lessons from the tequila crisis abstract this paper draws several important lessons from the tequila crisis of 1994 and 1995 the overriding lesson is that the dynamics of financial crises in emerging market countries differ from those in industrialized countries because institutional features of their debt markets differ several policy lessons for emerging market countries also emerge from the analysis 1 pegged exchange rate regimes are extremely dangerous 2 strong prudential supervision of the banking system is critical for prevention of financial crises 3 financial liberalization must be managed extremely carefully and 4 different policies are needed to promote recovery in emerging market countries than those that are applicable to industrialized countries

to float or to fix evidence on the impact of exchange rate regimes on growth we study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post bretton woods period using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables in contrast with previous studies we find that for developing countries less flexible exchange rate regimes are associated with slower growth as well as with greater output volatility for industrial countries regimes do not appear to have any significant impact on growth the results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature

the international monetary fund and developing countries a review of the evidence and policy options as its systemic role evaporated with the collapse of the bretton woods system so the international monetary fund imf became drawn into a much more specific role in the context of the balance of payments bop problems that developing countries were encountering at its inception the imf had been seen as having no specific role in developing countries but now it became exclusively these countries that formed its clientele while during the 1970s the imf had continued to make a few relatively large loans to a limited number of industrial countries italy and the united kingdom beyond the mid 1970s industrial countries ceased to draw any resources from it

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

the economics of exchange rate regimes a review essay the exchange rate regime issue has taken centre stage in discussions of international economic policy much of the profession appears to have been converted to the hypothesis of the vanishing middle regime for countries well integrated into world capital markets there is little if any middle ground between floating exchange rates and monetary unification this paper considers the exchange rate regime issue in the context of recent books on the subject by w max corden and morris goldstein both authors prescribe managed floating exchange rates supplemented with inflation targeting for emerging market economies under managed floating and with a credible monetary policy the public finances in order and strengthened debt management and prudential regulation the exchange rate is free to act as a market gauge for assessing policies and as a mode of conflict resolution both authors also argue however that no exchange rate regime is a holy grail ultimately a credible exchange rate regime depends upon the trust evoked by governments there is no exchange rate regime whether of the managed floating or hard fix variety that can eradicate a history of failed stabilisation attempts

interlinked contracts and moral hazard in investment abstract in agricultural tenancy arrangements the tenant is often required to undertake effort aimed at maintaining and improving the productive stocks this paper investigate the design of contracts which induce optimal investment of such effort it is found that a long term contract which interlinks tenancy with a credit agreement is optimal in equilibrium the tenant obtains credit from the landlord at a rate of interest below the market and is perpetually indebted to the landlord

optimal taxation of flow pollutants when firms may also inflict catastrophic environmental damage in many industries firms affect the environment in two distinct types of ways firstly they emit routine anticipated volumes of flow pollutants secondly they can potentially inflict catastrophic environmental damage liability for which may be overhanging or limited by the law operaters of chemical plants nuclear power stations and oil tankers are three examples if an emissions tax or charge is to be levied on the flow pollutants in these cases how should it be set we use simple dynamic programming techniques to characterise second best optimality we identify contexts in which the tax should be raised above its pigovian level to take account of the catastrophic potential and others where it should be set below that level the analysis has significant implications for how policymakers should go about calibrating ecological taxes in a number of high profile industries

vertical coordination financial structure and the changing theory of the firm developments for evaluating these changes including the relationships to financial structure the theoretical developments include contributions from the economics of organizations stiglitz 1991 agency relationships jensen and meckling transactions cost economics williamson 1979 1985 incomplete contracting hart 1988 asymmetric information and financial contracting 1 these theoretical developments provide rich opportunities to apply new interesting concepts toward understanding and evaluating the changing managerial and organizational environment in agriculture

