the effect of imf lending on the probability of sovereign debt crises abstract this paper explores empirically how the adoption of imf programs affects sovereign risk over the medium term we find that imf programs significantly increase the probability of subsequent sovereign defaults by approximately 1 5 2 percentage points these results cannot be attributed to endogeneity bias as they are supported by specifications that explain sovereign defaults and program participation simultaneously furthermore imf programs turn out to be especially detrimental to fiscal solvency when the fund distributes its resources to countries whose economic fundamentals are already weak our evidence is therefore consistent with the hypothesis that debtor moral hazard is most likely to occur in these circumstances other explanations that point to the effects of debt dilution and the possibility of imf triggered debt runs however are also possible

the political economy of bilateral bailouts imf loans during times of financial crisis often occur in conjunction with bilateral financial rescues these bilateral bailouts are substantial in size and a central component of international cooperation during financial crises we analyze the political economy of bilateral bailouts and study the trade offs that potential creditor governments experience when other countries find themselves in financial distress creditor governments want to stabilize crisis countries by providing additional liquidity particularly if the crisis country is economically or politically important to them but they are constrained by domestic politics politicians aim to balance these countervailing pressures they provide bailouts when their own economy is exposed to negative spillover effects and when the crisis country is important for geostrategic military or political reasons domestic economic and political constraints on the other hand limit their ability to bail out other countries we test our hypotheses using an original data set on bilateral bailouts by the g7 countries to countries that experienced financial crises between 1975 and 2010 the findings of our statistical analysis support our theoretical argument and contribute to a deeper understanding of international cooperation s complex structure during financial crises

swap rates and credit quality this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards with counterparties of different default risk the promised cash flows of a swap are discounted by a switching discount rate that at any given state and time is equal to the discount rate of the counterparty for whom the swap is currently out of the money that is a liability the impact of credit risk asymmetry and of netting is presented through both theory and numerical examples which include interest rate and currency swaps this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards this extends the valuation model for defaultable claims proposed by duffie and singleton 1994 to cases in which the two counterparties have asymmetric default risk the extension permits a reexamination of the impact of credit risk on swap rates while the valuation model applies to all forms of contingent claims in which both contracting parties are at risk to default such as forward contracts we focus on swaps for purposes of illustration for example consider a 5 year interest rate swap between a given party paying a floating rate such as the london inter bank offered rate libor and another counterparty paying a fixed rate replacing the given fixed rate counterparty with a lower quality counterparty whose bond yields are 100 basis points higher increases the swap rate by roughly 1 basis point using our model and typical parameters for libor rate processes this credit impact on swap rates is approximately linear within the range of normally encountered credit quality for a 5 year currency swap given a foreign exchange rate with 15 percent volatility our model shows the impact of credit risk asymmetry on the market swap rate to be roughly 10 fold greater than that for interest rate swaps that is approximately 10 basis points in swap rate per 100 basis points in bond yield credit spread the main goal of this article is to provide a simple and theoretically consistent model allowing such computations

preferential trading arrangements as strategic positioning abstract we analyze a three country model of trade negotiations in which countries can form bilateral free trade areas bilateral customs unions or a trilateral preferential trading arrangement and can continue negotiating after reaching an agreement in contrast to the literature on multilateral bargaining the set of agreements can form a nonpartitional network while in contrast to the network literature players can reach multilateral agreements patient enough countries only reach bilateral agreements if insiders gain more than outsiders which allows them to manipulate the status quo in subsequent negotiations however a hub and spoke pattern may then emerge and insiders then dissipate the advantages of strategic positioning we also use variants on the model to explain why a us commitment not to bargain bilaterally sustained progress at gatt negotiations and the rarity of open access preferential trading arrangements

absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth abstract this study examines the effects of foreign direct investment fdi and equity foreign portfolio investment efpi on economic growth using data on 80 countries from 1979 through 1998 the results largely suggest that lagged fdi and efpi do not have direct unmitigated positive effects on growth but some data are consistent with the view that the effects of fdi and efpi are contingent on the absorptive capacity of host countries with particular respect to financial or institutional development moreover extreme bound analysis eba of significant results indicates that the estimates are robust compared to other empirical studies on growth

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

a new taxonomy of sudden stops which sudden stops should countries be most concerned about abstract this paper proposes a new taxonomy of sudden stops comprised of seven categories with definitions depending on the behavior of gross and net capital flows the incidence of different types of sudden stops is detailed over time and we relate the type of sudden stop to economic performance sudden stops in net flows associated with reductions in gross inflows are associated with larger falls in output than those where sudden starts in gross outflows dominate the paper further discusses the mechanisms that might result in sudden stops in gross flows that are not sudden stops in net flows such that purchases and sales in financial assets or liabilities do not require a sharp current account adjustment still it is found that sudden stops in gross inflows that do not provoke a sharp contraction in net flows may also be disruptive particularly sudden stops that are driven by other flows which include banking flows the results suggest new avenues for research and future policy analysis

currency carry trade regimes beyond the fama regression abstract we show that carry trade strategies resemble fx option strategies that sell out of the money puts on high interest rate currencies both strategies collect premiums to generate persistent excess returns that unwind sharply when volatility increases we also show that the widely documented negative slope coefficient in regressions of exchange rate depreciation on forward currency premiums is an artifact of the volatility regime in high volatility regimes the so called fama regression produces a positive coefficient greater than unity we finally document the existence of an intuitive co movement between currency risk premiums and yield curve risk factors

global growth and international cooperation a structuralist perspective this paper revisits the structuralist ideas on trade and growth and suggests based on the prebisch s principle of implicit reciprocity that policies for promoting structural change in the periphery may lead to higher global growth and a better income distribution across countries the paper discusses the inter relations and complementarities that exist between autonomous expenditure and industrial and technology policies in the long run with this objective we develop a structuralist growth model in which the technology gap and the growth rate of the domestic autonomous expenditure are endogenously determined in a two country centre and periphery international economy copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

