expectations the exchange rate and the current account abstract a critical examination is undertaken of the relationship between the exchange rate and the current account in a small open economy theoretically the correlation between the exchange rate and the current account seems to be ambiguous in particular the association between movements in the exchange rate and the current account is likely to depend in an essential manner on the nature of exogenous disturbances affecting the two variables simultaneously lastly the question of the role of an optimal monetary policy and the choice of an exchange rate regime in an uncertain environment is raised

occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

optimal capital income taxation with incomplete markets borrowing constraints and constant discounting for a wide class of infinitely lived agent models chamley has shown that the optimal capital income tax rate is zero in the long run lucas has argued that for the u s economy there is a significant welfare gain from switching to this policy this paper shows that for the bewley class of models with incomplete insurance markets and borrowing constraints the optimal tax rate on capital income is positive even in the long run therefore cutting the capital income tax to zero may well lead to welfare losses

a comparative analysis of current credit risk models the new bis 1998 capital requirements for market risks allows banks to use internal models to assess regulatory capital related to both general market risk and credit risk for their trading book this paper reviews the current proposed industry sponsored credit value at risk methodologies first the credit migration approach as proposed by jp morgan with creditmetrics is based on the probability of moving from one credit quality to another including default within a given time horizon second the option pricing or structural approach as initiated by kmv and which is based on the asset value model originally proposed by merton merton r 1974 journal of finance 28 449 470 in this model the default process is endogenous and relates to the capital structure of the firm default occurs when the value of the firm s assets falls below some critical level third the actuarial approach as proposed by credit suisse financial products csfp with creditrisk and which only focuses on default default for individual bonds or loans is assumed to follow an exogenous poisson process finally mckinsey proposes creditportfolioview which is a discrete time multi period model where default probabilities are conditional on the macro variables like unemployment the level of interest rates the growth rate in the economy which to a large extent drive the credit cycle in the economy 2000 elsevier science b v all rights reserved

financial development and financing constraints international evidence from the structural investment model this article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment the financing constraints are inferred from the investment euler equation by assuming that the firm s stochastic discount factor is a function of the firm s financial position specifically the stock of liquid assets the magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development the size effect business cycles and legal environment effects are also considered copyright 2003 oxford university press

tariffs real exchange rates and the trade balance in a two country world abstract an intertemporal model of a two country world in which optimizing agents consume three goods importables exportables and nontradables is developed to investigate a tariffs effects on real interest rates real exchange rates and the trade balance real interest rates and real exchange rates are shown to move asymmetrically across countries in response to a temporary tariff we also show that in contrast to the findings of two tradable good models a temporary tariff may actually worsen the trade balance of both deficit and surplus countries even when there are no cross country differences in tastes

an exploration in the theory of exchange rate regimes three exchange rate regimes a float a one sided peg and a cooperative peg are evaluated and compared in terms of efficiency and welfare levels the framework of analysis embodies country specific monies with the money of each country being used to transact in its commodity markets and its currency denominated bonds welfare levels depend only on consumption levels in the presence of perfect foresight all equilibrium allocations are pareto efficient in a floating exchange rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy the same result holds in a one sided peg if the pegging country s exchange rate stabilizing authority breaks even over time in a cooperative peg regime there is a different equilibrium allocation for each combination of exchange rate levels and monetary policies problems of policy coordination and conflicts in desired monetary policies are discussed

loss given default of residential mortgages in a low ltv regime role of foreclosure auction process and housing market cycles abstract using loan level foreclosure auction data we study the loss given default lgd of defaulted residential mortgages originated in korea a low ltv regime we find that senior mortgages generate very low loss rates 5 10 while losses of subordinated claims are in 30 50 range we document the effects of housing market cycles on loss severity by showing that collateral characteristics that are overvalued during the boom increase loss severity during the market downturn we also investigate how a broad set of time of origination and post origination information on loan collateral and borrower characteristics and foreclosure auction process influence the lgd of residential mortgages

