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

exchange rate policy for developing countries according to the imf in the mid 1970 s approximately 85 percent of developing countries had pegged exchange rate arrangements since then the situation has changed drastically today most developing countries have either managed floats or flexible exchange rates argentina hong kong and a few others may persevere with their currency boards additional nations may well imitate them and movements toward common currencies a la the european union may gain strength here and there nonetheless it seems clear that the political and financial prerequisites to adopt such hard pegs are extremely stringent new attempts are the exception not the rule the question for most emerging market economies is no longer to float or not to float but how to float in this note we review some key issues in defining the right answer to this question

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

price pass through and the minimum wage this paper tests a textbook consequence of competitive markets that an industry wide increase in the price of labor is passed on to consumers through an increase in prices using several data sources on restaurant prices i explore the price impact of minimum wage hikes in canada and the united states particular attention is paid to the timing of these price responses to gauge the stickiness of minimum wage cost shocks i find that restaurant prices generally rise with changes in the wage bill and that this response is concentrated in the quarter surrounding the month during which the legislation is enacted

crises and exchange rate regimes time to break down the bipolar view we revisit the link between crises and exchange rate regimes err using a panel of 90 developed and developing countries over the period 1980 2009 we find that corner err are not more prone to crises compared to intermediate err this finding holds for different types of crises banking currency and debt and is robust to a wide set of alternative specifications consequently we clearly break down the traditional bipolar view countries that aim at preventing crisis episodes should focus less on the choice of the err and instead implement sound structural macroeconomic policies

ambiguity aversion in buyer seller relationships a contingent claims and social network explanation negotiations between buyers and sellers or suppliers of goods and services have become increasingly important due to the growing trend towards international purchasing outsourcing and global supply networks together with the high uncertainty associated with them this paper examines the effect of ambiguity aversion on price negotiations using multiple priors based real options with non extreme outcomes we study price negotiation between a buyer and seller in a dual contingent claims setting call option holding buyer vs put option holding seller to derive optimal agreement conditions under ambiguity with and without social network effects we find that while higher ambiguity aversion raises the threshold for commitment for the seller it has equivocal effects on the buyer s negotiation prospects in the absence of network control conversely when network position and relative bargaining power are accounted for we find the buyer s implicit price or negotiation threshold decreases or increases unequivocally with increasing aversion to ambiguity extending extant real options research on price negotiation to the case of ambiguity this set of results provides new insights into the role of ambiguity aversion and network structures in buyer seller relationships including how they influence the range of negotiation agreement between buyers and sellers the results also help assist managers in formulating robust buying selling strategies for bargaining under uncertainty by knowing their network positions and gathering background information or inferring the other party s ambiguity tolerance beforehand buyers and sellers can anticipate where the negotiation is heading in terms of price negotiation range and mutual agreement possibilities

are local minimum wages absorbed by price increases estimates from internet based restaurant menus the authors analyze 884 internet based restaurant menus from inside and outside san jose california which they collected before and after the city implemented a 25 minimum wage increase in 2013

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

macroeconomic policies and performance in latin america abstract this paper provides new evidence on macroeconomic policies and results in latin america and the caribbean results are i credibility allows adoption of counter cyclical macroeconomic policies ii accuracy in meeting inflation targets depends on central bank independence and country risk iii intermediate exchange rate er regimes have become less persistent iv er regimes matter for inflation and growth v real er trends are not explained by productivity growth and supply reforms do not resolve real er misalignments vi financial integration has increased significantly vii foreign shocks are a major growth determinant and viii composition of foreign capital inflows matters for growth

credible research designs for minimum wage studies a response to neumark salas and wascher the authors assess the critique by neumark salas and wascher 2014 of minimum wage studies that found small effects on teen employment data from 1979 to 2014 contradict nsw the authors show th

the exchange rate regime and the currency composition of corporate debt the mexican experience abstract this paper analyzes the effect that the change from a fixed to a floating exchange rate regime that took place in mexico in december 1994 had on the currency composition of corporate debt in particular the paper asks whether a fixed exchange rate regime biases corporate borrowing towards foreign currency due to an implicit exchange rate guarantee given by the government therefore under a predetermined regime firms will not fully internalize their exchange rate risk and will be more likely to engage in balance sheet mismatches than under a floating regime we study the main determinants of foreign currency borrowing of those firms listed in the mexican stock exchange from 1992 to 2000 to test whether balance sheet currency mismatches fell after the adoption of the floating exchange rate regime the results found support the view that the floating exchange rate regime has been useful in reducing exchange rate exposure