liquidity protection versus moral hazard the role of the imf abstract a game between the imf a country and atomistic private investors is motivated by recent crises including that in argentina the one stage game has no nash equilibrium in pure strategies considering an equilibrium in mixed strategies conditions are derived on whether the imf should exist a cooperative first best may be supported in a repeated game by a minimum punishment strategy but breaks down as the probability of insolvency rises countries are likely to deviate in bad times placing the imf in an impossible position the international financial architecture ifa remains incomplete

game theory and climate diplomacy abstract starting with the new periodic table npt of 2 2 order games introduced by robinson and goforth 2005 we provide an exhaustive treatment of the possible game theoretic characterizations of climate negotiations between two players e g great powers or coalitions of states of the 144 distinct 2 2 games in which the players have strict ordinally ranked utilities 25 are potentially relevant to climate problem the negotiations may be characterized as a no conflict game prisoner s dilemma coordination game chicken type game or cycle depending on the payoff matrix which game corresponds to the actual state of the world depends both on the severity of risks associated with climate change and the perceptions of the governments engaged in the negotiations nash equilibrium or maxi min equilibrium or neither may be the outcome achieving universal abatement of greenhouse gas emissions may require side payments or enforcement mechanisms outside the game framework but we show how the negotiations themselves may offer opportunities to select between nash equilibria or alter the payoff rankings and strategic choices of the players in particular scientific information pointing to the severity of the risks of climate change suggests characterization of the negotiations as a coordination game rather than a prisoner s dilemma

reconciling bagehot and the fed s response to september 11 bagehot 1873 states that to prevent bank panics a central bank should provide liquidity at a very high rate of interest in contrast most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate of zero this is broadly consistent with the federal reserve s behavior in the days following september 11 2001 this paper shows that both policies can be reconciled with commodity money as in bagehot s time liquidity is scarce and a high price allows banks to self select in contrast the fed has a virtually unlimited ability to temporarily expand the money supply so self selection is unnecessary

imperfect interbank markets and the lender of last resort abstract this paper presents a monetary model in which interbank markets have limited commitment to contracts limited commitment reduces the proportion of assets that can be used as collateral and thus banks with high liquidity demands face borrowing constraints in interbank markets these constraints can be relieved by the central bank a lender of last resort through the provision of liquidity loans i show that the constrained efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited otherwise a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency

towards a more ethically correct governance for economic sustainability in this paper we propose that economic sustainability is seen in terms of inter temporal and inter national value creation we claim that value appropriation or capture can become a constraint to economic sustainability we propose that for sustainable value creation to be fostered corporate governance needs to be aligned to public and supra national governance in order to achieve this a hierarchically layered set of agencies needs to be diagnosed and the issue of incentive alignment addressed enlightened self interest pluralism and diversity as well as a representative supra national organisation for world wide economic sustainability can serve as a new more ethically correct governance for economic sustainability but not a panacea

current account balance and dollar standard exploring the linkages abstract this paper examines whether the international role of the dollar as main global reserve currency has contributed to persistent current account imbalances to this end we analyse how central banks accumulation of reserve assets affects the current account balance of both reserve accumulating and reserve providing countries based on a simple portfolio balance model we show theoretically that the global demand for reserve assets by central banks may lower the current account balance of the reserve issuing country our panel data analysis over the period 1970 2009 confirms this hypothesis any dollar of provided reserve assets decreases the us current account by more than one dollar on average the demand for dollar reserves has lowered the us current account by 1 2 percentage points relative to gdp the flip side of this effect is a higher current account balance in reserve accumulating countries these novel findings show that the worldwide demand for international reserves has contributed to the buildup of global imbalances

should central bankers talk to the foreign exchange markets in this paper we study the role of official statements and speeches given by central bank authorities in charge of foreign exchange policy we investigate the impact of statements that comment on and confirm such interventions on the day of the intervention on the two major foreign exchange markets over an extended period 1989 2003 we also study the impact in terms of policy effectiveness of central bank communication before the actual operations our results suggest that appropriate speeches clarifying the current intervention policy can have marginally virtuous effects both in terms of exchange rate level and exchange rate volatility this leads us to conclude that in general actual interventions on the market should still be employed provided that official statements are used to clarify the nature and purpose of these interventions c 2008 elsevier ltd all rights reserved

leaders followers and equity risk premiums in booms and busts abstract we study an investment problem in which two asymmetric firms face competition and the regime characterizing the economic condition follows a markov switching process we derive the value functions and investment thresholds of the leader and follower the option value of regime uncertainty is found to be quite important for the investment decision of firms we also show the relationship between the equity risk premium and the economic cycle that has not been done in previous studies which proxy economic conditions by the level of demand or other state variables

central banks and financial stability rediscovering the lender of last resort practice in a finance economy the purpose of our paper is to assess whether central banks have adopted new practices of lending in last resort during the 2007 09 financial crisis we compare the current period with the classical period both featured by a finance economy with developed financial markets and unregulated institutions beyond the differences determined by the monetary regime and concerning the central bank rate policy we find similarities such as the enlargements of the set of counterparties and eligible collateral assets since the credit system is based on financial markets and innovations central banks have a wider involvement that goes beyond a narrow conception of the lender of last resort that prevailed under a regulated banking system we conclude that the historical roots of financial stabilisation by central banks in a finance economy have just been rediscovered and that the functions of lender of last resort and market maker of last resort may be analytically integrated copyright oxford university press