trade taxes and the current account abstract we show that under some conditions a temporary import tariff improves the current account whereas a temporary export tax deteriorates it permanent import tariffs and export taxes have an identical although ambiguous effect on the current account

an investigation in the theory of foreign exchange controls a choice theoretic cash in advance model is constructed to examine foreign exchange controls while foreign exchange controls improve the trade balance and the balance of payments or exchange rate they reduce welfare for a distortion free small open economy this is because foreign exchange controls essentially place a quota on imports shocks to the terms of trade are shown to be transmitted negatively to the domestic economy when exchange controls are in effect devaluations are found not to have real effects finally it is argued that foreign exchange controls are not the optimal policy for attaining trade balance objectives

tariff behavior in five european countries abstract this paper examines the time series properties of average tariff rates for denmark france sweden switzerland and the united kingdom for all five countries the tariff series contains a unit root however a complete description of the tariff rate series for each country suggests that tariff changes may have quite different effects on macroeconomic variables such as the trade balance in each of the five countries studied

income distribution and macroeconomics this paper analyzes the role of wealth distribution in macroeconomics through investment in human capital it is shown that in the presence of credit markets imperfections and indivisibilities in investment in human capital the initial distribution of wealth affects aggregate output and investment both in the short and in the long run as there are multiple steady states this paper therefore provides an additional explanation for the persistent differences in per capita output across countries furthermore the paper shows that cross country differences in macroeconomic adjustment to aggregate shocks can be attributed among other factors to differences in wealth and income distribution across countries

immiserizing deindustrialization a dynamic trade model with credit constraints abstract the paper develops an open economy dynamic model with bequests and credit constraints the agricultural sector uses only labor the industrial sector needs an indivisible investment under autarky productive agriculture provides the funds needed for investment in industry and in equilibrium credit constraints are not binding if agriculture is not sufficiently productive the price of the industrial good must be high enough to make the industrial sector sustainable in an open economy if the country has the comparative advantage in agriculture deindustrialization may occur over time deindustrialization is welfare reducing when the negative wealth distributional effects swamp the gains from trade

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

equilibrium income inequality among identical agents the paper offers a theory of income differences in which income inequality exists and persists despite identical tastes and talents teams of unskilled labor supervised by schooled managers produce goods with increasing returns to scale agents are assumed unable to borrow to fund the human capital investment needed to become managers despite ex ante identical agents the model displays the following equilibrium phenomena i risk averse agents accept fair gambles implying an unequal ex post distribution of unearned income ii agents agree to publicly subsidize education although those receiving the subsidy have the highest material wealth and iii income and educational differences are perpetuated from generation to generation

random earnings differences lifetime liquidity constraints and altruistic intergenerational transfers abstract this paper develops a model of private savings behavior in which households care about their descendants cannot have negative net worth and have lifetime earnings depending on random draws from an exogenous distribution of abilities the elements interact very lucky parents are likely to leave large estates constrained children are unusually likely to receive intergenerational transfers the paper proves the existence of a stationary cross sectional distribution of wealth endogenously determines where liquidity constraints will bind and shows that the long term interest rate must be such that ricardian neutrality fails its last section generates several illustrative numerical simulations

pareto superiority of unegalitarian equilibria in stiglitz model of wealth distribution with convex saving function this paper extends the conclusions obtained by stiglitz and others about the asymptotic wealth distribution in the neo classical growth model when the saving function is convex it is shown not only that locally stable two class unegalitarian equilibria may exist along with the egalitarian equilibrium but also that they necessarily are pareto superior to it more generally the paper also analyzes the class of pareto optimal unegalitarian equilibria

tariffs interest rates and the trade balance in the world economy abstract a two commodity intertemporal framework is used to show that in contrast to the conventional wisdom both permanent and temporary tariffs may worsen the trade balance of a large country for a temporary tariff the key condition for this result is a low intertemporal elasticity of substitution in consumption when a temporary tariff worsens the trade balance the world real interest rate must fall if the tariff imposing country is running a deficit and rise if it is running a surplus temporary tariffs can only worsen the trade balance of a surplus country when international differences in tastes are important