financial globalization and debt maturity in emerging economies this paper studies how financial globalization affects debt structure in emerging economies we find that by accessing international markets firms increase their long term debt and extend their debt maturity in contrast with financial liberalization long term debt decreases and the maturity structure shifts to the short term for the average firm these effects are stronger in economies with less developed domestic financial systems the evidence is consistent with financial integration having opposite effects on the firms that are able to integrate with world markets and obtain financing globally relative to the firms that rely on domestic financing only

precautionary principle and the optimal timing of environmental policy under ambiguity i consider a problem in environmental policy design in which i focus on stock pollutants in particular i consider stock pollutants that cause severe damage on the environment and do not depreciate at all once they are released into the atmosphere and the ocean the purposes of this paper are 1 to provide an economic foundation for environmental policies based on the precautionary principle and the 1992 rio declaration on environment and development and 2 to show that this optimal timing rule has a reservation property furthermore i analyze the effect of an increase in ambiguity on the optimal timing of adopting some environmental policy and show that an increase in ambiguity decreases the optimal timing of adopting the environmental policy

optimal pricing and quality choice when investment in quality is irreversible this paper examines the price and quality choice of a single product risk neutral monopolist who can delay irreversible investments required for market entry it is shown that the price and quality she chooses at entry increase with uncertainty about the size of future demand in a stackelberg leader follower game the leader and follower pre commit immediately up to a certain level of uncertainty in this case the leader produces the higher quality good when uncertainty is higher than this threshold the follower will wait and enter the market later with a higher quality good

who pays for the minimum wage this paper analyzes the eects of a large 60 and persistent increase in the minimum wage instituted in hungary in 2001 we propose a new approach to estimating the employment eects of a minimum wage increase that exploits information on the distribution of wages before and after the policy change we infer the number of jobs destroyed by comparing the number of pre reform jobs below the new minimum wage to the excess number of jobs paying at and above the new minimum wage our estimates imply that the higher minimum wage had at most a small negative eect on employment and so the main eect was pushing up wages we then use data on a large panel of firms to evaluate the economic incidence of the minimum wage increase contrary to theoretical models that attribute the small employment eects of minimum wage changes to monopsonistic wage setting we find no evidence that the rise in the minimum wage led to lower profitability among low wage employers instead we find that the costs of the minimum wage were largely passed through to consumers

the minimum wage restaurant prices and labor market structure using store level and aggregated consumer price index data we show that restaurant prices rise in response to minimum wage increases under several sources of identifying variation we introduce a general model of employment determination that implies minimum wage hikes cause prices to rise in competitive labor markets but potentially fall in monopsonistic environments furthermore the model implies employment and prices are always negatively related therefore our empirical results provide evidence against the importance of monopsony power for understanding small observed employment responses to minimum wage changes our estimated price responses challenge other explanations of the small employment response too

why did argentina s currency board collapse this paper sheds light on the risks associated with currency board arrangements referring to the severe liquidity crisis that emerged in argentina in november 2000 the inability of the argentinean economy to grow because of an overvalued peso and the massive borrowing needs of the government in the context of rapidly rising borrowing costs seriously undermined the credibility of the fixed exchange rate regime given the widespread dollarisation of the financial sector on the liability side argentina had arguably little choice but to stick to the currency board a series of measures aimed at reviving growth were implemented but with no signs of upturn in demand increasingly distrustful international investors and growing social unrest the country was forced into default in december 2001 putting an abrupt end to its decade long experiment with hard money this study shows that with rigid labour markets a lack of fiscal discipline and the absence of a natural anchor currency argentina was never a strong candidate for a hard peg

monopoly and product quality abstract this paper points out that without restrictions on the cost function distribution of consumer types and on the extent of market coverage the standard parameterization of preferences cannot by itself guarantee that a monopolist would choose a separating menu moreover there may not be any quality distortion

