capital controls and monetary policy in sudden stop economies abstract the dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies this paper studies the benefits of capital controls and monetary policy in a small open economy with financial frictions nominal rigidities and sudden stops without commitment the optimal monetary policy should sharply diverge from price stability the policymakers will also tax capital inflows in a crisis but such taxes may be welfare reducing with commitment capital controls involve a mix of current capital inflow taxes and future capital flow subsidies the optimal policy will never involve macro prudential capital inflow taxes or a departure from price stability whether or not commitment is available

credible public policy abstract credible public policy is defined in a way that incorporates competitive equilibrium behavior for households and subgame perfect nash equilibrium behavior for the government it is shown that the set of all equilibrium outcome paths for credible policies can be constructed by using arguments analogous to those of abreu 1988 for repeated games the results are then extended to systems with state variables simple models of monetary policy and capital taxation are studied by way of example

the role of investment specific technological change in the business cycle this is a quantitative investigation of the importance of technological change speci c to new investment goods for postwar us aggregate uctuations a growth model that incorporates this form of technological change is calibrated to us data and simulated using the relative price of new equipment to identify the process driving investmentspeci c technology shocks the analysis suggests that this form of technological change is the source of about 30 of output uctuations 2000 elsevier science b v all rights reserved

twin dollarization and exchange rate policy abstract this paper develops a small open economy general equilibrium model with nominal rigidities to study twin dollarization in east asian economies a phenomenon where firms borrow in us dollars and also set export prices in us dollars in this model we endogenize both the currency of liability denomination and the currency of export pricing we show that a key factor that affects firms dollarization decisions is exchange rate policy twin dollarization is an optimal strategy for all firms when exchange rate flexibility is limited which implies that a fixed exchange rate regime may lead to an equilibrium with twin dollarization furthermore we find that twin dollarization can reduce the welfare loss caused by the fixed exchange rate regime as it helps to cushion the economy against domestic nominal risk

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

fire sales and the financial accelerator abstract during financial turmoil increases in risk lead to higher default foreclosure and fire sales this paper introduces a costly liquidation process for foreclosed collateral and pro cyclical recovery rates in a dynamic stochastic general equilibrium model of the financial accelerator links between endogenous recovery rates risk premia and default risk generate a liquidity spiral magnifying financial accelerator effects we illustrate how collateral liquidation and monetary policy alter the real impact of financial shocks operating through macro financial linkages and the way a government subsidy on collateral liquidity and required liquidity buffers can help dampen the liquidity spiral by shoring up recovery rates

capital markets and the exchange rate with special reference to the dollarization debate in latin america the paper reviews the main challenges faced by policymakers in emerging market economies em in light of recent financial crises and taking into account salient factors like the existence of partial dollarization imperfect credibility weak financial systems and contagion the standard theory of optimal currency areas is discussed and criticized for omitting the above factors when these factors are taken into account an extreme foreign exchange regime like dollarization is shown to become much more attractive the paper discusses the pros and cons of dollarization and among other things shows that the lack of a lender of last resort is not necessarily a major drawback in em the paper also discusses inflation targeting it in a formal model it is shown that it could be subject to credibility problems similar to those found in exchange rate based stabilization programs

stabilization policy and the costs of dollarization this paper compares the welfare costs of business cycles in a dollarized economy to those associated with several alternative monetary regimes belonging to three broad families interest rate feedback rules inflation targeting and money growth rate rules the analysis is conducted within an optimizing model of a small open economy with sticky prices the model is calibrated to the mexican economy and is driven by 3external shocks terms of trade world interest rate and import price inflation we show econometrically that these shocks explain more than 75 of the observed forecasting error variance of mexican output and the mexican real exchange rate at 4 to 16 quarter horizons the welfare comparisons suggest that dollarization is the least successful of the monetary policy rules considered agents are willing to give up more than 2 of their non stochastic steady state consumption to see a policy other than dollarization implemented