common property institutions and sustainable governance of resources abstract the literature on common property based resource management comprises many important studies that seek to specify the conditions under which groups of users will self organize and sustainably govern resources upon which they depend using three of the more comprehensive such studies and with an extensive review of writings on the commons this paper demonstrates that the enterprise of generating lists of conditions under which commons are governed sustainably is a flawed and impossibly costly research task for a way out the paper examines the relative merits of statistical comparative and case study approaches to studying the commons it ends with a plea for careful research design and sample selection construction of causal mechanisms and a shift toward comparative and statistical rather than single case analyses such steps are necessary for a coherent empirically relevant theory of the commons

academic tenure posttenure effort and contractual damages i introduction in this article we explore the incentive properties of academic tenure relative to alternatives that might be substitutes for tenure we do not present a comprehensive theory of academic tenure but rather emphasize the role of tenure in providing an incentive for incumbent faculty to reveal the characteristics of recruits and to maintain their own posttenure performance academic tenure often implies that its holder cannot be removed from post except for good cause usually based on gross moral turpitude or gross incompetence mcpherson and schapiro 1999 such removal is historically characterized by a costly procedure governed by organizational or state statutes tepker 1993 our results suggest that tenure is just one of many mechanisms able to achieve honest revelation and that it has important interactions with other mechanisms there is no question that tenure is a constraint to administrators and limits the discretion of university managers the objective of our article is not to provide a new explanation for academic tenure but to show how tenure could in principle be replaced by contractual damages and how it more generally interacts with damages we believe it is worth theoretically exploring alternatives to tenure because universities appear to ignore tenure statutes on occasions in particular it is now common for schools to ignore orders to reinstate dismissed apparently tenured faculty and to choose to pay damages instead tepker 1993 carmichael s 1988 model suggests that damages can achieve efficient information revelation where the value of academics next best occupations are known a damages payment equal to the difference between current expected earnings and next best earnings that is restoring the victim s expectations ignoring nonpecuniary benefits for simplicity will then make an incumbent indifferent between remaining and being sacked and happy to reveal the skills of entrants carmichael rules out the payment of expectation damages and concentrates on the use of tenure which creates a requirement for specific performance by the university we contend that the frequent award of expectation damages by courts faced with cases of refusal to reinstate suggests that more attention should be given to the damages option 1 and indeed to possible interactions between tenure and its alternatives our contention is reinforced by the observation that many universities are currently softening tenure by introducing devices like five yearly reviews for tenured faculty note also that the role of tenure looms large once it has been awarded directing our attention toward a model of posttenure performance particularly if it could be lost possibly subject to the payment of contract damages our model explores the role of contractual damages in replacing academic tenure i e reinstatement as well as addressing the problem of revelation we depart from previous literature in considering that it is now common practice for university departments to use rankings and publication records to evaluate faculty thus reducing the asymmetry of information with respect to research and productivity detected by carmichael 1988 p 460 we focus on posttenure performance in the shadow of the threat of dismissal followed by payment of contract damages dnes and seaton 1998 2001 examine the reform of academic tenure in the united kingdom by the 1988 education reform act which allowed softer tenure to be chosen by universities 2 the authors tested the hypothesis that softening tenure encourages incumbent academics to consolidate their hold on academic life it seems that after 1988 the distinction between hard tenure and soft tenure universities persisted that is many british universities chose to continue operating a hard tenure system allowing softer tenure has not hindered the improvement of academic performance in the context of increased pressures from a research quality exercise that is periodically carried out by the higher education funding council

covered interest arbitrage and market turbulence the covered interest parity theorem states that the covered interest differential between two similar assets denominated in different currencies should be zero this paper utilizes high quality data recorded by the dealers at the bank of england to test covered interest parity during certain historical periods in which there is known to have been turbulence as well as during a relatively calm control period the data is high frequency and allowance is made for the bid offer spread brokerage costs and other considerations the results have three main implications firstly profitable arbitrage opportunities do occasionally occur and sometimes persist during turbulent periods secondly the degree of efficiency of the relevant markets appears to have increased over time thirdly there appears to be a maturity effect whereby the existence and size of profitable arbitrage opportunities appear to be positive functions of the length of maturity a rationalization of this phenomenon is offered in terms of the existence of credit limits copyright 1989 by royal economic society

the impact of rmb swap agreements on foreign exchange reserve demand this paper constructs panel data of 150 economies from 2001 to 2017 to study the impact of rmb renminbi swap agreements on foreign exchange reserve demand the empirical results show that the swa

the imf and precautionary lending an empirical evaluation of the selectivity and effectiveness of the flexible credit line abstract this paper provides an empirical evaluation of the flexible credit line fcl the imf s prime precautionary lending instrument since 2009 to which so far only mexico colombia and poland have subscribed we consider both questions of selectivity and effectiveness first which variables explain the three countries participation in fcl arrangements and second to which extent has the fcl delivered on its promise of boosting market confidence in its respective users based on a probit analysis we show that fcl selectivity can be explained by both demand and supply side factors the probability of participation in the fcl was greater in countries that experienced larger prior exchange market pressures that had lower bond spreads and inflation that accounted for higher shares in us exports and that exhibited a higher propensity of making political concessions to the us using a synthetic control approach we find evidence for some but generally limited beneficial effects on sovereign bond spreads and gross capital inflows into the three fcl countries overall our results suggest that any economic stigma that may prevent eligible countries from entering into an fcl arrangement is unwarranted conversely the apparent link of fcl participation with us interests is not conducive to overcoming political stigma

a model of adjuncts in higher education abstract we examine the phenomenon of the expanded use of non tenure track positions adjuncts and construct a supply side harris todaro model low adjunct wages are attributable to a hope rent from the gap between private opportunities and tenure track utility