international financial crises causes prevention and cures dale jorgenson has bestowed a great honor and no small challenge by inviting me to give this lecture a great honor because of the distinguished list of economists who have preceded me a challenge because of the standard they have set and because there is no greater challenge for any economist than providing a coherent account of significant events to his scientific peers i am sometimes asked by friends about the differences between academic life and life as a public official there are many two stand out first as an academic the gravest sin one can commit is to sign one s name to something one did not write as a public official it is a mark of effectiveness to do so as often as possible second as an academic if a problem is too hard and does not admit of a satisfactory solution there is an obvious response work on a different problem that is not a luxury that one has in government i have been reminded of this often in recent years as we have grappled with financial crises in a number of what had previously been considered emerging markets with unrestrained futures anyone who doubts the social importance of what economists do should consider the debates surrounding these crises hundreds of millions of people who expected rapidly rising standards of living have seen their living standards fall hundreds of thousands if not millions of children have been forced to drop out of school and go to work hundreds of billions of dollars of apparent wealth has been lost the stability of large nations as nations has been called into question and the united states has made its largest nonmilitary foreign policyrelated financial commitments since the marshall plan almost all the issues involved in understanding preventing and mitigating these crises are the stuff of economics courses and research fixed versus flexible exchange rates moral hazard and multiple equilibria speculation and liquidity fiscal and monetary policies regulation and competition what economists think say and do has profound implications for the lives of literally billions of their fellow citizens whether it is discussing the role of derivatives in signaling exchange rate commitments with chinese premier zhu rongji or discussing an nber working paper on inflation targeting with the brazilian central bank governor arminio fraga or discussing alternative approaches to bankruptcy law with indonesia s economic team or optimal debt durations with the mexican authorities i am consistently struck by the impact of the kind of research discussed at the aea meetings the future well being of the world s people in large part will depend on how the ongoing process of global integration works out this is a strong statement but one that is supported by the global economy s post world war i failure and its post world war ii success central to global integration is financial integration the flow of funds and of capital across international borders and as the events of the late 1920 s and early 1930 s remind us central to global disintegration can be international financial breakdowns today i want to reflect on the issue of global financial integration in light of the dramatic and largely unpredicted events of recent years it is perhaps a good time for reflection there has been enough repair that priority can shift from u s department of the treasury 1500 pennsylvania avenue washington dc 20005 this lecture reflects many things i have learned from experiences i have shared with colleagues in the united states government and governments around the world i thank brad delong marty feldstein stephanie flanders ken rogoff andrei shleifer and ted truman for useful comments and suggestions i am especially grateful to nouriel roubini and stephanie flanders for valuable discussions and assistance in the preparation of this lecture the usual disclaimer applies

how effective are capital controls a number of authors have recently argued that in order to avoid financial instability emerging countries should rely on capital controls two type of controls have been considered controls on capital outflows and controls on capital inflows in this paper i review the historical evidence on the effectiveness of these two type of controls i argue that controls on outflows have been ineffective they are circumvented and breed corruption i also analyze chile s recent experience with controls on inflows and i argue that their effectiveness has been exaggerated

monetary convergence of the eu accession countries to the eurozone a theoretical framework and policy implications abstract a flexible approach to direct inflation targeting offers the european union accession countries a viable monetary policy choice that is believed to facilitate both the economic transition and the monetary convergence to the eurozone following this assumption a model investigating the nexus between inflation and selected monetary variables in three eu accession countries the czech republic poland and hungary is advanced the empirical analysis is aimed at explaining the sensitivity of the cpi based inflation path in these countries to backward as well as forward looking expectations nominal exchange rate fluctuations the eurozone inflation impulses and output changes the analysis implies that the monetary convergence begins with flexible inflation targeting and concludes with a full fledged euroization

bias in economic news the reporting of nominal exchange rate behavior in colombia proquest denotes formulae omitted the behavior of the nominal exchange rate ner is regularly reported and commented on in colombian newspapers editorials and op eds however the number and flavor of the news and commentary seem to increase disproportionately during revaluation in contrast to periods of devaluation 1 during the course of a revaluation it is common to read claims not facts in the press of firms and entire industries in distress owing to revaluation and arguments about the benefits of outdated policies such as fixed and multiple exchange rates implemented after 1967 with the enactment of law 444 congreso de colombia 1967 if not a dollarization of the economy 2on one hand many news articles and op ed pieces often maintain that revaluation is devastating for the macroeconomic performance of the country owing to the reduced income for exporters and holders of foreign debt and the subsequent effects on the employment and wages of workers in related industries on the other hand when devaluation occurs little attention is paid in news editorials or op eds there are no complaints addressing the plausible effects of a devaluation such as inflation from higher prices of foreign capital machinery and equipment or imported raw materials this asymmetry in media reporting is hard to understand why would revaluation be more important to report and discuss than devaluation why are there claims of the benefits of a fixed exchange rate when the country has already gone through the crippling effects of an exchange rate black market premium easterly 2002 p 222 describes a high black market premium as a punitive tax on exporters not a good incentive for growth finally why after almost twenty years of experience with a market determined nominal exchange rate is revaluation still reported as harmful for the economy even though there have been more devaluation episodes than revaluation ones 3 one answer to these questions lies in media bias in reporting the behavior of the ner the existence of an interest group supplying media outlets with news to increase the awareness of readers and government officials of the catastrophic consequences of revaluation is considered when this is the case the media benefit from a larger audience and subsequent higher income from advertising revenues the interest group s goal is further satisfied when the fiscal authority offers subsidies or the monetary authority intervenes in the exchange rate market when a government related institution steps in to tame the expressions of discomfort it fulfills the goal of increasing political affection and public acceptance there is a growing literature on the economics of media bias and media slant gentzkow and shapiro 2008 and larcinese puglisi and snyder 2011 offer a review of the theoretical and empirical approaches to this topic the literature describes both supply and demand side models on the supply side the distortions of the news its relationship with the private sector and the government capture of media are the core subjects on the demand side the distortion comes from the public and its preference for news with a certain bias or slant and the media competition for their attention the empirical evidence of media bias shown in this paper fits into the supply side models and the idea of media capture not by the government but by an interest group specifically the work of corneo 2006 is an appropriate analytic framework for the alleged sources of media bias and slant in this paper corneo 2006 builds a voting model of media capture at the hands of special interests to begin with the interest group looking for a policy that will favor its current status seeks to form a coalition with the media the media can accept or refuse the formation of a coalition when they do refuse media demonstrate their independence and commitment to honest reporting