the imf a bird s eye view of its role and operations the international monetary fund imf is the world s premier international financial institution with 184 member countries and active programmes in a significant number of them at any one time the fund attracts a great deal of attention much of it critical but the discussion is often polemic in style strongly held but frequently opposing views are expressed this survey attempts to examine in an objective way the theory and evidence relating to the fund s operations many aspects of the empirical research are relatively recent and a universal consensus is yet to emerge as a consequence there is scope for disagreement to persist however the research is also gradually clarifying many important issues the format for the survey is to examine the life cycle of imf arrangements what makes a country turn to the fund for assistance should the imf be lending what influences the outcome of negotiations and the design of programmes are imf programmes effective and why do some countries make prolonged use of imf resources for completeness there is also some discussion of the history of the imf the extent to which fund policies have been influenced by advances in economic theory and the fund s systemic role important organisational and governance issues are also covered briefly although primarily adopting an economist s perspective the survey reflects the growing recognition that in order to understand the imf s operations economics has to be combined with politics examining the imf is an exercise in applied political economy copyright 2007 the author journal compilation 2007 blackwell publishing ltd

political economy influences within the life cycle of imf programmes increasing attention is being paid to political economy dimensions of the imf s operations however up until now the literature has lacked a systematic overview of how politics and economics interact in this context this paper sets out to fill the gap its conceptual basis is that of the life cycle of an imf programme what determines the decision to turn to the fund for financial assistance what determines the outcome of negotiations what determines whether a country will come back to the fund answers to these questions cannot be satisfactorily given by examining economics alone the paper draws on existing evidence to provide an empirically based discussion of the issues involved it also points the direction in which future research needs to go some of the policy implications of the analysis are also examined

the swedish banking crisis roots and consequences the article analyses the swedish banking crisis in the early 1990s newly deregulated credit markets after 1985 stimulated a competitive process between financial institutions where expansion was given priority combined with an expansive macro policy this contributed to an asset price boom the subsequent crisis resulted from a highly leveraged private sector being simultaneously hit by three major exogenous events a shift in monetary policy with an increase in pre tax interest rates a tax reform that increased after tax interest rates and the erm crisis combined with some overinvestment in commercial property high real interest rates contributed to breaking the boom in real estate prices and triggering a downward price spiral resulting in bankruptcies and massive credit losses the government rescued the banking system by issuing a general guarantee of bank obligations the total direct cost to the taxpayer of the salvage has been estimated at around 2 per cent of gdp copyright 1999 by oxford university press

exchange rate regimes and national price levels this paper explores the role of exchange rate regimes in explaining deviations from the classic theory of purchasing power parity examining a broad panel of countries i find that developing countries with fixed exchange rate regimes have national price levels that are 20 percent higher than those with flexible regimes for industrial countries the relation between regimes and price levels is qualitatively similar but weaker i investigate several explanations for this pattern and find that exchange rate overshooting in floats inflation inertia in pegs and expansionary policies can explain only 5 percentage points of the observed differences i also show that even though the observed pattern could be the outcome of a class of open economy models pioneered by obstfeld and rogoff the data provides limited empirical support for the predictions of this model

financial constraints and firm post entry performance abstract firms finance production by internally generated funds and external loans the benefits of leverage however come with a cost this cost is related to the uncertainty banks face about the firm s quality and output price as time evolves banks learn about the firm and adjust the terms of the loan contract because of this firms do not have equal access to credit small young firms face greater binding debt constraints than more mature firms with well known prospects the firm survival rate as well as the firm rate of growth are therefore important issues in analyzing firm post entry performance

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

choosing an exchange rate system abstract the focus of academic discussions of exchange rate policy has shifted in recent years the new literature on exchange rate regime choice emphasizes considerations relating to the problems of credibility in exchange rate targeting and the connections between exchange rate regime choices and choices of monetary and fiscal policy arguments for exchange rate targeting are reviewed under most circumstances and for most countries a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate

are external shocks responsible for the instability of output in low income countries external shocks such as commodity price fluctuations natural disasters and the role of the international economy are often blamed for the poor economic performance of low income countries the author quantifies the impact of these different external shocks using a panel vector autoregression var approach and compares their relative contributions to output volatility in low income countries vis a vis internal factors he finds that external shocks can only explain a small fraction of the output variance of a typical low income country internal factors are the main source of fluctuations from a quantitative perspective the output effect of external shocks is typically small in absolute terms but significant relative to the historic performance of these countries

the mirage of fixed exchange rates this paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets contrary to popular wisdom industrialized country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack but if their commitment to use those resources lacks credibility with markets the costs to the broader economy of defending an exchange rate peg can be very high the dynamic interplay between credibility and commitment is illustrated by the 1992 swedish and british crises and the 1994 95 mexican collapse we also discuss the small number of successful fixers