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

imperfect mobility of labor across sectors a reappraisal of the balassa samuelson effect this paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two sector open economy model with imperfect substitutability in hours worked across sectors the balassa samuelson 1964 model predicts that a rise in the sectoral productivity ratio by 1 raises the relative price of non tradables by 1 while leaving the non traded wage traded wage ratio unchanged applying cointegration methods to a panel of fourteen oecd countries over the period 1970 2007 our estimates show that the relative price rises by only 0 78 and the relative wage falls by 0 27 while our first set of empirical findings cast doubt on the quantitative predictions of the balassa samuelson model our second set of evidence highlights the role of imperfect labor mobility the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted in countries with higher intersectoral reallocation of labor we show that the ability of the two sector model to account for our evidence quantitatively relies upon two ingredients i imperfect mobility of labor across sectors and ii physical capital accumulation finally our numerical results reveal that the model predicts the relative price response fairly well and to a lesser extent the relative wage response

market structure and discrimination the case of small businesses this paper examines bank market structure to draw inferences concerning the role of discrimination in credit markets for small businesses the authors analyze credit application and denial rates loans outstanding and interest rates across demographic groups this set of variables in combination with information on local bank market structure helps them distinguish among borrower preferences lender tastes and inadequate lender information as likely causes of differences in credit market experiences of small business operators from distinct demographic groups the authors find that white men and women can expect similar treatment in credit markets with some benefits to female owned firms located in concentrated banking markets minorities by contrast fare worse than whites moreover by appealing to becker s 1957 classic theories we find some clear evidence to support the view that prejudicial discrimination is at least partly to blame

capital controls monetary policy and balance sheets in a small open economy we develop a small open economy new keynesian model that incorporates a financial accelerator in combination with liability dollarization applying a ramsey type analysis we compare the welfare implications of an optimal monetary policy under flexible exchange rates and an optimal capital control policy under fixed exchange rates in an economy without the financial accelerator an optimal monetary policy under flexible exchange rates is superior to an optimal capital control policy under fixed exchange rates in contrast in an economy with the financial accelerator an optimal capital control under fixed exchange rates yields higher welfare than an optimal monetary policy under flexible exchange rates jel e44 e52 f32 f38 f41

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

algorithms for asset replacement under limited technological forecast abstract the optimal asset replacement is analyzed when the future course of technological change is known on a limited future horizon comparison of factual and desired properties of known replacement methods leads us to the idea of how to improve their efficiency under changing technology reflected in decreasing operating and new asset costs we introduce new modifications of the economic life and two cycle variable horizon methods by correcting their capital recovery factor next we demonstrate that the modified methods deliver solutions equal or close to the infinite horizon replacement under technological change

vintage human capital and learning curves abstract i study a vintage human capital model in which long lived workers accumulate human capital following an exogenous learning curve different skill levels inside a vintage are complementary in production this makes the ex ante homogeneous workers enter different vintages the continuous time framework allows me to study the timing decision for the technology phase out differentially and to derive sharp characterization for wages and the distribution of workers in the dying technology i show how to posit and solve a planner s problem and construct equilibrium in this way consistent with empirical evidence i show that the experience premium is always positive but diminishes as a technology ages the connection between workers learning curves and the technology s progress curve is characterized

learning under fear of floating in recent years a large fraction of economies overcame the fear of floating we study a model that describes the policy of a central bank uncertain about whether currency depreciations cause output to expand textbook model or contract balance sheet model we conclude that the movement away from fear of floating may not be explained by bayesian or robust policies when the private sector anticipates the central bank s policy and endogenously determines the model central banks may fall in a learning trap an increase in financial volatility provides an escape to such trap that replicates patterns in the data