irreversible investment and knightian uncertainty when firms make a decision about irreversible investment they may not have complete confidence about their perceived probability measure describing future uncertainty they may think other probability measures perturbed from the original one are also possible such uncertainty characterized by not a single probability measure but a set of probability measures is called knightian uncertainty the effect of knightian uncertainty on the value of irreversible investment opportunity is shown to be drastically different from that of traditional uncertainty in the form of risk specifically an increase in knightian uncertainty decreases the value of investment opportunity while an increase in risk increases it

corporate dollar debt and depreciations much ado about nothing abstract emerging markets firms often carry foreign currency debt on their balance sheets following a depreciation the expanding peso value of dollar liabilities could via a net worth effect offset the expansionary competitiveness effect to assess which effect dominates we use accounting data including the currency composition of liabilities for 450 nonfinancial firms in five latin american countries in the 1990s we find that firms holding more dollar debt do not invest less than their peso indebted counterparts following a depreciation we also show that these firms match the currency denomination of their liabilities with the exchange rate sensitivity of their profits

optimal nonlinear pricing by a monopolist with information ambiguity we consider the optimal nonlinear pricing by an ambiguity averse monopolist the monopolist s subjective belief about the distribution of buyers is described by contamination of an additive probability we find that under a maxmin utility decision rule and with a continuum of buyers ambiguity aversion leads to bunching at the bottom in the optimal contract and the distortion at the bottom is reduced other high valuation buyers are offered the same quantity as in the case without ambiguity but they get a greater discount

exchange rate regimes in developing and emerging economies and the incidence of imf programs summary the global economic crisis will compel many countries to revise key economic policies including their exchange rate regime the international monetary fund will have significant influence on their choices and has exhibited a bias against intermediate regimes we examine the link between exchange rate regimes and imf program use and find no evidence that countries with intermediate exchange rate regimes require more frequent imf assistance rather they appear somewhat less dependent especially when compared to fixed exchange rates our results suggest that intermediate regimes should remain a viable and possibly desirable exchange rate choice for some countries

econometric testing of purchasing power parity in less developed countries fixed and flexible exchange rate regime experiences we investigate the purchasing power parity ppp hypothesis for 16 less developed countries ldcs from all over the world during their fixed and flexible exchange rate experiences over the period 1957 01 1999 12 the main contribution of this article to the empirical literature on ppp is that our study is the first to consider ppp hypothesis on alternative exchange rate regimes for ldcs the bilateral exchange rates of ldcs and the united states and their respective price levels are considered three different time series methodologies are employed unit root tests engle granger 1987 cointegration technique and johansen multivariate var methodology 1988 the cointegration techniques improve the results which allows the examination of the more frequent long run relationship between relative prices and nominal exchange rates nevertheless using each of econometric techniques we find only a few and a nearly equal evidence in favour of ppp under the alternative regimes in ldcs hence the main conc

the hysteresis of currency substitution currency risk vs network externalities abstract it is widely documented that currency substitution using foreign money in transactions increases in periods of high inflation but does not decline once inflation is reduced the paper uses survey data from bulgaria which experienced this phenomenon to investigate the origins of this ratchet effect we find that expected devaluation of the domestic currency while relatively high does not play a major role in sustaining the dollarization of transactions conversely preferences for the use of foreign money are strongly influenced by people s perception that foreign money is already widely used in the economy