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

is equality stable economic inequality is of interest not only at some intrinsic level but also for its close connections to diverse variables ranging from economic indicators such as growth rates to sociopolitical outcomes such as collective action and conflict it is only natural then to study the evolution of inequality in an economic system it is fair to say that the dominant view on this topic is that inequality is the outcome of a constant battle between convergence and luck gary becker and nigel tomes 1979 current asset inequalities may echo into the future but their natural tendency is to die out owing to a convex investment technology disparities are only sustained through ongoing stochastic shocks see also david champernowne 1953 glenn loury 1981 a second approach emphasizes that initial conditions determine final outcomes owing principally to a nonconvex investment technology see e g mukul majumdar and tapan mitra 1982 abhijit banerjee and andrew newman 1993 oded galor and joseph zeira 1993 ray and peter streufert 1993 historical disparities may persist and magnify if such differences straddle some bifurcation threshold inequality is not inevitable in this view stable steady states with inequality coexist with others that involve perfect equality in this paper we examine a third view which emphasizes an intrinsic tendency of the market mechanism to create inequality in this approach economic inequality appears as an inevitable outcome even if all agents are identical to begin with and even if there is no uncertainty or technological nonconvexity this view has received attention in ray 1990 debasis bandyopadhyay 1993 lars ljungqvist 1993 scott freeman 1996 kiminori matsuyama 2001 and mookherjee and ray 2001 the basic argument is as follows suppose that an economy is populated by several dynasties each of which allocates resources to current consumption and bequests to descendants assume for the moment that the latter consists entirely of educational expenditures preparing children for their chosen professions of course the returns to such professions are endogenous they depend on the distribution of individuals across different professions now if several professional categories are necessary wages must adjust so as to force separation in choices even if all individuals are ex ante identical to be sure this broken symmetry matsuyama 2002 has no payoff implications for the generation alive today identical individuals must receive identical payoffs starting with the next generation however there must be inequality not just in wages but in payoffs there must be individuals in lowpaying professions that involve low training costs whose parents invested little and there must be others in high paying high trainingcost professions whose parents invested a lot once such inequality sets in it may well magnify richer offspring will find it easier to invest in better paying professions for their children two ingredients are used in this argument first credit markets must be missing or imperfect otherwise the necessary finances may be borrowed and wages net of costs must be equalized over all professions however the assumption that parents cannot borrow against their children s future earnings seems innocuous enough second parents cannot make financial bequests to supplement or substitute for educational expenditures such bequests could conceivably neutralize earnings inequality this motivates the question when might financial bequests compensate for earnings inequality in steady state moreover starting from perfect equality will equality be preserved thereafter or will inequality emerge and persist we discuss an extended example from an ongoing research project mookherjee department of economics boston university 270 bay state road boston ma 02215 ray department of economics new york university 269 mercer street new york ny 10003 and instituto de analisis economico csic barcelona spain we thank kiminori matsuyama who encouraged us to write this paper

on the role of financial frictions and the saving rate during trade liberalizations we study how financial frictions and the saving rate shape the long run effects of trade liberalization on income consumption and the distribution of wealth in financially underdeveloped economies in our model regardless of whether the capital account is open or not trade liberalization reduces the share of wealth in the hands of entrepreneurs and may well reduce steady state consumption and income furthermore trade opening is more likely to reduce steady state consumption and output the higher is the level of financial development for economies with an open capital account a higher saving rate also increases the likelihood that a trade liberalization leads to a reduction in steady state consumption and output jel e2 f1 f2 f3 f4

