that economic theory in the form of the efficient-markets hypothesis provides no basis for such concerns.

Inequality and Conservation on the Local Commons: A Theoretical Exercise

Tue, 3 Dec 2002 00:00:00 +0000

To analyze the effect of asset inequality on cooperation within a group, we consider a two-player noncooperative model of conservation of a common-pool resource (CPR): a fishery. We give necessary and sufficient conditions such that conservation is a Nash equilibrium, and we show that increasing inequality does not, in general, favor full conservation. However, once inequality is sufficiently great, further inequality may push the players closer to efficiency. Thus the relationship between inequality and economic efficiency is U-shaped. We analyze the implications for conservation if players have earning opportunities outside the commons. Finally, we consider various schemes of community regulation of the commons in the light of the noncooperative model with or without exit options. We find that increases in inequality may restrict the range of implementable mechanisms.

Ever Closer to Heaven? An Optimum-Currency-Area Index for European Countries

Tue, 3 Dec 2002 00:00:00 +0000

In this paper we develop a procedure for applying the core implications of the theory of optimum currency areas to cross-country data. We demonstrate that these implications find strong empirical support. The relationship between the characteristics of countries to which OCA theory points and the observed behavior of exchange rates seems sufficiently stable and robust to support simple forecasting. Extrapolating the independent variables, we therefore use our exchange rate equations to predict which countries will be best able to support stable exchange rates in the future -- equivalently, which are likely to be best prepared to be among the founding members of Europe's monetary union.

On the Links Between Monetary and Political Integration

Tue, 3 Dec 2002 00:00:00 +0000

The connection between monetary integration and political integration is probably the most contentious aspect of the Maastricht process. In this paper I suggest that relationship between monetary and political integration is contingent; under only slightly different initial conditions, these two dimensions of the integration process can evolve in very different ways. Specifically, whether monetary and political integration develop hand in hand or the first progresses without significant movement toward the second will depend on the accompanying fiscal constitution.

EMU: An Outsider's Perspective

Tue, 3 Dec 2002 00:00:00 +0000

This talk was presented at the Finlay-O'Brien Lecture, delivered at University College, Dublin, October 7, 1996. One of the themes is that the economics profession knows little about EMU's benefits and costs. But while EMU is a gamble, it is probably a gamble worth taking, if you believe, as I do, that the EMU project is integrally linked to the effective completion of the Single Market, and that the benefits of the Single Market are large. EMU also has costs, and it is the difficulty of quantifying them that creates the uncertainty. Most discussions focus on the costs of forsaking monetary autonomy – that countries which give up a separate national currency give up recourse to an independent monetary response to economic shocks. While there is some merit to this argument, I will suggest that these costs are not the ones about which Irish policymakers and their constituents should be particularly worried.

Endogenous Growth Theory in a Vintage Capital Model

Tue, 3 Dec 2002 00:00:00 +0000

This is a model of quality ladder of machines in an endogenous growth context, when some machines are scrapped while others coexist with the latest variety, with the economic life of machines endogenously determined as in old vintage-capital models. Policies that affect this economic life of machines (for example, those influencing the gross savings or investment rate, or trade policy in a two-sector open economy) will have an effect on the long-run growth rate.

Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations

Tue, 3 Dec 2002 00:00:00 +0000

This conference is one sign of increased interest in collective or cooperative exchange rate arrangements for East Asian countries. A more concrete indication is the announcement in November 1995 by the Hong Kong Monetary Authority and the central banks of Malaysia, Indonesia and Thailand of repurchase agreements designed to provide one another with exchange market support.2 In February of this year Hong Kong and Singapore agreed to intervene for the account of the Bank of Japan to help the latter manage the dollar/yen rate. In March the Bank of Japan joined the network of repurchase arrangements (as had Singapore and the Philippines sometime earlier). Against this background it is not surprising that the apostles of European monetary integration have chosen this time to bring their message to Asia

European Monetary Unification and International Monetary Cooperation

Tue, 3 Dec 2002 00:00:00 +0000

In this paper we describe some of the opportunities and perils for international monetary cooperation associated with EMU. Our approach brings together two strands in the literature; one concerned with institutions, the other focusing on policy consensus. Previous work on the subject has featured both perspectives. Our contribution is to show how they fit together.

EMU: Ready, or Not?

Mon, 19 Aug 2002 00:00:00 +0000

In this paper I focus on two specific hazard areas in the transition from Stage Two to Stage Three of European economic and monetary union (EMU), as well as on some key problems of Stage Three that EMU’s monetary and fiscal structures appear ill-prepared to handle. The transitional hazards are of considerable theoretical as well as policy interest: the best way to coordinate monetary stances and lock exchange parities for a smooth switch from eleven national currencies to a single joint currency. A third problem, one that is central for EMU and to any currency union, lies behind the difficulty of the transition: the possibility of nationally asymmetric real shocks. I review that topic in the context of Ireland’s recent experience. The paper goes on to discuss weaknesses in the structure of Stage Three, already much noted, connected with the provision of lender of last resort facilities in the euro zone and the framework for supervising financial institutions. The deficit and...