optimal pricing and quality choice of a monopolist under knightian uncertainty abstract this paper analyzes a simple vertical product differentiation model with demand uncertainty and derives a risk neutral monopolist s optimal market entry timing her optimal pricing and optimal quality choice by incorporating knightian uncertainty irreversibility and flexibility in quality enhancing investment into a continuous time stochastic model it is shown that an increase in knightian uncertainty induces decreases in the optimal price the optimal quality and the value of undertaking the quality enhancing investment by the monopolist the social optimal entry timing pricing and quality are also analyzed

foreign banks and foreign currency lending in emerging europe based on survey data from 193 banks in 20 countries we provide the first bank level analysis of the relationship between bank ownership bank funding and foreign currency fx lending across emerging europe our results contradict the widespread view that foreign banks have been driving fx lending to retail clients as a result of easier access to foreign wholesale funding our cross sectional analysis shows that foreign banks do lend more in fx to corporate clients but not to households moreover we find no evidence that wholesale funding had a strong causal effect on fx lending for either foreign or domestic banks panel estimations show that the foreign acquisition of a domestic bank does lead to faster growth in fx lending to households however this is driven by faster growth in household lending in general not by a shift towards fx lending

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 effect of ownership structure on prices in geographically differentiated industries i analyze how ownership structure and market geography jointly influence fast food prices i estimate a model of demand and supply that accounts for the market geography and run counterfactual experiments that demonstrate how mergers affect prices i find that the impact of mergers can be large that this impact decreases as the merging outlets are farther apart that mergers among market leaders generally increase prices more than mergers among weaker firms and that mergers can increase prices even if the outlets are so far apart that neither outleti s presence affects prices at the other before the merger

pass through in retail and wholesale this paper studies how prices comove across products firms and locations to gauge the relative importance of retailer versus manufacturer level shocks in determining prices i make use of a large panel data set on prices for a cross section of retailers in the u s i analyze prices at the barcode or universal product code upc level for individual stores i find that only 16 of the variation in prices is common across stores selling an identical product 65 of the price variation is common to stores within a particular retail chain but not across retail chains while 17 is completely idiosyncratic to the store and product product categories with frequent temporary sales exhibit a disproportionate amount of completely idiosyncratic price variation my results suggest that most of the observed price variation arises from retail level rather than manufacturer level demand and supply shocks however the behavior of prices is difficult to relate to observed variation in costs and demand at the retail level this suggests that retail prices may vary largely as a consequence of dynamic pricing strategies on the part of retailers or manufacturers rather than static demand and supply shocks this abstract was borrowed from another version of this item

bank funding securitization and loan terms evidence from foreign currency lending we examine how bank funding structure and securitization activities affect the currency denomination of business loans we analyze a unique data set that includes information on the requested and granted loan currency for 99 490 loans granted to 57 464 firms by a bulgarian bank our findings document that foreign currency lending is at least partially driven by bank eagerness to match the currency structure of assets with that of liabilities our results also show that loan currency as well as loan amount and maturity are adjusted to make loans eligible for securitization

risk uncertainty and option exercise many economic decisions can be described as an option exercise or optimal stopping problem under uncertainty motivated by experimental evidence such as the ellsberg paradox we follow knight 1921 and distinguish risk from uncertainty to capture this distinction we adopt the multiple priors utility model we show that the impact of ambiguity on the option exercise decision depends on the relative degrees of ambiguity about continuation payoffs and termination payoffs consequently ambiguity may accelerate or delay option exercise we apply our results to investment and exit problems and show that the myopic npv rule can be optimal for an agent having an extremely high degree of ambiguity aversion

an extension of the maximum score estimator for disequilibrium models abstract mayer and dorsey 1998 mayer w j dorsey r e 1998 maximum score estimation of disequilibrium models and the role of anticipatory price setting journal of econometrics 87 1 4 propose a maximum score estimator for disequilibrium models with anticipatory pricing models here i prove consistency under assumptions that allow for more general price adjustment processes i also show that the smoothing function used in mayer and dorsey 1998 can be replaced with a simpler function that requires fewer arbitrary choices by the researcher

relative risk aversion and the transmission of financial crises we study how investor behavior affects the transmission of financial crises if investors exhibit decreasing relative risk aversion then negative wealth shocks increase the risk premium required to hold risky assets we integrate this into a second generation model of currency crises which allows for contagion through changes in fundamentals investor behavior can be a transmission channel of financial crises as changes in risk premia increase the coverage ratio and makes the defense of a peg less attractive for the policy maker the feedback effect of the risk premia on the probability of devaluation also makes multiple equilibria more likely the possible stabilization effects of capital controls and a tobin tax on the international transmission of financial crises are also studied