the macroeconomic dynamics of tariffs a symmetric two country analysis this paper examines the macroeconomic dynamics of tariffs the adverse microeconomic effects of tariffs have been exhaustively discussed in the international trade literature however there are still some debate and discussion on the effects of tariffs on the macroeconomy in the mainstream open economy macroeconomics literature it is argued that the impact of imposing a tariff is likely to be contractionary under flexible exchange rates 1 this view however has been challenged first by the cambridge economic policy group cripps and godley 3 and more recently by ford and sen 7 given the fact that commercial policies have recently returned to playing a more central role in policy debates this then leads to a revival of interest in the effects of tariffs on macroeconomic aggregates one important drawback of the analyses in the literature is that they all assume that the domestic economy faces a given world price of imports i e they focus exclusively on small open economies with virtually no attention being devoted to two country models 2 it is surely a question of relevance to examine the cross country impact of protection although considerable effort has been devoted to examine the international transmission of fiscal and monetary policies recently corden and turnovsky 2 svensson and van wijnbergen 13 little has been done on commercial policies in a two country framework 3 it is our intention therefore to relax the small country assumption to study the transmission effect of tariffs in this paper we discuss how likely a tariff will be beggar thy neighbor our main concern is the dynamic effects of a tariff on domestic and foreign aggregates we pay special attention to the distinction between anticipated and unanticipated permanent tariff changes 4 the case of a temporary tariff is also examined the analysis is conducted in a modified two country mun

trade and capital flows a financial frictions perspective the classical heckscher ohlin mundell paradigm states that trade and capital mobility are substitutes in the sense that trade integration reduces the incentives for capital to ow to capital scarce countries in this paper we show that in a world with heterogeneous nancial development the classic conclusion does not hold in particular in less nancially developed economies south trade and capital mobility are complements within a dynamic framework the complementarity carries over to nancial capital ows this interaction implies that deepening trade integration in south raises net capital in ows or reduces net capital out ows it also implies that at the global level protectionism may back re if the goal is to rebalance capital ows when these are already heading from south to north our perspective also has

credit risk in private debt portfolios default loss severity and average loss rates for a large sample of privately placed bonds are presented and compared with loss experience for publicly issued bonds the chance of very large portfolio losses is estimated and some determinants of such losses are analyzed results show ex ante riskier classes of private debt perform better on average than public debt both diversification and the riskiness of individual portfolio assets influence the bad tail of the portfolio loss distribution private placements are similar to corporate loans in that both are monitored private debt the results are thus relevant to management and securitization of private debt portfolios generally more than half of nonfinancial corporate debt finance is iss ued privately and decisions of the financial intermediaries that invest in such debt depend importantly on its credit risk regulators of such institutions are similarly attentive to portfolio credit risk and it is an important consideration in the design of securitizations of pools of private debt in spite of its importance little is known empirically about private debt credit risk especially ex ante risk as a function of portfolio characteristics many studies have examined the loan portfolio performance of banks thrifts and insurance companies but the ex ante risk characteristics of the portfo

capital market imperfections before and after financial liberalization an euler equation approach to panel data for ecuadorian firms using a large set of panel data for ecuadorian firms the authors analyze the role of capital market imperfections in investment decisions and investigate whether the financial reforms introduced in the 1980s in ecuador succeeded in relaxing financial constraints to facilitate capital accumulation and growth the ecuadorian government removed administrative controls on the interest rate and eliminated or scaled down directed credit programs the model used here allows both for an increasing cost of borrowing as the degree of leverage increases and for a ceiling on leverage the econometric results suggest that both types of capital market imperfections are important for small and young firms but not for large and old firms moreover the estimated equations do not provide evidence that financial reform in ecuador has helped to relax these financial constraints

pricing mortgage default and foreclosure delay this paper extends current mortgage pricing models to recognize the impact that delays between default and foreclosure have on the value of default to the borrower and the resulting value of the mortgage to investors the model explicitly captures potential costs through postforeclosure deficiency judgments and benefits in the elimination of negative equity and free rent that must be weighed at the time of default in determining whether the ultimate put option via allowing foreclosure is in the money the results provide policy implications concerning the operation of the fha insurance program copyright 1997 by ohio state university press

the effect of state foreclosure laws on loan losses evidence from the mortgage insurance industry this paper analyzes the effect of three major provisions of state foreclosure laws procedure redemption period and provision for deficiency judgment on loan losses as reflected in the claims paid by private mortgage insurers and the fha it also explores the significance of the incentive conflict between the lender and the insurer in terms of the presence or absence of a coinsurance relationship and the existence of a deficiency judgment the results demonstrate that foreclosure laws have a significant effect on loan losses and that the existence of a deficiency judgment affects the incentive conflict between lender and insurer copyright 1990 by ohio state university press