accounting for the east asian crisis a quantitative model of capital outflows in small open economies to what degree can the qualitative and quantitative aspects of the east asian crisis be accounted for within a dynamic general equilibrium model this paper investigates that question using a framework in which the crisis itself is modeled as an exogenous shock to the country risk premium this exercise has empirical discipline because the scale of the shock can be measured by the movement in the reported risk premium we calibrate a quantitative sticky price dynamic general equilibrium model of a small open economy to match the features of three east asian economies thailand korea and malaysia we identify a shock to the country risk premium using published data from international bond markets and identify shortrun monetary policy using observed domestic interest rates we find that the modeled response to the observed increase in external interest rates substantially matches macroeconomic data on prices and quantities at the aggregate and sectoral level however the model has more difficulty explaining the large exchange rate devaluations that occurred in those economies

international evidence on tradables and nontradables inflation abstract using 1970 1985 sectoral data for the oecd we find that inflation in nontradable goods exceeds inflation in tradables we identify a demand shift towards nontradables and faster growth of total factor productivity in the tradable goods sector as the prime causes of the differential inflation in addition disinflation attempts and the exchange rate regime appear to have exerted significant influence on the relative inflation rate

optimal monetary policy with international trade in intermediate inputs abstract this paper examines optimal monetary policy in a two country new keynesian model with international trade in intermediate inputs we derive the loss function of a cooperative monetary policymaker and find that the optimal monetary policy must target intermediate goods price inflation rates final goods price inflation rates final goods output gaps and relative price gaps we use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three taylor type monetary policy rules a main finding is that the degree of price stickiness at the stage of intermediate goods production is a key factor to determine which policy rule should be followed specifically when the degree of price stickiness at the stage of intermediate goods production is high the policymaker should follow intermediate goods ppi based taylor rule whereas cpi based taylor rule should be followed when the degree of price stickiness at the stage of intermediate goods production is intermediate or low

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

exchange rate pass through to domestic prices does the inflationary environment matter abstract the paper tests a hypothesis suggested by j taylor 2000 low inflation pass through and the pricing power of firms european economic review 44 7 1389 1408 that a low inflationary environment leads to a low exchange rate pass through to domestic prices to test this hypothesis the paper derives a pass through relation based on new open economy macroeconomic models a large database that includes 1979 2000 data for 71 countries is used to estimate this relation there is strong evidence of a positive and significant association between the pass through and the average inflation rate across countries and periods the inflation rate moreover dominates other macroeconomic variables in explaining cross regime differences in the pass through

macroeconomic stabilization in developing economies are optimal policies procyclical abstract many empirical studies provide evidence that macroeconomic policies as well as capital flows exhibit procyclical characteristics in developing economies in particular kaminsky et al 2004 when it rains it pours procyclical capital flows and macroeconomic policies nber macroeconomics annual mit press demonstrate that a large group of middle income countries run contractionary policies and experience capital flight during times of recession this paper investigates the role of international financial markets in explaining these macroeconomic policy and capital flow characteristics an optimal fiscal and monetary policy problem is formulated and solved for a small open economy that faces a country specific interest rate spread in international financial markets it is found that in the presence of the country spread optimal fiscal and monetary policies as well as capital flows are procyclical under a reasonable parametrization optimal policies and capital flows turn countercyclical in the absence of the country spread this pattern is robust to a range of alternative model specifications

money demand and the effects of fiscal policies this paper reexamines the choice of the scale variable in the money demand function a variety of evidence suggests that consumer spending is a better scale variable than gnp changing the money demand specification along these lines can profoundly affect the standard keynesian analysis of a tax cut copyright 1986 by ohio state university press

inflation inertia and credible disinflation abstract we develop a model of optimizing forward looking staggered price setting where even fully credible disinflations display a delayed and gradual inflation response and significant output losses there is a welfare trade off between these output losses and the gains from smaller inflationary distortions for reasonable parameter values disinflation improves welfare and more so if it is phased in gradually the pricing assumption of our model yields dynamics that are similar to models of sticky information but its state space is much simpler thereby allowing for the application of standard linearization methods

monetary policy in emerging markets can liability dollarization explain contractionary devaluations abstract in emerging markets external debt is denominated almost entirely in large developed country currencies such as the u s dollar this liability dollarization offers a channel through which exchange rate variation can lead to business cycle instability when firms assets are denominated in domestic currency and liabilities are denominated in foreign currency an exchange rate depreciation worsens firms balance sheets which leads to higher capital costs and contractions in capital spending to illustrate this i construct a quantitative sticky price small open economy model in which a monetary policy induced devaluation leads to a persistent contraction in output in this model fixed exchange rates offer greater stability than an interest rule that targets inflation