Sovereign Debt as Intertemporal Barter

Mon, 19 Aug 2002 00:00:00 +0000

Borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk-averse party subject to endowment shocks. The surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties, including any other competitive agents who are potential lenders to the sovereign. The sole punishments consist of renegotiation-proof changes in the path of future payments. We show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever. That is, borrowing and lending are possible under anarchy, and are supported by punishments that consist of cheating any cheater. Long-term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short-term loans. The analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved.

The Global Capital Market: Benefactor or Menace?

Mon, 19 Aug 2002 00:00:00 +0000

This paper reviews the theoretical functions, history, and policy problems raised by the international capital market. The goal is to offer a perspective on both the considerable advantages the market offers and on the genuine hazards it poses, as well as on the avenues through which it constrains national policy choices. A duality of benefits and risks is inescapable in the real world of asymmetric information and imperfect contract enforcement. I argue, however, that in confronting the global capital market there is no reason to depart from conventional economic wisdom. The way to maximize net benefits is to encourage economic integration while attacking concomitant distortions and other unwanted side-effects at, or close to, their sources.

Country Funds and Asymmetric Information

Mon, 19 Aug 2002 00:00:00 +0000

Closed-end country funds trade in New York at their price. Their Net Asset Value (NAV) represent the value of the underlying assets, usually traded in each particular country. If the holders of the underlying assets have more information about local assets than the country fund holders, changes in NAVs will tend to explain future changes in prices but not vice versa. This paper shows that most NAVs appear exogenous; while most prices reject exogeneity. Past changes in NAVs and discounts predict current prices more frequently than prices and discounts predict NAVs. The price (NAV) adjustment coefficients are low and negatively correlated with the local (foreign) market variability--but not with the fund price (NAV) variability. These findings are consistent with the existence of asymmetric information in international capital markets. The appendix introduces a model of asymmetric information, that rationalizes our empirical findings. Different perceived risk makes foreign investors...

Understanding Devaluations in Latin America: A 'Bad Fundamentals' Approach

Mon, 19 Aug 2002 00:00:00 +0000

This paper is an empirical study of the determinants of Latin American devaluations during the period between 1957 and 1988. The estimation of probabilities of devaluation is done using logit analysis. The empirical results show that reserves, the real exchange rate, the share of domestic credit to the public sector and the current account deficit have a significant effect on the likelihood of a devaluation. In summary, this paper confirms the view that devaluations in Latin America are a consequence of the state of fundamentals in these economies.

Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics

Thu, 15 Aug 2002 00:00:00 +0000

The New Open Economy Macroeconomics has allowed economists to tackle classical problems with new tools, while also generating new ideas and questions. In their attempts to make the new models capture empirical regularities, researchers have entertained a variety of assumptions about the international pricing of goods, notably, models of pricing to market and destination-currency pricing of exports. Some of the resulting models imply that exchange-rate changes lack international expenditure-switching effects, and they thus appear to call for a radical rethinking of the role of exchange rates in international adjustment. This paper argues that the recent resurgence of exchange-rate pessimism stems from oversimplified modeling strategies rather than from evidence. Like earlier episodes starting with the extreme "elasticity pessimism" of the early postwar era, it is based on a misinterpretation of the empirical record.

Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?

Fri, 31 May 2002 00:00:00 +0000

The dollarization of bank deposits and credit is widespread in developing countries,resulting in varying degrees of currency mismatches in domestic financial intermediation, which in turn may accentuate balance sheet problems and thus financial fragility. It is widely argued that flexible exchange rate regimes encourage banks to match dollar-denominated liabilities with a corresponding amount of dollar-denominated assets, ameliorating currency mismatches. Does the behavior of dollar deposits and credit in financially dollarized economies support that presumption? A new database on deposit and credit dollarization in developing and transition countries is assembled and used to address this question. Empirical results suggest that, if anything, floating regimes seem to exacerbate, rather than ameliorate, currency mismatches in domestic financial intermediation, as those regimes seem to encourage deposit dollarization more strongly than they encourage matching via credit dollarization....

Relative Capture of Local and Central Governments: An Essay in the Political Economy of Decentralization

Mon, 25 Mar 2002 00:00:00 +0000

A common presumption is that decentralization is prone to a potential pitfall owing to the greater vulnerability of local governments to capture by local elites. We investigate the determinants of relative capture of local and national governments theoretically, in the context of an extended version of the Baron-Grossman-Helpman model of electoral competition with lobbying by special interest groups. A number of factors do provide support to the traditional presumption, such as reduced cohesiveness of interest groups, higher levels of voter awareness, and greater electoral competition at the national level. A number of other factors may, however, create an opposite tendency for lower capture at the local level. These include less electoral uncertainty at the national level, and a higher value of campaign funds in national elections owing to their fungibility across different districts. Relative capture also depends on heterogeneity across districts with respect to levels...

What Drives Capital Flows? The Case of Cross-Border M&A Activity and Financial Deepening