bail out or work out theoretical considerations this paper assesses various crisis resolution proposals using a theoretical model of liquidity and solvency crisis the model suggests that payments standstills and last resort lending are an equally efficient means of dealing with liquidity crises while coordinated lending through creditor committees is second best debt write downs are preferred to subsidised imf financing when dealing with solvency crises because of the negative moral hazard implications of the latter tool finally the model suggests that international bankruptcy court proposals may be superior to existing contractual approaches in securing such write downs on many measures the incidence of international financial crises increased in the last part of the twentieth century bordo et al 2001 but it is not just the incidence of financial crises that has altered in recent years so too has their nature the recent crises in mexico across south east asia russia brazil turkey and argentina were clearly rooted in the capital rather than current account of the balance of payments we appear to have entered an era of capital account crises imf 2002 theoretical models of financial crisis have developed in lockstep with crisis experience a third generation of models of financial crisis has emerged chang and velasco 1998 krugman 1999 these models combine imperfections in fundamentals as suggested by so called first generation models and fragility in expectations as suggested by second generation models to explain crises under the third generation approach capital account crises can originate in either fundamentals or expectations we have solvency as well as liquidity capital account crises

the delivery and control of quality in supplier producer contracts we model the effect of contract parameters such as price rebates and after sales warranty costs on the choice of quality by a supplier the inspection policy of a producer and the resulting end product quality both noncooperative and cooperative settings are explored the paper s contribution is to highlight the importance of strategic and contractual issues in quality management

contract design and the control of quality in a conflictual environment this paper provides an approach to quality supply by a supplier and quality inspection by a producer which explicitly recognizes the inherently opposing interests these two parties may have the supplier and the producer are modeled as players in a nonzero sum game where the supplier can control the effort invested in the delivery of quality and the producer may or may not inspect incoming materials we study the effect of contract design e g stipulation of penalties for defective units on equilibrium behavior and identify conditions on the contract parameters which will result in the implementation of a cooperative solution

international taxation the trajectory of an idea from lorimer to brandt abstract this paper examines early proposals for the establishment of international taxes for the support of international organization for the maintenance of international order and or for development the writings examined span close to one century starting with james lorimer in 1884 and concluding with the report of the brandt commission in 1980 our focus is on works mainly written since 1940 which explore the possibility of taxation levied by a global authority on income and transactions of individuals and firms rather than the financing of aid and international organization by national governments which is sometimes regarded as equivalent to taxation

academic freedom private sector focus and the process of innovation we develop a model that clarifies the respective advantages and disadvantages of academic and private sector research rather than relying on lack of appropriability or spillovers to generate a rationale for academic research we emphasize control rights considerations and argue that the fundamental tradeoff between academia and the private sector is one of creative control versus focus by serving as a precommitment mechanism that allows scientists to freely pursue their own interests academia can be indispensable for early stage research at the same time the private sector s ability to direct scientists toward higher payoff activities makes it more attractive for later stage research

research productivity over the life cycle evidence for academic scientists the relationship between age and the publishing productivity of ph d scientists is analyzed using data from the survey of doctorate recipients national research council and the science citation index the longitudinal nature of the data allows for the identification of pure aging effects in five of the six areas studied life cycle aging effects are present only in particle physics where scientists often speak of being on a religious quest is the indication that scientific productivity is not investment motivated vintage effects are also considered the expectation that the latest educated are the most productive is not generally supported by the data copyright 1991 by american economic association

incentives in academics why is there tenure this paper models ancademic department as an internal labor market the major problem facing the university administration is to ensure that members of its departments are willing to hire the best possible candidates academic tenure is seen to be a necessary condition for this the analysis is also consistent with other aspects of the academic environment including tenure track appointments contract buy outs early retirement plans and when a budget crunch hits the elimination of entire departments the results extend in a simple way to other organizations in which members have an input into overall decisions

communication by central bank committee members different strategies same effectiveness the paper assesses the communication strategies of the federal reserve the bank of england and the european central bank and their effectiveness we find that the effectiveness of communication is not independent from the decision making process the paper shows that the federal reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision making while the bank of england is using a collegial communication strategy and highly individualistic decision making the european central bank ecb has chosen a collegial approach both in its communication and in its decision making assessing these strategies we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the federal reserve and the ecb this suggests that there may not be a single best approach to designing a central bank communication strategy

restructuring the imf s lending facilities the imf has recently completed a review of its lending facilities as a consequence of which it has implemented a number of reforms by examining the fund s basic functions this paper offers a critical appraisal of these reforms it is argued that more radical change is needed building on the liquidity and adjustment roles of the imf the reforms advocated here would reverse the proliferation of imf lending facilities that is to be observed since the early 1960s

the dynamics of financially constrained arbitrage we develop a model of financially constrained arbitrage and use it to study the dynamics of arbitrage capital liquidity and asset prices arbitrageurs exploit price discrepancies between assets traded in segmented markets and in doing so provide liquidity to investors a collateral constraint limits their positions as a function of capital we show that the dynamics of arbitrage activity are self correcting following a shock that depletes arbitrage capital profitability increases and this allows capital to be gradually replenished spreads increase more and recover faster for more volatile trades although arbitrageurs cut their positions in these trades the least when arbitrage capital is more mobile across markets liquidity in each market generally becomes less volatile but the reverse may hold for aggregate liquidity because of mobility induced contagion

can swap line arrangements help solve the triffin dilemma how the recent massive rise in the currency reserves of emerging countries has once again brought the triffin dilemma to the fore albeit different to the past at all the events new tools for the creation of international liquidity emerged during the global financial crisis of 2007 08 including bilateral swap line arrangements bsas these arrangements ultimately constitute a form of lending of last resort therefore for emerging countries they can substitute currency reserves and help resolve the triffin dilemma in this manner the stipulation of bsas by advanced countries although motivated by domestic reasons contributes to international financial stability providing access to these arrangements automatically would contradict the principle of constructive ambiguity and the discretion that should be at the base of the lending of last resort also at the international level