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

search and knightian uncertainty suppose that uncertainty about labor market conditions has increased does this change induce an unemployed worker to search longer or shorter this paper shows that the answer is drastically different depending on whether an increase in uncertainty is an increase in risk or that in true uncertainty in the sense of frank knight we show in a general framework that while an increase in risk the mean preserving spread of the wage distribution that the worker thinks she faces increases the reservation wage an increase in knightian uncertainty a decrease in her confidence about the wage distribution reduces it

quality underprovision by a monopolist when quality is not costly in the mussa and rosen model j econ theory 18 1978 301 of vertical differentiation a monopolist may optimally choose to underprovide quality if consumers are allowed to buy several units of the indivisible good even if quality provision involves no cost of any sort c 2002 elsevier science b v all rights reserved

the impact of foreign liabilities on small firms firm level evidence from the korean crisis abstract using korean firm level data on publicly listed and privately held firms together with firm exit data we find strong evidence that holdings of foreign currency denominated debt negatively affected the economic performance of small firms during the 1997 98 crisis the large exchange rate depreciation that occurred during the crisis resulted in a decline in net worth for firms with foreign currency denominated debt on their balance sheets small firms with more short term foreign debt were more likely to declare bankruptcy conditional on surviving the crisis small firms that had more short term foreign debt experienced larger declines in sales the exit bankruptcy margin accounts for a large fraction of small firms adjustment during the crisis

distinguished lecture on economics in government exchange rate regimes is the bipolar view correct the choice of appropriate exchange rate regime which for economies with access to international capital markets increasingly means a move away from the middle ground of pegged but adjustable fixed exchange rates towards the two corner regimes of either flexible exchange rates or a fixed exchange rate supported if necessary by a commitment to give up altogether an independent monetary policy lawrence h summers 2000 p 8

when do governments improve fiscal institutions lessons from financial crisis and fiscal reform in latin america do crises really lead to more institutional reforms this paper explores the connection between financial crises and one type of reform frequently advocated during the recent global financial crisis namely fiscal institutional reforms some authors expect that crises lead to reforms but we demonstrate that the relationship is not so straightforward using a data set of latin american countries that experienced several crises and also several periods of reform in the period from 1990 to 2005 we find that the type of crisis and its duration matter we argue that reforms are less likely during a banking crisis whereas fiscal crises are most likely to lead to fiscal reforms this means that the type of economic crisis is important for explaining the likelihood of reforms we explore other possible explanations for reform such as the partisanship of the president and whether a country is under an imf program and do not find confirming evidence for alternative explanations

identifying monetary policy in a small open economy under flexible exchange rates abstract previous empirical study on the effects of monetary policy shocks in small open economies has generated puzzling dynamic responses in various macroeconomic variables this paper argues that these puzzles derive from an identification of monetary policy that is inappropriate for such economies to remedy this it is proposed that a structural model be estimated to explicitly account for the features of the small open economy such a model is applied to canada with tightly estimated results overall the dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the exchange rate as a transmission mechanism

the effect of financial liberalization on the capital structure and investment decisions of indonesian manufacturing establishments this article analyzes the consequences of financial liberalization using a large panel of indonesian manufacturing establishments it discusses whether financial reforms have had an impact on investment and on the allocation of credit and whether the effects differ depending on the type of firms the overall conclusion is that shifting from administrative toward market based allocation of credit has increased borrowing cost particularly for smaller firms but at the same time has benefited firms by giving them widened access to finance

targeting the real exchange rate theory and evidence abstract this paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate an intertemporal optimizing model suggests that in the absence of changes in fiscal policy a more depreciated level of the real exchange rate can only be attained temporarily this can be achieved by means of higher inflation and or higher real interest rates depending on the degree of capital mobility evidence for brazil chile and colombia supports the model s prediction that undervalued real exchange rates are associated with higher inflation

foreign currency borrowing by small firms in emerging markets when domestic banks intermediate dollars this paper investigates what induces small firms in an emerging market economy to borrow dollar credit from domestic banks our data are from a unique survey of firms in lebanon the findings complement studies of large firms with foreign currency loans from foreign lenders exporters naturally hedged against currency risk are more likely to incur dollar debt firms also partly hedge themselves by passing currency risk to customers and suppliers less opaque firms with easily verifiable collateral and higher net worth are more likely to access dollar credit firms reliant on formal financing banks and supplier credit are more likely to contract dollar debt than firms reliant on informal financing family friends and moneylenders bank relationships however do not increase the dollar debt likelihood and finally profitable firms are less likely to have dollar debt information frictions and limited collateral therefore constrain dollar credit even when it is intermediated domestically

