the effects of total factor productivity and export shocks on a small open economy with unemployment abstract the paper analyzes the dynamic effects of a supply side shock and a demand side shock which hit an open economy with unemployment the supply side shock is modeled as a reduction in total factor productivity whereas the demand side shock is caused by a drop in exports the model builds upon the small one sector two good open economy framework described in turnovsky 2000 chapter 11 3 in contrast to this standard framework in which walrasian labor markets are assumed search unemployment and wage bargaining are introduced and unemployment results from time consuming and costly matching of vacancies with searching agents using a plausible calibration of the model the dynamic adjustments of unemployment output and other economic key variables are analyzed we find that a negative export shock primarily has effects on consumption and welfare but not on unemployment and output whereas the supply side shock leads to considerable responses of unemployment output consumption and welfare if both shocks together hit the economy the changes in consumption and welfare almost double

currency preferences and the australian dollar abstract we investigate currency substitution and currency complementarity in the case of the australian dollar data spanning 1984 2003 contain evidence of the australian dollar s substitution for the deutschmark and complementarity with the yen and the us dollar consistent with the theory that international variables will in general affect the demand for domestic money atemporally nonseparable preferences also give rise to the possibility of third currency effects our regressions find some evidence of these for example a rise in the us federal funds rate has been associated with rises in the value of the australian dollar against the mark and yen controlling for changes in other interest rates and in money supplies and real outputs

trend growth expectations and u s house prices before and after the crisis abstract we provide an analysis that might help distinguish rationally justified movements in house prices from potentially non rational movements using a two sector business cycle model in which investment in housing is subject to collateral constraints a large portion of the evolution of u s house prices during the past 20 years can be reproduced when expectations of future income growth as published in surveys are used as an input into the model changes in growth expectations translate into corresponding changes in house prices since the value of housing must be linked to expected aggregate income only since about 2005 do actual and model implied house prices clearly diverge calling for explanations not based on economic fundamentals

a model of housing and credit cycles with imperfect market knowledge abstract the paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion contraction positive negative development in house prices fuels optimism pessimism and credit expansion contraction which in turn boost dampen housing demand and house prices and reinforce agents optimism pessimism bayesian learning about house prices can endogenously generate self reinforcing booms and busts in house prices and significantly strengthen the role of collateral constraints in aggregate fluctuations the model can quantitatively account for the 2001 2008 u s boom bust cycle in house prices and associated household debt and consumption dynamics it also demonstrates that allowing for imperfect knowledge of agents a higher leveraged economy is more prone to self reinforcing fluctuations

sovereign debt as a contingent claim a quantitative approach abstract we construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt in the model benefits of defaulting are tempered by higher future interest rates for a wide set of parameters the only equilibrium is one in which the sovereign defaults in all states additional output losses however sustain equilibria that resemble the data we show that due to the adverse selection problem some countries choose to delay default to reduce loss of reputation moreover although equilibria with no default imply greater welfare levels they are not sustainable in highly indebted and volatile countries

the behaviour of the real exchange rate evidence from regression quantiles abstract we test for mean reversion in real exchange rates using a recently developed unit root test for non normal processes based on quantile autoregression inference in semi parametric and non parametric settings the quantile regression approach allows us to directly capture the impact of different magnitudes of shocks that hit the real exchange rate conditional on its past history and can detect asymmetric dynamic adjustment of the real exchange rate towards its long run equilibrium it therefore provides a detailed mapping of the real exchange rate behaviour while being a robust alternative to previous unit root tests the latter is confirmed by a simulation analysis comparing the power of the alternative tests as concerns the real exchange rate our results suggest that large shocks tend to induce strong mean reverting tendencies in the exchange rate with half lives less than one year in the extreme quantiles mean reversion is faster when large shocks originate at points of large real exchange rate deviations from the long run equilibrium however in the absence of shocks no mean reversion is observed finally we report asymmetries in the dynamic adjustment of the rer

wall street and the housing bubble we analyze whether mid level managers in securitized finance were aware of the housing bubble and a looming crisis in 2004 2006 using their personal home transaction data we find little evidence of them timing the bubble or exercising cautious behavior in purchasing homes relative to two uninformed control groups one composed of non housing equity analysts and the other of non real estate lawyers to the extent that the practice of securitization may have led to lax screening of subprime borrowers the average person in our sample did not expect it to lead to problems in the wider housing market our findings suggest the need to expand the incentives based view of the crisis to incorporate a role for distorted beliefs

the distribution of exchange rate returns and the pricing of currency options an empirical model of the distribution of exchange rate returns based on a combination of the generalized student t distribution and conditional variance specifications is formulated and estimated for four daily bilateral exchange rates over the period 1984 to 1991 the empirical results show that the stylized characteristics of exchange rate returns such as volatility clustering leptokurtosis and skewness are consistently captured by this model in contrast with other model specifications based on more restrictive distributional assumptions implications of the analysis are also investigated for the pricing of currency options including comparisons with black scholes prices