strict dollarization and economic performance an empirical investigation in this paper we analyze the macroeconomic record of strictly dollarized economies in particular we investigate whether dollarized countries have historically exhibited faster growth and lower volatility than countries with a domestic currency we analyze this issue by using a treatment regression analysis that estimates jointly the probability of being a dollarized country and outcome equations our analysis indicates that the probability of being a dollarized country depends on regional geographical political and structural variables our results also suggest that gdp per capita growth has not been statistically different in dollarized and in non dollarized countries we also find that volatility has been significantly higher in dollarized than in non dollarized economies these results are robust to the estimation technique and to the sample used

credit rationing concessionary lending and debt maturity abstract a firm raises capital for a two period investment while creditors observe the project status midstream unobservable managerial perks may consume capital each period when the firm is unfortunate early on short term financing results in either concessionary lending or costly liquidation rolling over short term debt may be problematic because the high risk premium creditors demand when asset value is low relative to debt impares managerial motivation precisely when the incentive to defer perk consumption is weakest long term financing may reduce total agency costs be enabling lenders to charge higher initial premia in effect shifting loan repayments to states in which incentive constraints are non binding

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

exchange rate policy and endogenous price flexibility most theoretical analysis of exible vs flxed exchange rates takes the degree of nominal rigidity to be independent of the exchange rate regime choice itself but informal policy discussion often suggests that a credible exchange rate peg may increase internal price exibility this paper explores the relationship between exchange rate policy and price exibility in a model where price exibility itself is an endogenous choice of proflt maximizing flrms a flxed exchange rate can afiect the optimal degree of price exibility by altering the volatility of nominal demand facing price setting flrms we flnd that a unilateral peg such as a currency board adopted by a single country will increase internal price exibility perhaps by a large amount on the other hand when an exchange rate peg is supported by bilateral participation of all monetary authorities such as in a monetary union price exibility may actually be less than under freely oating exchange rates quantitatively we flnd that the endogenous increase in price exibility following a unilateral peg might be big enough that output volatility is no greater than it would be under a oating exchange rate regime

exchange rate regime durability and performance in developing versus advanced economies abstract drawing on new data and advances in exchange rate regimes classification we find that countries appear to benefit by having increasingly flexible exchange rate systems as they become richer and more financially developed for developing countries with little exposure to international capital markets pegs are notable for their durability and relatively low inflation in contrast for advanced economies floats are distinctly more durable and also appear to be associated with higher growth for emerging markets our results parallel the baxter and stockman classic exchange regime neutrality result though pegs are the least durable and expose countries to higher risk of crisis

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

the economics of workout lending lenders are forced to consider a workout loan when a borrower loses access to financial markets and must seek loans from existing creditors to continue servicing outstanding loans a model of the loan decision is developed that distinguishes socially useful from socially wasteful workout loans the analysis is extended to examine two collective action problems that may arise when many lenders have claims on a troubled borrower the paper concludes with a consideration of the implications of the model for the establishment of prudential lending limits and of policies to stimulate new lending to troubled debtor countries copyright 1989 by ohio state university press

the long run volatility puzzle of the real exchange rate abstract this paper documents large cross country differences in the long run volatility of the real exchange rate it shows that the real exchange rate of developing countries is approximately three times more volatile than the real exchange rate in industrial countries the paper shows that this difference in volatility cannot be explained by the fact that developing countries face larger shocks both real and nominal recurrent currency crises or by different elasticities to these shocks arch estimations find a much higher persistence of deviations of the variance of the rer from its long run value when the economy suffers shocks of various kinds

terms of trade and exchange rate regimes in developing countries abstract since friedman essays in positive economics university of chicago press chicago 1953 157 203 an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks i use a post bretton woods sample 1973 96 of 75 developing countries to assess whether the responses of real gdp real exchange rates and prices to terms of trade shocks differ systematically across exchange rate regimes i find that responses are significantly different across regimes in a way that supports friedman s hypothesis the paper also examines the importance of terms of trade shocks in explaining the overall variance of output and prices in developing countries

adverse selection in dynamic moral hazard this paper studies a multiperiod moral hazard problem under two assumptions i contracts are subject to renegotiations ii the agent s action has long term effects the action is also interpreted as a choice of characteristic or type renegotiation proof contracts that implement various actions including random ones are characterized under appropriate conditions the equilibrium involves the principal implementing a random action therefore the equilibrium has standard properties of adverse selection models

does the exchange rate regime matter for real shocks evidence from windstorms and earthquakes abstract does the choice of exchange rate regime affect an economy s adjustment to real shocks exploiting the unpredictability and economic exogeniety of windstorms hurricanes and typhoons and earthquakes this paper assesses the often contrasting answers found in the theoretical literature there is robust evidence that exchange rate flexibility helps an economy better adjust to real shocks and consistent with the channels emphasized in the classic literature on exchange rates and shocks differences in the behavior of the export sector help explain the different reactions between the two regimes