the structure of public debt and the choice of exchange rate regime this paper explores the relationship between the denomination of public debt and the choice of exchange rate regime three types of debt nominal indexed and foreign and two regimes fixed and flexible are considered indexed debt is insulated against unexpected inflation the real domestic currency value of foreign debt is subject to valuation effects from real exchange rate shocks the fear of floating result that foreign debt makes pegging more attractive is shown to hold unambiguously only if the peg is fully credible if the peg lacks credibility a critical factor is the perceived likelihood of using the escape clause of a switch to a float which raises the costs of pegging foreign debt increases the temptation to resort to the escape clause so when a peg is not fully credible as is almost always the case in reality pegging tends to be less attractive than floating in the presence of foreign debt ce memoire explore le rapport entre la denomination de la dette publique et le choix d un regime de taux de change trois types de dettes sont considerees nominale indexee etrangere et deux types de regimes taux fixes et taux flexibles la dette indexee est immunisee contre l inflation imprevue la valeur reelle en monnaie domestique de la dette etrangere est sujette a des effets attribuables aux chocs dans les taux de change reels la peur de laisser flotter le taux de change aide a comprendre qu une dette etrangere rend le taux fixe plus attrayant mais ce resultat est sans ambiguite seulement si le taux fixe est pleinement credible si le taux fixe manque de credibilite un facteur critique est la perception de la probabilite qu on va utiliser l echappatoire du passage au taux flottant ce qui augmente les cots d un taux fixe la dette etrangere accroit la tentation d avoir recours a la clause echappatoire ce qui fait que quand un taux fixe n est pas pleinement credible comme c est a peu pres toujours le cas en realite un regime de taux de change fixe tend a tre moins attrayant qu un regime de taux de change flottants quand il y a dette etrangere

discrimination in the small business credit market we use data from the 1993 and 1998 national surveys of small business finances to examine the existence of racial discrimination in the small business credit market we conduct an econometric analysis of loan outcomes by race and find that black owned small businesses are about twice as likely to be denied credit even after controlling for differences in creditworthiness and other factors a series of specification checks indicates that this gap is unlikely to be explained by omitted variable bias these results indicate that the racial disparity in credit availability is likely caused by discrimination

currency crises and monetary policy in an economy with credit constraints this paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities the possibility of multiple equilibria including a currency crisis equilibrium with low output and a depreciated domestic currency results from the following mechanism if nominal prices are sticky a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms and thus to a fall in their profits this reduces firms borrowing capacity and therefore investment and output in a credit constrained economy which in turn reduces the demand for the domestic currency and leads to a depreciation we examine the impact of various shocks including productivity fiscal or expectational shocks we then analyze the optimal monetary policy to prevent or solve currency crises we also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms

the optimal economic lifetime of vintage capital in the presence of operating costs technological progress and learning abstract this paper studies the optimal vintage specific investment and disinvestment decision of a firm the decision is formulated as a distributed optimal control problem with a constraint on the state variable the economic model takes into accounts maintenance and operating costs technological progress and learning it allows firms to purchase not only the latest technology but also previous year vintages and completely disinvest old machines it does not assume that the firms keep machines of all vintages as other similar models do an analytical expression for the optimal economic lifetime of capital is derived and the qualitative dynamics of the optimal investment and disinvestment rules is analyzed

economic life replacement under improving technology abstract the economic life el method of asset replacement is analyzed under improving technology that impacts the maintenance cost new asset cost and salvage value in particular we prove that the asset el is constant when all these costs decrease with the same rate if these costs decrease geometrically then the el method with a corrected capital recovery factor calculates the optimal asset lifetime over the infinite horizon for arbitrary age dependent deterioration and salvage value in a general case the el method delivers an optimal replacement decision when the relative rate of technological change is less than 1 for larger rates we recommend to minimize the annual cost over two future replacement cycles which was earlier proposed and implemented by christer and scarf journal of the operational research society 45 1994

