the international transmission of real business cycles the authors present a stochastic model of two barter economies with production linked by free trade in goods and securities which generates pareto efficient international transmissions of business cycle disturbances each country is inhabi ted by an infinitely lived representative firm and consumer worker and is subject to country specific production shocks the internation al capital market effects perfect pooling of country specific risk c onsumption and output volatility may be higher in trade than under au tarchy as agents can be induced to undertake additional risk in exchange for a higher expected utility copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

estimation of de facto flexibility parameter and basket weights in evolving exchange rate regimes a new technique for estimating countries de facto exchange rate regimes synthesizes two approaches one approach estimates the implicit de facto basket weights in an ols regression of the local currency value rate against major currency values here the hypothesis is a basket peg with little flexibility the second estimates the de facto degree of exchange rate flexibility by observing how exchange market pressure is allowed to show up here the hypothesis is an anchor to the dollar or some other single major currency but with a possibly substantial degree of exchange rate flexibility around that anchor it is important to have available a technique that can cover both dimensions inferring anchor weights and the flexibility parameter we test the synthesis technique on a variety of fixers floaters and basket peggers we find that real world data demand a statistical technique that allows parameters and regimes to shift frequently accordingly we here take the next step in estimation of de facto exchange rate regimes endogenous estimation of parameter breakpoints following bai and perron jel numbers f31 f41

the demand for money in developing countries assessing the role of financial innovation traditional specifications of money demand have commonly been plagued by persistent overprediction implausible parameter estimates and highly autocorrelated errors the authors argue that some of these problems stem from the failure to account for the impact of financial innovation they estimate money demand for ten developing countries using various proxies for financial innovations they also assess the relative importance of this variable finding financial innovation can be better modeled as a stochastic random walk trend rather than a deterministic time trend financial innovation plays an important role in determining fluctuations of the demand for money the importance of this role increases with the rate of inflation

predicting exchange rate crises mexico revisited abstract this paper predicts ex ante probabilities of currency crises and sizes of expected devaluations month by month for mexico between 1980 and 1986 the forces contributing to speculative attacks on the mexican peso include domestic fiscal and monetary shocks external credit shocks and relative price shocks reducing domestic credit growth increasing the uncertainty surrounding this growth and reducing the size and perhaps increasing the frequency of currency realignments might have greatly reduced the amount of currency speculation against the peso between 1980 and 1986 anticipated external credit supply shocks played a relatively minor role during mexico s balance of payments crises

does money matter in canada evidence from a vector error correction model this paper investigates the statistical properties of a set of canadian and u s economic time series and uses the data to address the question of the importance of monetary variables in canadian business cycle fluctuations the individual time series are found to contain unit roots but the data reveal the existence of several economically meaningful cointegrating vectors a multivariate vector error correction model is estimated and canadian velocity which appears as an error correction term is significant in the canadian output equation this supports the contention that monetary variables have predictive content for real output copyright 1989 by mit press

on savings and investment dynamics in a small open economy abstract this paper constructs a stochastic overlapping generations two country model of savings and investment under conditions of perfect international capital mobility the focus of the analysis is on the relationship between savings and investment dynamics in a small open economy in response to stochastic variations in domestic and or foreign production technologies the model is simulated under alternative specifications of the stochastic distribution governing both technologies this provides insight into the very complicated nature and rich diversity of possible relationships between savings and investment dynamics

pegged exchange rate regimes a trap this paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime we confirm empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises the cost of which increases with the duration of the peg before the crisis we explain these observations in a framework in which the exchange rate peg is used as a commitment mechanism to achieve inflation stability but multiple equilibria are possible we show that there are ex ante large gains from choosing a more conservative not only in order to mitigate the inflation bias from the well known time inconsistency problem but also to steer the economy away from the high inflation equilibria these gains however come at a cost in the form of the monetary authority s lesser responsiveness to output shocks in these circumstances using a pegged exchange rate as an anti inflation commitment device can create a trap whereby the regime initially confers gains in anti inflation credibility but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy we also show that the more conservative is the regime in place and the larger is the cost of regime change the longer will be the average spell of the fixed exchange rate regime and the greater the output contraction at the time of a regime change

determinants of portfolio performance ii an update 1991 determinants of portfolio performance ii an update financial analysts journal vol 47 no 3 pp 40 48

exchange rate based stabilizations a literature review the exchange rate based stabilizations erbss that have been undertaken in chronic inflation countries have generated a controversial body of literature regarding the effects of disinflation programs especially those on real consumption and output this survey provides an extensive overview of the literature on erbs the paper covers various empirical studies that have attempted to document the macroeconomic regularities associated with erbs discussing both their strengths and their weaknesses it analyzes diverse theoretical models that have been put forward to replicate the business cycles associated with erbs and sheds light on which models perform better using real data the results suggest that durables incorporated weak credibility and sticky price model proves to be most compatible with the empirical regularities observed in the course of erbs

explaining currency crises a duration model approach abstract in this paper we estimate a duration model for oecd countries during the 1970 97 period we use semiparametric methods to estimate a model with unrestricted base line hazards and test if the time length already spent on a tranquil period is a determinant of the probability of exit into a currency crisis state the results indicate first that increases in export growth bank deposits growth and openness decrease the probability of exit into a currency crises state whereas increases in import growth claims on government and foreign port folio investment and appreciated reer increase the probability of currency crises and second the existence of a highly significant negative duration dependence the highest probability of exit into a currency crash state is given at the initial of the tranquil period