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

the incentive effects of dismissals efficiency wages piece rates and profit sharing the relation of several incentive schemes to productivity is studied with a particular emphasis on the effects and determinants of dismissals dismissals turn out to be positively but in a nonlinear way associated with productivity similarly profit sharing raises productivity wages and piece rates are insignificant profit sharing decreases the number of dismissals made by firms copyright 1991 by mit press

economic liberalization via imf structural adjustment sowing the seeds of civil war previous studies that have explored the effects of economic liberalization on civil war have employed aggregate measures of openness and have failed to account for potential endogeneity bias in this research note we suggest two improvements to the study of the relationship between liberalization and civil war first emphasizing that it is processes that systematically create new economic winners and losers rather than particular levels of economic openness that have the potential to generate conflict we consider the effects of one oft used means of liberalizing economies the adoption by countries of international monetary fund imf structural adjustment programs second we use a bivariate probit model to address issues of endogeneity bias analyzing all data available for the period between 1970 and 1999 we identify an association between the adoption of imf programs and the onset of civil war this finding suggests that imf programs to promote economic openness unintentionally may be creating an environment conducive to domestic conflict

is work special justice and the distribution of employment i investigate from an egalitarian welfarist standpoint the issue of whether state guaranteed employment should be offered as a matter of right to able bodied poor citizens who suffer chronic or persistent unemployment an affirmative answer is defended one consideration supporting this right to work is that provision of transfer aid in the form of jobs rather than cash screens nonneedy bohemians from the class of beneficiaries the main conclusion of the essay is defended from one objection based on efficiency wage models of the labor market and from another based on the alleged impossibility of maintaining the self respect and self esteem of able bodied individuals who fail to earn their own keep independently in a market economy

an empirical inquiry into the role of sectoral diversification in exchange rate regime choice abstract whether sectoral diversification affects the exchange rate regime choice and the mechanisms through which this effect might work are largely unknown this study identifies two mechanisms through which sectoral diversification and exchange rate regime choice may be related namely the external shock absorption and rent seeking mechanisms a direct effect of diversification on regime choice is also hypothesized using a panel dataset covering 91 countries over the period 1985 2006 the paper runs a horse race among these potential channels the results show that diversification is associated with flexible regimes in countries experiencing greater external shocks additionally countries characterized by higher levels of corruption and lower levels of diversification opt for fixed regimes suggesting that a fixed regime may shield the powerful elites from international competition there is also weak evidence of the direct effect of diversification in adopting flexible regimes

great expectations and hard times the argentine convertibility plan this paper studies the process that led to the argentine crisis the analysis concentrates on the sequence of public and private decisions together with the varying perceptions and policy incentives that motivated them in the 1990s argentina searched for a new growth trend during much of the period the behavior of agents seemed to be based on the anticipation that current and future incomes could sustain a value of domestic spending much higher than in the past in both real and dollar terms the government was motivated to reinforce those expectations for signaling and political economy reasons the monetary regime not only provided a very visible nominal anchor but also operated as a basic framework for financial contracts mostly denominated in dollars dollar contracting implicitly presumed that the dollar value of incomes would support the servicing of debts despite precautionary actions on the part of the government and the private sector over time an increasing mass of decisions and contracts came to rely on the sustainability of the real exchange rate in the late 1990s exports stopped rising and the foreign supply of credit tightened the economy contracted in the face of these constraints and the solvency of the government was called into question the financial system was vulnerable both in the event of devaluation and in the event of a large deflation cum adjustment convertibility proved to have very large exit costs as was implicit in its design and management