inefficient foreign borrowing a dual and common agency perspective studying the implications of uncoordinated borrowing the paper first looks at whether and when countries borrow too much in the aggregate it then revisits the original sin debate analyzing whether and when equity portfolio investment international portfolio diversification domestic currency denomination and longer maturities enhance borrowing countries access to international lending the paper thereby relates a country s level and quality of access to international capital markets to a variety of institutional features such as the level of domestic savings their location the extent of control rights held by political authorities and the interests of dominant domestic political forces

sudden stops financial frictions and the banking sector abstract financial crises typically feature a large fall in total factor productivity tfp in emerging economies about 40 of domestic credit is provided by banks theories have largely focused on how exogenous changes in domestic interest rates impact the economy in this paper i explore the role of banks intermediation in exacerbating allocative inefficiency i build a small open economy model in which banks are the only domestic agents with access to international capital markets during sudden stops a shock to the world interest rate decreases banks credit supply and raises the domestic interest rate on loans firms with working capital financing needs experience an increase in the cost of production this worsens the misallocation and generates an endogenous fall in tfp and output the model is calibrated to mexico before the 1995 crisis the model predicts a 6 9 fall in tfp and a 5 fall in investment to gdp ratio which closely matches the effects observed in the data

vintage capital investment and growth abstract we study the dynamics of growth and investment in a continuous time model with vintage capital vintage capital models may be characterized by non exponential rates of depreciation and technical change and can incorporate gestation lags as well as learning by using we investigate the effect of such features on the dynamics of investment and growth and show how they can contribute to explaining the volatile nature of investment time series

what constitutes evidence of discrimination in lending we analyze a simple model of bank lending in order to ascertain what can be inferred from relative denial and default rates about lending discrimination we show that if minority applicants are of lower average creditworthiness than majority applicants then contrary to a popular argument a uniform nondiscriminatory credit policy cannot simultaneously produce i higher denial rates for minority applicants and ii equal default rates for minority and majority applicants moreover we show that equality of denial or default rates always implies discrimination in particular equal denial default rates imply discrimination against majority minority applicants is there discrimination in the bank lending market this question has recently attracted attention in the popular press and from federal regulators this interest was spurred by a 1992 boston federal reserve bank study which concludes that minorities are discriminated against in the home mortgage market 1 the study finds that minority applicants in the boston area are sixty percent more likely to be denied a mortgage loan than whites even after controlling for such factors as debt burdens loan to value ratios income and credit histories not surprisingly this conclusion has been controversial critics of the boston fed study have argued that the methodology used by the fed is flawed a representative example is macey 1994 who

maintenance and investment complements or substitutes a reappraisal a benchmark ak optimal growth model with maintenance expenditures and endogenous utilization of capital is considered within an explicit vintage capital framework scrapping is endogenous and the model allows for a clean distinction between age and usage dependent capital depreciation and obsolescence it is also shown than in this set up past investment profile completely determines the size of current maintenance expenditures among other findings a closed form solution to optimal dynamics is provided taking advantage of very recent development in optimal control of infinite dimensional systems more importantly and in contrast to the pre existing literature we study investment and maintenance co movements without any postulated ad hoc depreciation function in particular using impulse response experiments we find that optimal investment and maintenance do move together in the short run in response to neutral technological shocks which seems to be more consistent with the data

replacement echoes in the vintage capital growth model this paper is concerned with a non standard source of fluctuations called echo effects i e the ability of an economy to reproduce its own past history in the 1960s growth theorists believed that this property could arise in vintage capital models taking the form of replacement echoes this line of research was stopped after the publication of solow et al 15 who showed that echoes should vanish in a solow growth model with vintage capital however the fundamental reason for this result has nothing to do with vintages rather it comes directly from the main assumption in a solow growth model i e at equilibrium investment is a constant fraction of output and does not depend on any optimal replacement rule we claim that in a more general ramsey model replacement echoes do not necessarily vanish and we show this in the case when instantaneous utility is linear c 1997 academic press