network externalities and the overprovision of quality by a monopolist 1 introduction the increasing relevance of high tech sectors such as telecommunication hardware software and audio video industries justifies the growing amount of attention devoted to the analysis of markets for goods that generate network externalities katz and shapiro 1985 1986 1994 farrell and saloner 1985 1986 an example taken by the audio video industry is the current discussion concerning the possibility of adopting a new standard for hi fi equipments dvd digital versatile disc or sacd super audio compact disc the network effect consists of the fact that the utility from purchasing equipment characterized by a given standard is positively related to the number of consumers who purchase a compatible equipment for two reasons the first is that the larger the number of users of a given standard the wider the range of software made available for that standard the second is that a larger network of users is usually associated with more efficient customer service and technical assistance if consumers are sensitive to the size of the market the producer s choice of the output level can be compared to the provision of product quality in that allowing consumers to access a larger network is essentially like providing them with a good characterized by a superior quality therefore the existence of network effects in markets where intrinsic quality is endogenous prompts a reassessment of the welfare implications of market power against either perfect competition or social planning the foregoing analysis has some relevant policy implications

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

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

currency boards more than a quick fix currency boards more than a quick fix once a popular colonial monetary arrangement currency boards fell into disuse as countries gained political independence but recently currency boards have made a remarkable come back this essay takes a critical look at their performance are currency boards really a panacea for achieving low inflation and high growth or do they merely provide a quick fix allowing authorities to neglect fundamental reforms and thus fail to yield lasting benefits we have three major findings first the historical track record of currency boards is sterling with few instances of speculative attacks and virtually no involuntary exits countries that did exit from currency boards did so mainly for political rather than economic reasons and such exits were usually uneventful second modern currency boards have often been instituted to gain credibility following a period of high or hyperinflation and in this regard have been remarkably successful countries with currency boards experienced lower inflation and higher if more volatile gdp growth compared to both floating regimes and simple pegs the inflation difference reflects both a lower growth rate of money supply a discipline effect and a faster growth of money demand a credibility effect the gdp growth effect is significant but may simply reflect a rebound from depressed levels third case studies reveal the successful introduction of a currency board to be far from trivial requiring lengthy legal and institutional changes as well as a broad economic and social consensus for the implied commitment moreover there are thorny issues as yet untested regarding possible exits from a currency board thus currency boards do not provide easy solutions but if introduced in the right circumstances with some built in flexibility they can be an important tool for gaining credibility and achieving macroeconomic stabilization atish r ghosh anne marie and holger c wolf

financial liberalization credit constraints and collateral investment in the mexican manufacturing sector abstract we examine the impact of financial liberalization on fixed investment in mexico using establishment level data from the manufacturing sector in addition to analyzing changes in cash flow sensitivities an innovative approach explores the role of real estate as collateral and addresses a potential censoring problem the results suggest that financial constraints were eased for the smallest firms but not for larger ones however the importance of possessing real estate increased given banks reliance on collateral in their lending the results also provide microeconomic evidence consistent with the role attributed to financial accelerator mechanisms during lending booms and during post crisis recessions

what drives credit dollarization in transition economies abstract this paper provides an in depth analysis of the use of foreign currencies in the lending activities of banks in transition economies the impact of bank and firm variables on credit dollarization is studied in an optimal portfolio allocation model and estimated using new aggregate data for 21 transition economies for the period 1990 2003 empirical results provide evidence that credit dollarization is the combined outcome of domestic deposit dollarization and banks desire for currency matched portfolios beyond regulatory requirements the effects of international financial factors and natural hedges are less robust across alternative specifications the paper further discusses the role of regulations in affecting the impact of these factors on credit dollarization and calls for more developed domestic forward foreign exchange markets

how firms construct price changes evidence from restaurant responses to increased minimum wages we use price data underlying the consumer price index to assess how restaurants whose prices are generally quite sticky respond to minimum wage increases aggregate prices rise quickly by amounts reflecting the increase in costs and they rise more among fast food outlets and in low wage locations but restaurants do not construct price increases by raising all their prices by amounts reflecting the increase in wages instead they raise only some prices but by larger amounts prices at cluster points are less likely to be changed and prices that were recently increased decreased are less more likely to be raised