credit layering in informal financial markets abstract informal lenders with access to markets or capital often find it attractive to delegate loan provision to downstream lenders who have an information or enforcement advantage in dealing with particular borrowers in this paper we examine the conditions under which such an arrangement is preferred by two informal lenders a landlord and a merchant who compete in loan provision to tenant farmers differentiated by wealth we show that credit layering is preferred only when tenants are sufficiently poor in this case the trader lends to tenant farmers via a contract with their landlord otherwise only the trader lends as a consequence a pattern of borrowing emerges in which relatively wealthy tenants borrow from merchants while poor tenants borrow mainly from their landlords interlinkage between land and credit thus arises only for a subset of tenants and purely as a consequence of credit layering this pattern is shown to be supported empirically

environmental accidents under moral hazard and limited firm liability we study optimal government policy when firms operations involve a risk of a large environmental accident firms do not have sufficient assets to cover such costs and the risk is affected by firms efforts which are unobservable to outsiders when firms profits and government revenues have equal weights in the social welfare function a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident and all its assets confiscated in the event of an accident with a lower weight on firm profits the solution is always second best with lower subsidies to the firm and a firm effort lower than at the first best solution when firm investments affect both the required accident preventing effort for given risk and the work effort required for a given output the first best never involves specific investment subsidies while a second best solution generally always does

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

theoretical foundations for sticky wages abstract the paper compares three different types of theoretical explanation of sticky wages they are implicit contracts efficiency wage models and insider outsider models it then reconsiders keynes rationale for sticky wages which focuses on relative wage issues finally the paper considers possible directions for future research

the structural determinants of external vulnerability the authors examine empirically how domestic structural characteristics related to openness and product and factor market flexibility influence the impact that terms of trade shocks can have on aggregate output for this purpose they apply an econometric methodology based on semi structural vector auto regressions to a panel of 90 countries with annual observations for the period 1974 2000 using this methodology the authors isolate and standardize the shocks estimate their impact on gdp and examine how this impact depends on the domestic conditions outlined above they find that larger trade openness magnifies the output impact of external shocks particularly the negative ones while improvements in labor market flexibility and financial openness reduce their impact domestic financial depth has a more nuanced role in stabilizing the economy it helps reduce the impact of external shocks particularly in environments of high exposure that is when trade and financial openness are high firm entry is unrestricted and labor markets are rigid

dynamic microlending under adverse selection can it rival group lending we derive an optimal lending contract in a two period adverse selection model with limited commitment on the borrower side the contract involves penalty interest rates after default and favorable rates after success under some conditions it also charges first time borrowers higher rates than repeat borrowers as in relationship lending because the lender is constrained to keep borrowing attractive while using revealed information to price for risk we compare the efficiency of a group lending contract of the kind popularized by the microcredit movement to the dynamic individual contract both types of contracts reveal the same information but the contracts face different constraints on using the information to improve risk pricing as a result either type of contract can lead to greater efficiency depending on specifics of the environment opening the possibility that dynamic lending has played a role comparable to that of group lending in the success of microcredit we also characterize the optimal dynamic group contract when both lending techniques are feasible and find that it combines both approaches but with varying emphases a recurrent theme is that in more marginal environments dynamic lending performs relatively better than and is prioritized over group lending we also discuss a number of extensions including spatially and serially correlated risk and the effect of competition

financial instability in latin america in this paper i deal with a number of issues related to financial instability in latin america i first discuss from a macroeconomic research perspective what i believe are some of the most important policy issues faced by the latin american nations these include the effectiveness of controls on capital inflows the effect of exchange rate depreciation on output and the international transmission of the business cycle second i argue that the economic research agenda on latin america should not ignore history in latin america more so than in any other region in the world there has been a self destructing tendency for repeating history 2003 elsevier ltd all rights reserved

peer monitoring and credit markets a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced one partial solution is peer monitoring having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt peer monitoring is largely responsible for the successful financial performance of the grameen bank of bangladesh and of similar group lending programs elsewhere but peer monitoring has a cost it transfers risk from the bank which is in a better position to bear risk to the cosigner in a simple model of peer monitoring in a competitive credit market this article demonstrates that the transfer of risk leads to an improvement in borrowers welfare