on rational bubbles and fat tails this paper addresses the statistical properties of time series driven by rational bubbles a la blanchard and watson 1982 using insights on the behavior of multiplicative stochastic processes we demonstrate that the tails of the unconditional distribution emerging from such bubble processes follow power laws exhibit hyperbolic decline more precisely we find that rational bubbles predict a fat power tail for both the bubble component and price differences with an exponent smaller than 1 the distribution of returns is dominated by the same power law over an extended range of large returns although power law tails are a pervasive feature of empirical data these numerical predictions are in disagreement with the usual empirical estimates it therefore appears that exogenous rational bubbles are hardly reconcilable with some of the stylized facts of financial data at a very elementary level

coffee economic fluctuations and stabilisation an intertemporal disequilibrium model with capital market imperfections abstract this paper develops a two period disequilibrium model of a small open economy under keynesian unemployment to analyse the effects of temporary anticipated and permanent coffee price shocks the model includes a government sector that administers a commodity price stabilisation fund and allows for capital market imperfections the type of capital market imperfection makes an important difference to the results of the model in particular when the government borrows on more favourable terms than individuals the coffee price stabilisation fund reduces the multiplier effects of temporary and permanent shocks not only in the first but also in the second period by contrast when individuals face an upward sloping supply of capital curve the stabilisation fund shifts some of these effects from the first to the second period

the handbook of international macroeconomics preface 1 introduction rick van der ploeg amsterdam 2 quantity constrained models of open economies neil rankin warwick 3 imperfect competition and open economy macroeconomics huw d dixon york 4 relative price movements in dynamic general equilibrium models of international trade david backus nyu patrick kehoe pennsylvania and finn kydland carnegie mellon 5 international fiscal policy coordination and competition assaf razin and efraim sadka tel aviv 6 capital taxation in the world economy a lans bovenberg tilburg 7 history of the international monetary system implications for research in international macroeconomics and finance barry eichengreen berkeley 8 on inflation unemployment and the optimal exchange rate regime george alogoskoufis athens 9 macroeconomic policy speculative attacks and balance of payments crisis pierre richard agenor and robert p flood imf 10 continuous time models of exchange rates and intervention giuseppe bertola princeton 11 stylized facts of nominal exchange rate returns casper g de vries leuven 12 partial versus general equilibrium models of international capital market equilibrium 13 sovereign debt kenneth kletzer santa cruz 14 growth and external debt daniel cohen cepremap 15 growth and deficits in an interdependent world index

using option prices to estimate realignment probabilities in the european monetary system the case of sterling mark abstract this paper describes a procedure for estimating the market s perceived probability distribution of future exchange rates from the prices of risk reversals strangles and other currency options and uses the procedure to estimate the risk neutral ex ante probability of a realignment of the pound sterling the procedure for estimating the realignment probabilities relies on the jump diffusion model of exchange rate behavior and the resulting option pricing formula by fitting this model to market option price data i retrieve the unobserved parameters of the jump diffusion process i then use these parameter estimates to estimate the ex ante probability distribution of exchange rates and thus the realignment probabilities

financial innovation the discovery of risk and the u s credit crisis abstract financial innovation and overconfidence about the risk of new financial products were key factors behind the 2008 u s credit crisis we show that a model with a collateral constraint in which learning about the risk of a new financial environment interacts with fisherian amplification produces a boom bust cycle in debt asset prices and consumption early realizations of a high borrowing ability regime turn agents optimistic about the persistence probability of this regime conversely the first realization of a low borrowing ability regime turns agents unduly pessimistic the model predicts large increases in household debt land prices and excess returns during 1998 2006 followed by a collapse

expectation shocks and learning as drivers of the business cycle psychological factors market sentiments and less than fully rational shifts in beliefs are widely believed to play a role in the economy yet they are rarely considered in macroeconomic models this paper evaluates the empirical role of expectational shocks on business cycle fluctuations the paper relaxes the rational expectations assumption to exploit survey data on expectations in the estimation of a new keynesian model which allows for learning by economic agents expectation shocks affect the formation of expectations and capture waves of optimism and pessimism that lead agents to form forecasts that deviate from those implied by their learning model the empirical results uncover a crucial role for these novel expectations shocks as a major driving force of the u s business cycle expectation shocks regarding future real activity are the main source of economic fluctuations accounting for roughly half of business cycle fluctuations