why common factors in international bond returns are not so common this paper analyzes the common factor structure of us german and japanese government bond returns unlike previous studies we formally take into account the presence of country specific factors when estimating common factors we show that the classical approach of running a principal component analysis on a multi country dataset of bond returns captures both local and common influences and therefore tends to pick too many factors we conclude that us bond returns share only one common factor with german and japanese bond returns this single common factor is associated most notably with changes in the level of domestic term structures we show that accounting for country specific factors improves the performance of domestic and international hedging strategies

money as meta rule buchanan s constitutional economics as a foundation for monetary stability this paper explores james buchanan s contributions to monetary economics and argues these contributions form the foundation of a robust monetary economics paradigm while often not recognized for his contributions to monetary economics buchanan s scholarship offers important insights for current debates especially the renewed interest in narrow banking in the wake of the financial crisis we argue that the post 2007 crisis milieu creates a unique opportunity to recognize as buchanan did the vital role that money plays in the market as the grammar of commerce that recognition makes the need for more fundamental reform of our monetary regimes at the constitutional level more apparent making buchanan s work on monetary constitutions more relevant than ever before we then discuss how adopting buchanan s monetary framework can improve both monetary scholarship and institutions

moral hazard the long lasting legacy of bailouts the u s government appears to be committed to supporting any large bank that gets into trouble a bailout environment distorts risk assessments debt capital flows more readily to large institutions even inefficient ones than to small ones this article proposes reforms to the u s financial system a change in incentives is needed phasing out the deductibility of interest on all business tax returns would reduce the incentive for leverage another reform would require all banks to issue 10 year subordinated notes which would provide a large capital cushion banks would have to go to market every year to replace maturing subordinated debt which would greatly enhance market discipline listen to a presentation by the author based on this article

contagion of a liquidity crisis between two firms abstract this paper presents a model in which the contagion of a liquidity crisis between two nonfinancial institutions occurs because of learning activity within a common creditor pool after creditors observe what occurs in a rollover game for a firm they conjecture one another s type or attitude toward the risk associated with the firm s investment project creditors inference about one another s type then influences their decision to lend to the next firm by providing an analysis of the incidence of failure the threshold for a liquidity crisis for each firm this paper demonstrates that the risk of contagion increases sharply if it originates ex ante from a firm facing a low probability of failure in addition the paper proposes some policy measures for mitigating the severity of contagion during a liquidity crisis

market specific and currency specific risk during the global financial crisis evidence from the interbank markets in tokyo and london abstract this paper investigates how international money markets reflected credit and liquidity risk during the global financial crisis after matching the currency denomination we examine how the tokyo interbank offered rate tibor was synchronized with the london interbank offered rate libor we find remarkably asymmetric responses in market specific and currency specific risk during the crisis the regression results suggest that market specific credit risk increased the difference across markets whereas liquidity risk caused the difference across currency denominations they also support the view that liquidity shortage of the us dollar occurred in international money markets during the crisis coordinated central bank liquidity provisions were useful in reducing the liquidity shortage of the us dollar but their effectiveness was asymmetric across markets

central banking in the credit turmoil an assessment of federal reserve practice abstract central banking is understood in terms of the fiscal features of monetary credit and interest on reserves policies monetary policy expanding reserves by buying treasuries transfers all revenue from money creation directly to the fiscal authorities credit policy selling treasuries to fund loans or acquire non treasury securities is debt financed fiscal policy interest on reserves frees monetary policy to fund credit policy independently of interest rate policy an ambiguous boundary of responsibilities between the fed and the fiscal authorities contributed to economic collapse in fall 2008 accord principles are proposed to clarify fed credit policy powers and secure its independence on monetary and interest rate policy the fed needs more surplus capital from the fiscal authorities to be fully flexible against both inflation and deflation at the zero interest bound

determining all nash equilibria in a bi linear inspection game abstract this paper addresses a game between an inspection agency and multiple inspectees that are subject to random inspections by that agency we provide explicit easily computable expressions for all possible nash equilibria and verify that none is left out in particular our results characterize situations when there exists a unique nash equilibrium we also explore special features of the nash equilibria and the solution of the problem the inspection agency faces in a non strategic environment

turning bagehot on his head lending at penalty rates when banks can become insolvent ever since bagehot s 1873 pioneering work it is a widely accepted wisdom that in order to alleviate ex ante bank moral hazard a lender of last resort should lend at penalty rates only in a model in which banks are subject to shocks but can exert effort to affect the likelihood of these shocks we show that the validity of this argument crucially relies on banks always remaining solvent the reason is that when banks become insolvent bagehot s prescription dictates to let them fail penalty rates charged when banks are illiquid but solvent then reduce banks incentives to avoid insolvency ex ante and thus increase bank moral hazard we derive a condition which shows precisely when this effect on ex ante incentives outweighs the traditional one and show that it is fulfilled under plausible scenarios

the economics of academic tenure a relational perspective abstract this analysis draws on recent work in analytical labor economics that shows the value of stable long term employment relationships tenure is conventionally portrayed as an economically wasteful institution justified if at all by its non economic value the present analysis identifies ways in which an extended probationary period followed by a lifetime guarantee of a well defined job is well adapted to features of academic work the most important of these are a the difficulty of monitoring faculty work performance and the highly specific character of b faculty jobs and c the training those jobs require the probation tenure system is contrasted with term contracting case studies support the theoretical inferences about the drawbacks of term contracting in an academic setting