capital accumulation under technological progress and learning a vintage capital approach abstract in standard capital accumulation models all capital goods are equally productive and produce goods of the same quality however due to technological progress in reality it holds most of the time that newer capital goods are either more productive process innovation or produce goods of better quality product innovation implications of process innovation for the firm s investment policies are investigated while the output price development is subject to a business cycle and a given generation of capital goods gets more productive over time due to learning the problem is turned into an optimal control model that distinguishes the vintages of capital goods and where unlike most of the recent contributions it is possible to keep on investing in older technologies it is shown that i learning is one of the reasons why a firm may invest in old technologies even when apparently superior technologies are available ii investments in machines of a given age increase more over time under faster technological progress iii under faster technological progress investments are more vulnerable to output price developments and iv on average machines are older during recessions in deciding whether to invest in newer or older capital goods also the lower productivity due to aging versus differences in cost of discounting and acquisition have to be taken into account

gender discrimination in microfinance some evidence from uganda abstractmicrofinance literature has proved the existence of gender discriminatory practices against women in some specific contexts discrimination is often explored from the access side loans approved or denied following agier and szafarz 2013 we deviate from this practice and use the variable loan size considering up to four loans for each client drawing on data from a microfinance programme in uganda we find no evidence of gender discrimination against women clients even though our results show that the loan size is influenced by personal characteristics and that women in contrast to men are rewarded according to their credit history

exchange rates and monetary policy in emerging market economies this paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade in particular we highlight the impact of financial frictions and the degree of exchange rate pass through in determining the relative performance of alternative regimes in stabilizing the economy in the face of external shocks our results are quite sharp when exchange rate pass through is high a policy of non traded goods inflation targeting does best in stabilizing the economy and is better in welfare terms when exchange rate pass through is low however a policy of strict cpi inflation targeting is better in all cases a fixed exchange rate is undesirable in addition financial frictions have no implications for the ranking of alternative policy rules

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

the optimal currency basket under vertical trade abstract this paper explores the theory of optimal currency basket in a small open economy general equilibrium model with sticky prices in contrast to existing literature we focus on an economy with vertical trade where the currencies in the basket may play different roles in invoicing trade flow in a simple two currency basket one currency is used to invoice imported intermediate goods and is called import currency while the other currency is used to invoice exported finished goods and is called export currency we find that the optimal weights of the import currency and the export currency depends critically on the structure of vertical trade moreover if a country decides to choose a single currency peg the choice of pegging currency also depends on how other competing economies respond to external exchange rate fluctuations

investment under uncertain market conditions this paper studies the responsiveness of firm investment to shocks in the input factor and output prices the market conditions by using stock market information on excess returns the q theory of investment is modified to allow for heterogeneous capital ex post inflexible technology and irreversible investment a structural model linking the excess returns to a firm s equity to the firm s investment history and the evolution of the market conditions is estimated using a panel of u s manufacturing firms the estimates of the cost of adjusting tile capital stock are economically sensible they imply a high degree of sensitivity of investment to fundamental variables that affect the profitability of capital such as the market conditions and the purchase price of capital copyright 1995 by mit press

do lenders discriminate against minority and woman entrepreneurs abstract this paper draws on a conceptual analysis of discrimination to improve the methodology for estimating discrimination in small business credit markets and to provide some evidence about the possible causes of discrimination in these markets using a variety of statistical enhancements to existing studies we find statistically significant evidence of substantial discrimination in loan approval against black owned and hispanic owned businesses in 1998 we also find some hints that this discrimination takes the form of statistical discrimination driven by lenders stereotypes about the ability of black and hispanic owned businesses to succeed under some circumstances although we find no discrimination on average in interest rates on approved loans we also find that black owned businesses do face discrimination in interest rates when they borrow from finance companies and businesses such as mutual fund companies and leasing companies with a primary mission other than lending these findings suggest that federal financial regulatory agencies should re double their efforts to uncover and prosecute lenders who discriminate against black and hispanic owned businesses and that new tools may be needed to find discrimination by firms not well covered by the existing fair lending enforcement system