expectations learning and business cycle fluctuations this paper explores an alternative theory based on learning dynamics in the con text of an otherwise standard stochastic growth model we consider an environment in which households and firms have an incomplete model of the macroeconomy knowing only their own objectives constraints and beliefs agents are optimizing have a completely specified belief system but do not know the equilibrium map ping between primitive disturbances the aggregate state of the economy and mar ket clearing prices by extrapolating from historical patterns in observed data they approximate this mapping to forecast variables that are exogenous to their decision problems such as the rental rate of capital and the real wage this belief structure has the property that beliefs affect the true data generating process of the economy which in turn affects belief formation the economy is therefore self referential shifts in beliefs about future returns to labor and capital affect current market clear ing prices which in turn can reinforce beliefs in this environment current prices can become less informative about future economic conditions generating fluctuations in real activity this kind of mechanism driving business cycle fluctuations is found in early writ ings on macroeconomic dynamics for example alfred c pigou 1927 on page 122 writes

are more resources always the answer a supply and demand analysis for public health services in brazilian municipalities abstract the aim of this paper is to determine whether it is necessary to increase available resources to local governments or if better use of these funds is sufficient the paper contributes to the literature by looking both at the supply and demand for public health services if the demand is estimated correctly one can compare its expected value to actual health expenditures even if actual expenditures are lower than the estimated demand it is not certain that additional spending is necessary if the efficiency scores supply side indicate that local governments can simply save resources to make up for the difference then it is possible to reduce or bring to zero new resources only by requiring local governments to efficiently manage their expenditures since municipalities in brazil are very heterogeneous we estimate their efficiency using the metafrontier approach o donnell et al 2008 while we estimate the demand through an equation derived from the median voter theorem model using 2010 data we find evidence that efficient management of spending is sufficient to meet excess demand for goods and services in the health sector

solving the real business cycles model of small open economies by a sample independent approach abstract one hallmark of small open economy models with a time separable preference assumption is the non uniqueness of their steady states following king et al j monetary econ 21 1988 195 232 most studies compute a log linear approximation solution to their small open economies around the sample means of the corresponding variables the resulting reliance of the outcome on a particular sample may lead to different implications about the business cycles properties of a small open economy this paper proposes a sample independent approach to solving this kind of model and shows its superiority over a sample dependent method through some simulation results

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

internal rationality imperfect market knowledge and asset prices we present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning agents are internally rational i e maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future but agents may not be externally rational i e may not know the true stochastic process for payoff relevant variables beyond their control this includes future market outcomes and fundamentals we apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors expectations of the price and dividend in the next period rather than by expectations of the discounted sum of dividends as a result learning about price behavior affects market outcomes while learning about the discounted sum of dividends is irrelevant for equilibrium prices stock prices equal the discounted sum of dividends only after making very strong assumptions about agents market knowledge

tariffs and exchange rate dynamics redux abstract this paper builds a two country intertemporal macroeconomic model similar to one developed recently by obstfeld and rogoff imperfectly competitive producer consumers maximize an intertemporal utility function with consumption real money balances and output as arguments we use the framework to examine both the short run and steady state effects of the imposition of a tariff in one of the countries this results in a fall in the tariff imposer s output in both the steady state and in the short run a small tariff may make a country worse off contrary to the usual result under perfect competition spillover effects are also considered

currency substitution and speculative attacks on a currency board system abstract a currency board arrangement cba is supposed to be robust against attacks currency substitution complicates life with controversial implications for floating versus fixed exchange rate regimes after reporting evidence of currency substitution in hong kong a monetary model incorporating currency substitution is used to estimate the shadow exchange rate and the probability of speculative attack on the hong kong dollar a decomposition analysis of a markov switching model indicates that the no attack regime was the most durable one this implies that hong kong s quasi cba was relatively robust against both speculative attacks and currency substitution

estimating saving investment correlations evidence for oecd countries based on an error correction model abstract saving investment correlations are important stylized facts in open economy macroeconomics and indicators of capital mobility they are best estimated by an error correction model ecm because an ecm is consistent with intertemporal general equilibrium models the ecm is a synthesis of previous approaches applying the ecm to the oecd countries we find that in general saving and investment are cointegrated the ecm is more powerful in detecting cointegration than the two step engle granger procedure estimates of the saving investment correlation are robust with respect to overdifferencing we find evidence of a large country effect and an increase in capital mobility within the oecd area

measuring the degree of exchange market intervention in a small open economy abstract in this article i introduce an index of intervention activity which can be calculated on the basis of observed data this intervention index measures intervention activity as the proportion of exchange market pressure relieved by exchange market intervention the properties of the intervention index are established analytically using a model of a small open economy with rational expectations the index is used to calculate measures of bilateral and multilateral intervention for canada over the period 1975 1990