the impact of bad writing in economics we find significant style differences between articles written by economists for their professional journals and articles by the same economists in the wall street journal we find no evidence that style influences the professional success of economists which suggests that the private rewards to improving the quality of writing are low indeed each community of scholars has probably adopted a professionally correct writing style from which its members diverge little however scholars do alter their rhetorical style to communicate effectively with audiences other than the professional community this suggests that intra and inter group written communication by economists is efficient

imf bailouts and moral hazard this paper empirically investigates the extent of investor moral hazard associated with imf bailouts by analyzing the responses of sovereign bond spreads to the changes in the perceived probability of imf bailouts of countries undergoing financial crisis we do not find strong evidence that the extent of investor moral hazard changed after the non bailout of russia in august 1998 that signaled a modification to imf intervention policy in contrast we find evidence that investor moral hazard is intensified for those countries that have stronger political connections to the imf and that are thereby more likely to be bailed out by the imf this pattern prevailed even after the russian crisis

when and how us dollar shortages evolved into the full crisis evidence from the cross currency swap market abstract this paper investigates when and how the us dollar shortages evolved into the full crisis in the cross currency swap market between major european currencies and the us dollar during the turmoil of 2007 2009 using the dynamic factor model with regime switching coefficients of each swap price with respect to the latent common factor the 1 year market entered the high crisis regime soon after the onset of the subprime problem in august 2007 the 10 year market entered that regime following the collapse of bear sterns in mid march 2008 financial credit spreads have significant predictive power for switches between high and low regimes

ben bernanke and bagehot s rules former federal reserve chairman ben bernanke has claimed that the fed s bank bailouts during the 2008 financial crisis were consistent with walter bagehot s rules for a lender of last resort this paper demonstrates bernanke s claims to be mistaken first we outline bagehot s doctrine for a classical lender of last resort next we discuss bernanke s theory of bank bailouts and his statements regarding the fed s role in the 2008 bank bailouts finally we examine the bailouts and demonstrate that contrary to bernanke s claims the fed s actions were not consistent with bagehot s rules for a lender of last resort

balance of trade announcements and asset prices influence on equity prices exchange rates and interest rates abstract this paper examines the informational impact of traded balance announcements on asset prices including equities currrencies long and short term debt instruments and financial futures this study finds that in the 1980s prior to the 1985 plaza agreement for international economic cooperation information in trade balance announcements seem to have influenced only interest rates however in the 1985 1987 period such announcements also influenced stock prices and currency values these influences intensity further in the 1987 1988 period thus asset prices are sensitive to news in trade balance announcements and this sensitivity seems to have increased significantly in recent years with important implications for asset pricing models and economic policy formulation jel f30

responding to a shadow banking crisis the lessons of 1763 in august 1763 northern europe experienced a financial crisis with numerous parallels to the 2008 lehman brothers episode the 1763 crisis was sparked by the failure of a major provider of acceptance loans a form of securitized credit resembling modern asset backed commercial paper the central bank at the hub of the crisis the bank of amsterdam responded by broadening the range of acceptable collateral for its repo transactions analysis of archival data shows that this emergency source of liquidity helped to contain the effects of the crisis by preventing the collapse of at least two other major securitizers while the underlying themes seem to have changed little in 250 years the modest scope of the 1763 liquidity intervention together with the lightly regulated nature of the eighteenth century financial landscape provide some informative contrasts with events of late 2008

quality improvement incentives and product recall cost sharing contracts as companies outsource more product design and manufacturing activities to other members of the supply chain improving end product quality has become an endeavor extending beyond the boundaries of the firms in house process capabilities in this paper we discuss two contractual agreements by which product recall costs can be shared between a manufacturer and a supplier to induce quality improvement effort more specifically we consider i cost sharing based on selective root cause analysis contract s and ii partial cost sharing based on complete root cause analysis contract p using insights from supermodular game theory for each contractual agreement we characterize the levels of effort the manufacturer and the supplier would exert in equilibrium to improve their component failure rate when their effort choices are subject to moral hazard we show that both contract s and contract p can achieve the first best effort levels however contract s results in higher profits for the manufacturer and the supply chain for the case in which the information about the quality of the supplier s product is not revealed to the manufacturer i e the case of information asymmetry we develop a menu of contracts that can be used to mitigate the impact of information asymmetry we show that the menu of contracts not only significantly decreases the manufacturer s cost due to information asymmetry but also improves product quality

international cooperation during the covid 19 pandemic this paper explores the concept of global public goods gpgs in the context of the ongoing covid 19 pandemic it argues that many of the tasks involved in public health and in particular those involved in the control of an infectious disease like covid 19 ought to be treated as gpgs that can only be effectively delivered through international cooperation it sets out what a cooperative response to the covid 19 pandemic should look like and introduces ideas for further discussion about how it might be financed

coordination failures and the lender of last resort was bagehot right after all the classical doctrine of the lender of last resort lolr elaborated by bagehot 1873 asserts that the central bank should lend to illiquid but solvent banks under certain conditions several authors have argued that this view is now obsolete in modern interbank markets a solvent bank cannot be illiquid this paper provides a possible theoretical foundation for rescuing bagehot s view our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs we built a model of banks liquidity crises that possesses a unique bayesian equilibrium in this equilibrium there is a positive probability that a solvent bank cannot find liquidity assistance in the market we derive policy implications about banking regulation solvency and liquidity ratios and interventions of the lender of last resort furthermore we find that public bailout and private bail in involvement are complementary in implementing the incentive efficient solution and that bagehot s lender of last resort facility must work together with institutions providing prompt corrective action and orderly failure resolution finally we derive similar implications for an international lender of last resort ilolr jel g21 g28

adam smith goes to college an economist becomes an academic administrator the author asks whether it is useful to view universities in a utility maximizing framework and shows that university organizing virtually guarantees that the utility maximizing model is the incorrect approach he then discusses resource allocation issues at cornell and reflects upon how concepts that are obvious to economists helped or hindered decision making at cornell the author hopes to convey not that economic concepts are irrelevant in operating a university but rather that it takes a long time to explain to all the actors in the system why these concepts should matter and even longer to actually make them matter