capital inflows fiscal discretion and exchange rate policy many writers have argued for the benefits of a credible fixed exchange rate a hard peg as a commitment device in an open economy but historically fixed exchange rates have often been associated with large current account deficits and episodes of over borrowing this paper develops a model of capital inflows that are linked to the exchange rate regime because of endogenous fiscal policy the key message of the paper is that a hard peg is undesirable in the absence of commitment in fiscal policy in face of a credible fixed exchange rate the fiscal authority subsidizes capital inflows the economy will engage in inefficiently high international borrowing and in welfare terms may end up worse off than under capital market autarky to eliminate the incentive to subsidize borrowing the monetary authority must follow a flexible exchange rate rule in which capital inflows lead to exchange rate appreciation if fiscal policy must be financed by money creation rather than direct taxation then a fixed exchange rate rule may cause both over borrowing and a subsequent exchange rate crisis r 2005 elsevier b v all rights reserved

optimal fiscal policy and different degrees of access to international capital markets abstract empirically the cyclical pattern of fiscal policy differs between developed and developing countries with in particular much greater pro cyclicality and volatility of public investment in developing countries in this paper i provide a theoretical explanation for the observed differences by analyzing optimal fiscal policy under different degrees of access to world capital markets if the supply of foreign capital is elastic as in a developed country then it is optimal to adjust to an adverse external shock by borrowing from abroad to finance public expenditure and cutting taxes to smooth private consumption if the supply of foreign capital is inelastic however as in a developing country the optimal adjustment policy is to reduce public investment by much more than public consumption and to raise consumption taxes

a corporate balance sheet approach to currency crises this paper presents a general equilibrium currency crisis model of the third generation in which the possibility of currency crises is driven by the interplay between private firms credit constraints and nominal price rigidities despite our emphasis on microfoundations the model remains sufficiently simple that the policy analysis can be conducted graphically the analysis hinges on four main features i ex post deviations from purchasing power parity ii credit constraints a la bernanke gertler iii foreign currency borrowing by domestic firms iv a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short term lending facilities we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises we show that an interest rate increase intended to support the currency in a crisis may not be effective but that a relaxation of short term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

currency mismatches and monetary policy a tale of two equilibria we develop a model of a small economy whose residents choose whether to borrow in domestic or foreign currency the central bank in turn chooses fixed or flexible exchange rates taking the currency denomination of debts as given we characterize the simultaneous determination of portfolios and exchange rate regime both floating and fixed rates can occur as equilibrium outcomes fear of floating may emerge endogenously and in association with a currency mismatch in assets and liabilities if equilibria with both fixed rates and floating rates coexist the latter is pareto superior lessons for current de dollarization proposals are discussed

input substitution export pricing and exchange rate policy abstract this paper develops a small open economy model with sticky prices to show why a flexible exchange rate policy is not desirable in east asian emerging market economies we argue that weak input substitution between local labor and import intermediates in traded good production and extensive use of foreign currency in export pricing in these economies can help to explain this puzzle in the presence of these two trade features the adjustment role of the exchange rate is inhibited so even a flexible exchange rate cannot stabilize the real economy in face of external shocks instead due to the high exchange rate pass through exchange rate changes will lead to instability in domestic inflation as a result a flexible exchange rate regime becomes less desirable in a very limited parameter space a fixed exchange rate can be superior to monetary policy rules with high exchange rate flexibility such as non traded good price targeting in most cases however non traded good price targeting still delivers higher welfare

price adjustment and exchange rate pass through abstract this paper develops a simple theoretical model that can be used to account for the determinants of exchange rate pass through to consumer prices while recent evidence has found low estimates of pass through in many countries there is little consensus on an explanation for this our paper argues that sticky prices represent a key determinant of exchange rate pass through we make this argument in two stages first holding the frequency of price change constant we show that our model calibrated to data from low inflation countries can reproduce the estimates of very low pass through for these countries the principal determinant of low pass through in this case is the slow adjustment of prices we then extend the model to allow the frequency of price change to be endogenous calibrating to a wider set of countries including both low inflation and high inflation countries we show that our model implies that exchange rate pass through is increasing in average inflation but at a declining rate performing the identical exercise on the data we find a striking correspondence between the predictions of the model and those of the data