financial market globalization symmetry breaking and endogenous inequality of nations this paper investigates the effects of financial market globalization on the inequality of nations the world economy consists of inherently identical countries which differ only in their levels of capital stock each country is represented by the standard overlapping generations model modified only to incorporate credit market imperfection an integration of financial markets affects the set of stable steady states as it changes the balance between the equalizing force of the diminishing returns technology and the unequalizing force of the wealth dependent borrowing constraint the model is tractable enough to allow for a complete characterization of the stable steady states in the absence of the international financial market the world economy has a unique steady state which is symmetric and stable in the presence of the international financial market symmetry breaking occurs under some conditions that is the symmetric steady state loses its stability and stable asymmetric steady states come to exist in the stable asymmetric steady states the world economy is endogenously divided into the rich and poor countries the borrowing constraints are binding in the poor but not in the rich the world output is smaller the rich are richer and the poor are poorer in any of the stable asymmetric steady states than in the unstable symmetric steady state

a theory of trickle down growth and development this paper develops a model of growth and income inequalities in the presence of imperfect capital markets and it analyses the trickle down effect of capital accumulation moral hazard with limited wealth constraints on the part of the borrowers is the source of both capital market imperfections and the emergence of persistent income inequalities three main conclusions are obtained from this model first when the rate of capital accumulation is sufficiently high the economy converges to a unique invariant wealth distribution second even though the trickle down mechanism can lead to a unique steady state distribution under laissez faire there is room for government intervention in particular redistribution of wealth from rich lenders to poor and middle class borrowers improves the production efficiency of the economy both because it brings about greater equality of opportunity and also because it accelerates the trickle down process third the process of capital accumulation initially has the effect of widening inequalities but in later stages it reduces them in other words this model can generate a kuznets curve

risk based capital requirements for mortgage loans abstract we contribute to the debate over the reform of the basel accord by developing risk based capital requirements for mortgage loans held in portfolio by financial intermediaries our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification hence rules that offer little risk differentiation including the current basel i regime and standardized approach proposed in basel ii result in significant divergence between regulatory and economic capital these results highlight the incentive problems inherent in simplified methods of capital regulation

the dynamics of the wealth distribution and the interest rate with credit rationing are uniquely determined and wealth dispersion among individuals or firms is irrelevant introducing credit rationing into the solow model modifies these conclusions multiple stationary interest rates and wealth distributions can exist because higher initial rates can be self reinforcing through higher credit rationing and lower capital accumulation the wealth accumulation process is ergodic in every steady state but wealth mobility is lower with higher steady state interest rates aggregate output is higher in steady states with lower interest rates because credit is better allocated short run interest rate or distribution shocks can be self sustaining and can have long run effects on output through the induced dynamics of the wealth distribution and credit rationing

credit constraints and human capital accumulation in the open economy abstract this paper analyzes the implications of capital market imperfections for understanding the causes and consequences of international trade credit constraints in financing education and exogenous income distribution affect patterns of comparative advantage and are crucial in determining the impact of international trade unlike the standard results in the trade literature in the model here trade liberalization in a skill scarce country leads to higher investments in human capital

exchange rate pass through and the effects of tariffs on economic performance and welfare abstract we develop a stochastic two country general equilibrium model where prices are determined under conditions of monopolistic competition to examine the macroeconomic and welfare effects of tariffs on the world economy under alternative nominal rigidities producer currency pricing pcp and local currency pricing lcp where the exchange rate pass through is absent we find that the significance of export pricing for the effects of tariffs depends critically upon whether tariffs are anticipated or unanticipated in the former case both pcp and lcp yield the same outcome as do perfectly flexible prices although the mechanism whereby this is achieved is different in the latter case the effects of unanticipated permanent tariffs are highly sensitive to the pricing scheme adopted by exporters leading to a wide range of conflicting outcomes involving tradeoffs among key parameters