the economic effects of a citywide minimum wage this paper presents the first study of the economic effects of a citywide minimum wage san francisco s adoption of an indexed minimum wage set at 8 50 in 2004 and 9 14 by 2007 compared to earli

measuring exchange rate misalignment in turkey we propose a new methodology to measure exchange rate misalignment for turkey which has already undergone a severe economic crisis we estimate the real exchange rate within a time varying parameter model where a return to normality assumption about the parameters are assumed contrary to common belief it is found that except the initial four months of the stabilization program the turkish lira remained structurally undervalued for most of 2000 also we observe a pattern where lira has been structurally overvalued after the crisis in 1994 until 1998 and has displayed structural undervaluation after then

quality choice and the coase problem abstract this paper studies the quality choice made by a durable good monopolist to alleviate the coase problem the durable good monopolist not only over supplies the quality but decreases the price per unit of quality so that the high demand consumers do not postpone their purchase

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

the choice of exchange rate regime and speculative attacks we develop a framework for studying the choice of exchange rate regime in an open economy where the local currency is vulnerable to speculative attacks the optimal regime is determined by a policymaker who trades off the loss from nominal exchange rate uncertainty against the cost of maintaining a given regime this cost is affected in turn by the likelihood of a speculative attack searching for the optimal regime within the class of exchange rate bands we show that the optimal regime is either a peg a zero width band a free float an infinite width band or a non degenerate finite width band the paper shows that lower costs of moving across currencies induce policymakers to set more flexible exchange rate systems this lowers ceteris paribus the likelihood of financial crises one implication is that a tobin tax does not necessarily reduce the likelihood of currency crises the paper also investigates the effects of country size openess variability in fundamentals and reputation on the choice of exchange rate regime the role of abrupt changes in reputation in triggerering crises even with unchanged fundamentals as an alternative to sunspots is discussed and illustrated

minimum wage shocks employment flows and labor market frictions we provide the first estimates of the effects of minimum wages on employment flows in the u s labor market identifying the impact using policy discontinuities at state borders we find that minimum wages have a sizable negative effect on employment flows but not stocks separations and accessions fall among affected workers we interpret our findings using a job ladder model in which minimum wage increases can reduce job to job transitions we find that a standard calibration of the model generates predicted relative magnitudes of the employment stock and flow elasticities that are very close to our reduced form estimates

do government guarantees really matter in fixed exchange rate regimes abstract since the mid 1990s theories of speculative attacks have argued that fixed exchange rate regimes induce excessive borrowing in foreign currency as an optimal response to implicit guarantees that the government will not devalue the domestic currency using data on brazilian firms before and after the end of the fixed exchange rate regime in 1999 we estimate the relevance of the government guarantees by comparing the changes in foreign debt of two groups of firms those that hedged their foreign currency debt prior to the exchange rate float and those that did not using the difference in differences approach in which firm specific characteristics are introduced as control variables we exclude the macroeconomic effects of the change in the exchange rate regime and the possible differences in foreign debt trends of the two groups of firms thus obtaining an estimate of the impact of the government guarantees on borrowing in foreign currency the results suggest that the guarantees do not induce excessive borrowing in foreign currency

the role of inflation targeting in international debt denomination in developing countries abstract this paper analyzes the inflation targeting experience of developing countries as an effective monetary policy framework to promote changes in the currency composition of their international debt using matching with difference in differences to address the self selection bias we find that inflation targeting has led to a 3 6 percentage point reduction in the foreign currency share of international debt in targeting countries when compared to non targeting countries with the effect especially pronounced for sovereign international debt differentiating by type of owner we find a reduction of the foreign currency share in foreign held total sovereign debt but no effect on domestic held debt furthermore from the analysis of the us dollar and euro shares we find that inflation targeting has contributed to a 9 percentage points lower dollar share in international debt in targeting countries compared to non targeting countries while the effect on the euro share is negligible this not only provides evidence that the structural features of international financial markets matter but also that monetary policy can help developing countries reduce their reliance on foreign currency debt especially if it is held by foreign investors

quality choice and vertical integration abstract we show that despite coordination in the quality level of the components that they provide independent vertically related disintegrated monopolists will provide products of lower quality level than a sole integrated monopolist further the integrated monopolist achieves higher market coverage higher consumer surplus and higher profits we establish these results for any distribution of preferences in the standard model of quality differentiation despite the lower quality we also show that for a wide class of cost functions price will be higher in a market of independent vertically related monopolists all results are the effects of the interaction of double marginalization occurring in the market of independent monopolists with the choice of quality