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

monetary policy under imperfect capital markets in a small open economy following the financial crises of the late 1990 s an increasing number of emergingmarket countries have adopted a flexible exchange rate regime and an inflation targeting monetary policy framework this trend has generated a growing debate on the appropriate monetary policy rule for financially fragile economies with thin and incomplete financial markets that are subject to highly volatile capital flows within this context i examine the implications of alternative monetary policy rules and the choice of instruments and targets in a small open economy with imperfect capital markets i compare a benchmark efficient markets model with a monetary targeting regime and three different inflation targeting rules the taylor rule a cpi inflation target rule and a non tradable inflation target rule furthermore i study how sensitive the results are to varying degrees of capital market integration

does the currency regime shape unhedged currency exposure abstract this paper examines how unhedged currency exposure of firms varies with changes in currency flexibility a sequence of four time periods with alternating high and low currency volatility in india provides a natural experiment in which changes in currency exposure of a panel of firms is measured and the moral hazard versus incomplete markets hypotheses tested we find that firms carried higher currency exposure in periods when the currency was less flexible our results support the moral hazard hypothesis that low currency flexibility encourages firms to hold unhedged exposure in response to implicit government guarantees

machine replacement under evolving deterministic and stochastic costs the infinite horizon cost minimization and the real option stopping problem are used to analyze serial replacement of a single asset under improving technology it is shown that both techniques produce the same equal life replacement policy when exponential technological improvements affect the operating cost and new asset cost in the same way next this result is extended to the stopping problem under evolving stochastic costs under general improving technology the expected asset lifetimes appear to be different for sequential replacement cycles and depend on the future cost evolution numeric experiments are provided and managerial implications of the obtained outcomes are discussed

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

inventories and optimal monetary policy in a small open economy abstract we study how inventory investment affects the design of optimal monetary policy in a new keynesian small open economy model we find that under producer currency pricing when the intratemporal elasticity of substitution is smaller than 1 optimal monetary policy in our model with inventories is similar to a standard model without inventories however when the intratemporal elasticity of substitution is larger than 1 inventory investment increases the importance of nominal exchange rate stabilization relative to a standard model without inventories the importance of nominal exchange rate stabilization increases with the intratemporal elasticity of substitution

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

racial and gender discrimination in the micro firms credit market evidence from trinidad and tobago this paper examines the market for loans from banks to micro and small enterprises in trinidad and tobago it tests for the presence of racial and gender discrimination it takes the reported refusal to grant loans to groups when all other indicators of credit worthiness are taken into account as evidence of discrimination the paper distinguishes between application and denial rates it finds that once all other indicators of credit worthiness are taken into account neither application nor denial rates differ significantly by gender reported denial rates are however higher for africans compared with other ethnic groups implying the possible presence of discrimination

microfinance and gender issues challenges and the road ahead this special collection examines the claim that microfinance promotes gender equality the focus is on three areas of the debate first the question of how successful microfinance has been in empowering women second whether and how negative gender discrimination operates within the sector third how power relations within and beyond the household shape the context and outcomes of microfinance initiatives the papers in this collection demonstrate the divergence of circumstances and emphasise the need to go beyond the past searches for a simple narrative regarding the impact of microfinance rather as the sector evolves and is incorporated into the mainstream financial system the challenge ahead for researchers is to marshal the evidence on gendered dynamics to ensure that the gains made are built on through deeper understanding of why impact outcomes and processes differ and use this to inform new initiatives to further gender equality