dollarization in post hyperinflationary argentina abstract this paper analyzes the continued dollarization of the argentine economy which experienced a rapid decline in inflation following its hyperinflations of the 1980s first a measure of dollar currency circulating in argentina is developed thereby improving upon previous studies of dollarization and currency substitution that focused on dollar deposit holdings only second cointegration analysis of peso money demand in argentina finds a negative ratchet effect from inflation the reduction in peso money demand attributable to the ratchet mirrors the estimated stock of all dollar assets held domestically by argentine residents consistent with the hypothesis of irreversible dollarization

learning adaptive expectations and technology shocks this study explores the macroeconomic implications of adaptive expectations in a standard growth model we show that the self confirming equilibrium under adaptive expectations is the same as the steady state rational expectations equilibrium for all admissible parameter values but that dynamics around the steady state are substantially different between the two equilibria the differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect not by escapes emphasised by williams 2003 consequently adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labour market dynamics

what causes the failure of inflation stabilization plans abstract the paper discusses the causes of failure of inflation stabilization plans following a description of stylized facts of inflation stabilization a model of balance of payments crises is presented highlighting some of the main factors leading to the collapse of stabilizations empirical results obtained when estimating a binary probit model over a panel of 34 stabilizations identify real exchange rate appreciation lack of foreign reserves and government budget deficits as the main causes of failure of inflation stabilization plans this is consistent with the model presented in this paper with the stylized facts of stabilizations and with some of the models found in the literature

credit cycles redux theoretical studies have shown that under unorthodox assumptions on preferences and production technologies collateral constraints can act as a powerful amplification and propagation mechanism of exogenous shocks we investigate whether or not this result holds under more standard assumptions we find that collateral constraints typically generate small output amplification large amplification is obtained as a knife edge type of result

learning with misspecification in an artificial currency market abstract agents evolve their forecast rules over time via a modified genetic algorithm in a simple artificial currency market these forecast rules can be nonlinearly misspecified when the misspecification is suppressed learning tends to be complete when it is not suppressed learning can generate persistent exchange rate dynamics

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

nominal rigidity and monetary uncertainty in a small open economy temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy the foreign country is also modelled and is the closed economy counterpart of the domestic country we examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy a signal of an increase in future variability which was not previously foreseen as a risk by agents is shown to weaken the current exchange rate and boost current output in the small open economy in the equivalent closed economy it has no effect on current variables

exchange rate predictability and monetary fundamentals in a small multi country panel in this paper a panel of vector error correction models based on a common long run relationship is utilized to test whether the euro exchange rates of canada japan and the united states have a long run link with monetary fundamentals we use both exchange relationships relative to the full emu area with synthetic aggregates for the pre emu period and relative to germany solely compared to existing cointegration frameworks our approach provides more evidence that the aforementioned exchange rates are consistent with a rational expectations based monetary exchange rate model based on a common long run relationship albeit with a long run impact of relative income that is higher than predicted by the theory as a next step we analyze the out of sample fit of this common long run exchange rate model relative to naive random walk based forecasts these forecasting evaluations indicate that the monetary fundamentals based common longrun model is superior to both random walk based forecasts and standard cointegrated var model based forecasts especially at horizons of 2 to 4 years

the dynamics of inflation and currency substitution in a small open economy abstract this paper analyzes the relationship between money and inflation in a small open economy where domestic and foreign currencies are perfect substitutes as means of payment it is shown that if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled there will be an adjustment period during which domestic inflation adjusts to equal the foreign inflation rate the model captures the stylized fact that temporary increases in the inflation rate may have permanent effects in the use of foreign currency even without the introduction of dollarization costs

time to enter and business cycles abstract this paper examines a model in which market entry forms a business cycle propagation mechanism during expansionary periods new firms enter previously monopolized markets creating efficiency gains that amplify the effect of technology and fiscal policy shocks on employment market entry is delayed creating a dynamic pattern to output growth closer to that observed in the us economy than the standard rbc model

competing commitments technocracy and democracy in the design of monetary institutions in this article i refine and expand the agenda for research on monetary institutions first i evaluate the analyses and research designs presented in this special issue of international organization out of this evaluation several ideas about how to produce a third generation of research on this topic emerge specific ideas include how to create a better synthesis with certain branches of economics such as information economics broaden the welfare criteria on which institutional choices are made deepen the analyses of coalitional and other political processes on which the choice of institutions are based and strengthen the tests that are offered in support of these choices in the second part of this article i explore questions of how popular sovereignty over economic policy and institutional choice are achieved i show that the institutional regimes proposed in the special issue are in a sense democratic as long as the public s perceived consensus about economic policies and macroeconomic outcomes is real however if as new work suggests there is genuine dissensus about policy and macroeconomic objectives it is no longer clear that the regimes proposed in the special issue are democratic in the conclusion i briefly discuss a possible crisis of imagination in institutional design