short term contracting and strategic oil reserves the effect of short term contracting on resource extraction is studied in a two country model of international trade in oil countries planners are assumed to be fully rational with perfect information and perfect foresight contracts are assumed perfectly enforceable and complete except that short term contracts do not allow commitments to actions taken beyond the contract period we show that short term contracting limits countries opportunities for intertemporal consumption smoothing reducing their collective tolerance for temporal variation in consumption this tends to make them extract more slowly than in the efficient plan that results from long term contracting contractual relationships often outlive the contracts that govern them it is therefore common for a long term relationship to be governed by a sequence of short term contracts when these contracts allow complete control of the organization of the relationship within each contract period any outcome that can be achieved in a long term contract covering the entire life of the relationship is also feasible with a sequence of short term contracts short term contracting can nevertheless have significant effects on resource allocation because each contract must be voluntarily negotiated in the environment created by its predecessors an allocation that is acceptable to both parties as a long term contract might not be voluntarily negotiable as a sequence of short term contracts because short term contracting is so prevalent it is worth asking what sorts of relationship can be organized efficiently only by long term contract and what kinds of distortion are caused by short term contracting two kinds of answers to these questions have been given in the literature one important line of investigation considers the use of memory in contracts designed to control parties incentives under asymmetric information baron and besanko 1985 rubinstein and yaari 1983 sanchez and zapater 1985 stiglitz and weiss 1983 tirole 1986 and townsend 1982 among others have shown how parties can use

building an incentive compatible safety net abstract bank safety nets originally proposed as a means of stabilizing financial systems have become an important destabilizing influence government protection of bank debts encourages banks to undertake excessive risk particularly in response to adverse shocks to asset values reforms that would remove the destabilizing moral hazard consequences of government protection are considered both from the perspective of economic desirability and political feasibility requiring banks to maintain a minimal proportion of subordinated debt finance and restricting the means by which government recapitalization of insolvent banks occurs are the central features of promising reforms to the safety net

argentina s currency board collapse weak policy or bad luck two basic views can be discerned in post mortems of argentina s currency board 1 that weak fiscal policy was fundamentally to blame and 2 that the peso had become too severely overvalued for the peg to survive this paper evaluates the evidence for these rival interpretations the real effective exchange rate index did not indicate massive overvaluation but this index does not capture the effects on the equilibrium rate of the sudden stop in capital flows to emerging markets after 1998 it also understates the amount of adjustment required for argentina to reach the equilibrium rate because neighbour countries dollar exchange rates were held up by argentina s overvaluation as is indicated by their depreciation in 2002 argentina was particularly vulnerable to the sudden stop because of the extreme volatility of its portfolio inflows fiscal policy simulations suggest that even with a substantially improved primary balance from 1994 onwards loss of investor confidence would still have triggered unsustainable debt dynamics once the recession began to bite after 1998 the stagnation of output and prices in argentina created a yawning gap between the interest rate on debt and the rate of growth of nominal gdp had the currency been floated in say 1995 the real devaluation of the peso would still have pushed up the debt gdp ratio but higher output would have left greater scope for addressing this by running a sizeable primary surplus moreover the more gradual depreciation under floating might have allowed the economy to adjust to higher debt service payments without resort to default the imf has criticised itself for not pressing for tighter fiscal policy in the 1990s a more fundamental criticism would be that it was seduced by the bipolar model into complacency about adjustment to real shocks and forgetting the teachings of optimum currency area theory