dollar illiquidity and central bank swap arrangements during the global financial crisis abstract while the global financial crisis was centered in the united states it led to a surprising appreciation in the dollar suggesting global dollar illiquidity in response the federal reserve partnered with other central banks to inject dollars into the international financial system empirical studies of the success of these efforts have yielded mixed results in part because their timing is likely to be endogenous in this paper we examine the cross sectional impact of these interventions theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the united states through trade and financial channels less transparent holdings of dollar assets and greater illiquidity difficulties we examine these predictions for observed cross sectional changes in cds spreads using a new proxy for innovations in perceived changes in sovereign risk based upon google search data we find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the united states through either trade linkages or asset exposure we obtain weaker results for differences in asset transparency or illiquidity however several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness

the out of sample forecasting performance of exchange rate models when coefficients are allowed to change abstract this study examines the out of sample forecasting performance of models of exchange rate determination without imposing the restriction that coefficients are fixed over time both fixed and variable coefficient versions of conventional structural models are considered with and without a lagged dependent variable while our results on fixed coefficient models support most of the meese and rogoff conclusions we find that when coefficients are allowed to change an important subset of conventional models of the dollar pound the dollar deutsche mark and the dollar yen exchange rates can outperform forecasts of a random walk model the structural models considered are the flexible price frenkel bilson and sticky price dornbusch frankel monetary models and a sticky price model which includes the current account hooper morton

managing liquidity optimal degree of centralization abstract large banking groups face the question of how to optimally allocate and generate liquidity in a central liquidity hub or in many decentralized branches we translate this question into a facility location problem under uncertainty we show that volatility is the key driver behind de centralization we provide an analytical solution for the 2 branch model and show that a liquidity center can be interpreted as an option on immediate liquidity therefore its value can be interpreted as the price of information i e the price of knowing the exact demand furthermore we derive the threshold above which it is advantageous to open a liquidity center and show that it is a function of the volatility and the characteristic of the bank network finally we discuss the n branch model for real world banking groups 10 60 branches and show that it can be solved with high granularity 100 scenarios within less than 30 s

blueprint for an international lender of last resort abstract this paper proposes a low cost alternative to the large bailout packages that the international monetary fund imf has organized to address financial crises the imf would act as a lender of last resort faced with an unsustainable debt burden a government would declare default it would announce negotiations to restructure its debt at a sustainable level and a minimum restructured value of the debt during the restructuring period the imf would provide a cash support bid at a discount to the government s minimum offer the imf floor would guarantee liquidity and create a functioning market in the defaulted debt the proposal would remedy market failure preclude panic and contagion and facilitate an orderly debt restructuring this would be achieved without substantial official funds lenders would be forced to bear the risks they undertake thereby reducing moral hazard and future instability

from turmoil to crisis dislocations in the fx swap market before and after the failure of lehman brothers abstract this paper investigates dislocations in the foreign exchange fx swap market between the us dollar and three major european currencies after the failure of lehman brothers in september 2008 deviations from covered interest parity cip were negatively associated with the creditworthiness of us financial institutions as well as that of european institutions consistent with the deepening of a dollar liquidity problem into a global phenomenon us dollar term funding auctions by the ecb snb and boe as well as the us federal reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the fx swap market dislocations

tenure issues in higher education the system of tenure that dominates american higher education has long been a source of controversy the institution of tenure has been attacked for entrenching a lazy professoriate more interested in attending faraway conferences and producing unreadable research than in teaching or developing practical insights while on the other hand it has long been defended as an absolute necessity for the defense of open intellectual inquiry the tenure controversy has been sharpened in recent years by several events the end of mandatory retirement which was abolished by federal law effective january 1 1994 has heightened concerns about the productivity and commitment of professors who received tenure long ago and who no longer have the same incentives to invest in long term reputation there is also ongoing concern over the steadily rising cost of higher education which raises the question of what students as well as the taxpayers who support public institutions of higher education are getting for their money 1 the idea that tenure is a wasteful institution for universities runs up against the puzzling fact that the commitment to tenure is one that academic institutions impose on themselves although the american association of university professors aaup provides a powerful lobby in favor of tenure generally colleges and universities most notably private ones are under no legal requirement to observe tenure constraints although as administrators we certainly feel the weight of those constraints our view is that a tenure system in fact provides important benefits to society and to colleges and universities we argue here that the role of tenure is

a yen is not a yen tibor libor and the determinants of the japan premium pricing in the euroyen market is based on libor the london interbank offered rate set at 11 00am london time or tibor the tokyo interbank offered rate set at 11 00am tokyo time the changing tibor libor spread reflects the credit risk associated with japanese banks or the japan premium the spread is modeled as a function of determinants of bank default and firm value systematic variation in the spread can be explained by interest rate and stock price effects along with public information flows of good and bad news regarding japanese banking with a separate role for bank credit downgrades and upgrades

determinants of the japan premium actions speak louder than words abstract since august 1995 japanese banks have had to pay a premium on eurodollar and euroyen interbank loans relative to their u s and u k competitors this so called japan premium provides a market indicator of investor anxiety about the ability of japanese banks to repay loans we examine the determinants of the japan premium and find that government announcements not associated with concrete actions had little impact on the other hand announcements of concrete actions by the japanese government such as injections of funds into the banking system tended to have an effect on the size of the japan premium