information institutions and banking sector development in west africa i introduction banks and other financial intermediaries can perform an important developmental function especially in africa where alternative sources of finance are limited or nonexistent by providing firms with essential finance they help them to take advantage of productive investment opportunities which may not otherwise materialize by screening loan applicants they can help to address adverse selection in the credit market and channel funds toward productive uses by monitoring borrowers they can contain moral hazard behavior for example excessively risky investment activity that could undermine a borrower s ability to repay a loan through long term bank borrower relationships well established banks can address both adverse selection and moral hazard this not only helps banks to remain solvent but also ensures that bank finance is channeled toward productive and sound investments there is a large body of empirical evidence which suggests that the development of banking systems goes hand in hand with economic development see e g levine 2004 although the evidence on causality is mixed see e g demetriades and hussein 1996 there is broad consensus that well functioning banking systems promote economic growth demetriades and andrianova 2005 it is therefore a puzzle that so many countries remain financially underdeveloped this is particularly true of sub saharan africa which remains one of the most financially under developed regions in the world a recent study by the world bank has shown that african banking systems lack depth compared to other regions in the world but are also excessively liquid honohan and beck 2007 according to the world bank banks themselves complain that there is a lack of creditworthy borrowers while at the same time households and firms find finance to be a major constraint the evidence presented by the world bank also suggests that the least developed banking systems are also the most liquid suggesting that excess liquidity is a common feature of financial under development this article aims to shed light on these features of financial under development in africa utilizing a panel data set comprising the banks operating in the west african economic and monetary union uemoa during 2000 2005 the uemoa provides a uniform financial system across eight countries the structure of this system has changed little in the last 15 years therefore we can be sure that the variations in bank behavior we observe within the uemoa are not because of variations in the nature of public financial institutions which the banks face this makes feasible the identification of the institutional sources of the variations in bank behavior which are not correlated with variations in the quality of public financial institutions our data set includes balance sheet information on each bank in the uemoa including bank characteristics such as age and ownership type profitability and the number of urban and rural branches we also utilize country level data on loan defaults which provides information on the average quality of borrowers we use this as a proxy for the severity of information problems faced by banks in the credit market we combine this information with macroeconomic data including institutional quality indices constructed by the world bank our data set enables us to examine the extent to which informational and institutional factors and interactions between different factors can explain a bank s loans to assets ratio which is an inverse measure of bank liquidity our data set is also used to examine the microeconomic and macroeconomic determinants of the total volume of assets of an individual bank which is a good micro level indicator of overall banking sector development our results suggest that to a large extent financial under development including excess liquidity and low banking sector development can be attributed to severe informational problems

competing lending platforms endogenous reputation and fragility in microcredit markets this paper shows that market fragility and mass default can arise in microcredit markets as a result of the strategic interaction between a microlender using a reputation based mechanism and a traditional lender using physical collateral in our model borrowers solve a dynamic programming problem which induces an endogenous equilibrium distribution of reputational capital because the quality of each lender s pool of borrowers is affected by both lenders interest rates lender reaction curves are non monotonic and discontinuous this can result in knife edge equilibria and mass default on the microlender precipitated by minor parametric perturbations fragility is exacerbated by borrower screening and sovereign risk but ameliorated when microlenders have social welfare goals our results highlight the importance of studying the entire credit market rather than microfinance in isolation

the life cycle of a microfinance institution the irish loan funds abstract ireland s loan funds were a long lived self sustaining large scale microfinance organization that made millions of loans without collateral to the poor during the first 100 years of their life cycle a period of growth ending in the 1840s they adapted constantly and obtained improvements to their legal structure because they were complementary to the banking system and seen as effective in relieving poverty in their 2nd century they became ossified in part because of competition with commercial banks the loan funds provide an example of sustainable microfinance under harsh economic conditions and illustrate how organizations change incrementally and when successful alter their institutional framework

the mirage of exchange rate regimes for emerging market countries this paper argues that much of the debate on choosing an exchange rate regime misses the boat it begins by discussing the standard theory of choice between exchange rate regimes and then explores the weaknesses in this theory especially when it is applied to emerging market economies it then discusses a range of institutional traits that might predispose a country to favor either fixed or floating rates and then turns to the converse question of whether the choice of exchange rate regime may favor the development of certain desirable institutional traits the conclusion from the analysis is that the choice of exchange rate regime is likely to be of second order importance to the development of good fiscal financial and monetary institutions in producing macroeconomic success in emerging market countries this suggests that less attention should be focused on the general question whether a floating or a fixed exchange rate is preferable and more on these deeper institutional arrangements a focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years

coping with terms of trade shocks pegs versus floats the choice of the exchange rate regime has always been an area of great controversy and debate the discussion has once again taken center stage in the developing world the sequence of currency crises in the 1990 s the success of cultency board arrangements the dollarization plan of ecuador and the apparent swing toward flexible regimes of many emerging economies has revived interest in this debate milton friedman 1953 argued that one of the most important advantages of flexible regimes over fixed regimes is that they can smooth adjustment to real shocks even in the presence of nominal rigidities ever since this has been one of the least disputed benefits attributed to fully flexible exchange rate regimes subsequent to friedman many theories of the international transmission of real shocks have confirmed the original intuition that the shortrun responses to terms of trade shocks should be different across exchange rate regimes here i look at a post bretton woods sample of 74 developing countries to test whether flexible regimes can buffer terms of trade shocks better than fixed regimes