monetary policy and covered interest parity in the post gfc period evidence from the australian dollar and the nz dollar abstract after the global financial crisis gfc most major currencies had higher interest rates than the us dollar on forward contract because of increased demand for the us dollar as international liquidity however unlike the other major currencies the australian dollar and the nz dollar had lower interest rates than the us dollar on forward contract in the post gfc period the purpose of this paper is to explore why this happened through estimating the covered interest parity cip condition in the analysis we focus on a unique feature of australia and new zealand where short term interest rates remained significantly positive even after the gfc the paper first constructs a theoretical model where increased liquidity risk causes deviations from the cip condition it then tests this theoretical implication by using daily data of six major currencies we find that both money market risk measures and policy rates had significant effects on the cip deviations the result implies that unique monetary policy feature in australia and new zealand made deviations from the cip condition distinct on the forward contract

central bank swap line effectiveness during the euro area sovereign debt crisis abstract the federal reserve re established a swap line with the european central bank in response to the international liquidity stresses created by the euro area sovereign debt crisis we examine the swap line s effectiveness in addressing these stresses in 2010 11 we find that announcements about the swap line had a significant effect in reducing euro dollar fx swap spreads during the 2010 11 crisis but that the swap line only had limited effectiveness in alleviating the stresses probably owing to some stigma being attached to its use

financial instability reserves and central bank swap lines in the panic of 2008 in this paper we connect the events of the last twelve months the panic of 2008 as it has been called to the demand for international reserves in previous work we have shown that international reserve demand can be rationalized by a central bank s desire to backstop the broad money supply to avert the possibility of an internal external double drain a bank run combined with capital flight thus simply looking at trade or short term debt as motivations for reserve holdings is insufficient one must also consider the size of the banking system m2 here we show that a country s reserve holdings just before the current crisis relative to their predicted holdings based on these financial motives can significantly predict exchange rate movements of both emerging and advanced countries in 2008 countries with large war chests did not depreciate and some appreciated meanwhile those who held insufficient reserves based on our metric were likely to depreciate current account balances and short term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account our model s typically high predicted reserve levels provide important context for the unprecedented u s dollar swap lines recently provided to many countries by the federal reserve this abstract was borrowed from another version of this item

catalytic finance when does it work in a model of debt crisis caused partly by creditor coordination failure we show that bailouts that reduce ex post inefficiency will sometimes enhance the incentives for governments to take costly adjustment effort this model helps us understand a debate about the role of the imf in catalyzing lending to developing countries

eu china collaboration in the reform of the international monetary system much ado about nothing he global nancial crisis which began in the united states in 2008 has raised doubtsabout the ef ciency of the current dollar led international monetary system ims twomain structural theories have been put forward to explain the crisis each with their respectivereform solutions on the one hand there is the savings glut theory bernanke 2005 2011 favoured by policymakers in washington and a signi cant part of the economics literature which says that the unsustainable overleveraging in the united states was induced by therecycling of dollar denominated savings of surplus economies especially the east asiancountries including china this constant in ow of large volumes of savings suppressed inter est rates on us debt and thus fostered over consumption and over indebtedness to avoid arepeat the proposed solution is to encourage countries like china to let its currency oat sothat the appropriate market equilibrium can be found and a rebalancing of the global economycan be achieved on the other hand there is the trif n dilemma theory zhou 2009 padoa schioppa 2010 bini smaghi 2011 favoured by policymakers in beijing and a number of high pro leeuropean of cials this argues that the crisis is a product of the structural contradiction asso ciated in any international regime dominated by a national currency as trif n 1960 explained in the era of the bretton woods system when the dollar was still linked to gold there is an inherent aw in the dollar standard to provide the necessary liquidity for the glo bal economy the united states needs to run current account de cits the increase in this de cit however undermines the credibility of the reserve currency while for some timeeconomists thought the trif n dilemma was history because it was only valid for a systemlinked to gold the recent crisis suggests otherwise even in a system where the issuer of themain international currency in this case the united states adopts a exible exchange rate there is a limit to its liquidity provision as current events have shown by increasing its scalde cits and expanding substantially its monetary base the united states risks underminingthe credibility of the dollar as the global reserve currency the solution thus is to nd a mech anism that can restrain us pro igacy in uenced by this second theory policymakers of the brics brazil russia india chinaand south africa and eurozone have openly called for the end to the dollar dominated ims chinese and french of cials have been particularly active in this debate the former presidentof china hu jintao the governor of the people s bank of china pboc zhou xiaochuan and

international reserves before and after the global crisis is there no end to hoarding we evaluate the impact of the global financial crisis gfc and recent structural changes in the patterns of hoarding international reserves ir we confirm that the determinants of ir hoarding evolve with developments in the global economy during the pre gfc period of 1999 2006 gross saving is associated with higher ir in developing and emerging markets the negative impact of outward direct investment on ir accumulation is consistent with the recent trend of diverting international assets from the international reserve account into tangible foreign assets the joneses effect lends support to the regional rivalry in hoarding ir as a motivation and commodity price volatility induces precautionary buffer hoarding during the 2007 2009 gfc period previously significant variables become insignificant or display the opposite effect probably reflecting the frantic market conditions driven by financial instability nevertheless the propensity to import and gross saving continue to display strong and even larger positive effects on ir holding the results from the 2010 2012 post gfc period are dominated by factors that had been mostly overlooked in earlier decades while the negative effect of swap agreements and the positive effect of gross saving on ir holdings are in line with our expectations we find a change in the link between outward direct investment and ir in the pre and post crisis period the macro prudential policy tends to complement ir accumulation developed countries display different demand behaviors for irs higher gross saving is associated with lower ir holding possibly reflecting high income countries tendency to deploy their savings in the global capital markets the presence of sovereign wealth funds motivates developed countries to hold a lower level of ir our predictive exercise affirms that an emerging market economy with insufficient ir holdings in 2012 tends to experience exchange rate depreciation against the u s dollar when many emerging markets were adjusted to the news of tapering quantitative easing in 2013