monopolistic competition increasing returns to scale and the importance of productivity shocks abstract the neoclassical growth model is extended to incorporate monopolistic competition and increasing returns to scale implications for the measurement of productivity change through the solow residual are studied it is found that for this extension productivity fluctuations continue to account for a substantial fraction of output volatility the model cannot account for volatility of employment

can leading indicators assess country vulnerability evidence from the 2008 09 global financial crisis abstract we investigate whether leading indicators can help explain the cross country incidence of the 2008 09 financial crisis rather than looking for indicators with specific relevance to the recent crisis the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators our motivation is to address suspicions that indicators found to be useful predictors in one round of crises are typically not useful to predict the next round the review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and episodes in the past for the 2008 09 crisis we use six different variables to measure crisis incidence drops in gdp and industrial production currency depreciation stock market performance reserve losses and participation in an imf program we find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008 09 crisis in line with the conclusions of the pre 2008 literature in addition to reserves recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis we define the period of the global financial shock as running from late 2008 to early 2009 which probably explains why we find stronger results than earlier papers such as obstfeld et al 2009 2010 and rose and spiegel 2009a b 2010 2011 which use annual data

exchange rate management intertemporal tradeoffs exchange rate management is possible only if the government pursues consistent monetary and fiscal policies the authors constructa model in which the real consequences of exchange rate management depend on the precise time pattern of these policies the authors study the constraints on feasible policies and the comparative dynamics of disinflation by means of exchange rate targeting theoretical results are consistent with exchange rate managed disinflation attempts in argentina chile and israel copyright 1987 by american economic association

exchange rate based inflation stabilization the initial real effects of credible plans abstract this paper studies the initial effects of exchange rate based stabilization programs within a dynamic general equilibrium model of a small open economy in which inflation acts as a tax on intermediate transactions and capital accumulation is subject to convex adjustment costs and gestation lags the model replicates the typical pattern of slow inflation convergence sustained real exchange rate appreciation trade balance deterioration and expansion in domestic spending followed by a deflationary slowdown without resorting to sticky prices imperfect credibility or adaptive expectations calibrated versions of the model are compared with the initial effects of the argentine convertibility plan of april 1991

capital controls and balance of payments crises abstract the theory of balance of payments crises shows that under perfect foresight a system of fixed exchange rate is not sustainable in the presence of diverging economic policies in this paper it is shown how and why capital controls succeed in maintaining the principle of a fixed but adjustable parity both cases of a devaluation and a revaluation are considered and a condition for a parity change to be credible is presented

internal and external habits and news driven business cycles in many applications of habit persistence to macroeconomics it is of little significance whether habits are internal or external in this paper it is shown that the distinction between internal and external habits is important in a situation wherein a shock is news about the future an internal habit can be a source of news driven business cycles positive comovement in consumption labor investment and output from the news about the future whereas an external habit cannot

who can adjust to the euro this study estimates potential exchange rate variation among 26 european countries during 1992 1998 as a proxy for the potential magnitude of adjustment they face to euro block membership using the instrumental variable iv method applying least squares cross section regression analysis based on optimal currency area theory a currency union among belgium denmark france germany ireland malta the netherlands and slovenia is found to entail a relatively light burden of adjustment for its members the current membership of other countries in the euro block is potentially very demanding on their societies in the long term this study also compares currency boards and independent central banks as alternative monetary frameworks for disinflation policies based on a pooled time series cross section dataset of the same countries and years currency boards are found to be more effective in reducing inflation in all countries except belgium balancing emu s credibility gains against its adjustment costs finland greece italy portugal and spain seem like unstable members of the euro block for all new eu member states except the czech republic malta slovenia and slovakia the advice is to stay out of the euro block until their economies are liberalised and flexible enough to withstand major adjustments and their societal interest groups supportive enough of these adjustments

choosing an exchange rate system abstract the focus of academic discussions of exchange rate policy has shifted in recent years the new literature on exchange rate regime choice emphasizes considerations relating to the problems of credibility in exchange rate targeting and the connections between exchange rate regime choices and choices of monetary and fiscal policy arguments for exchange rate targeting are reviewed under most circumstances and for most countries a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate

the optimum quantity of money rule in the theory of public finance this paper examines optimal tax policy in a monetary economy in which money serves as an intermediate good that helps facilitate the conversion of scarce resources into tinal consumption goods by enabling consumers to economize on the costs of transacting it is shown that in such an environment even though distorting taxes must be levied for revenue purposes the optimal tax structure calls for abstaining from inflationary finance and adopting the optimum quantity of money rule

exploring different views of exchange rate regime choice the empirical distinction between de facto and de jure exchange rate regimes raises a number of interesting questions which factors may induce a de facto peg why do countries enforce a peg but do not announce it why do countries break their promises we show that a stable socio political environment and an efficient political decision making process are a necessary prerequisite for choosing a peg and sticking to it challenging the view that sees the exchange rate as a commitment device policymakers seem rather concerned with regime sustainability in the face of adverse economic and socio political fundamentals

elections and the timing of devaluations this paper presents a rational political budget cycle model where devaluation acts as a tax on consumption due to a cash in advance constraint competent governments can signal their competency by reducing the rate of devaluation prior to elections when voters also ignore the degree to which governments are opportunistic i e the extent to which they are willing to distort the economy for electoral gain an incompetent opportunistic incumbent can reduce the rate of devaluation in the run up to an election the main theoretical implication in either setup that the rate of devaluation is significantly higher in the months following an election is consistent with evidence drawn from 26 countries in latin america d 2003 elsevier b v all rights reserved

sticky inflation and the real effects of exchange rate based stabilization abstract this paper tests the empirical validity of the forward looking pricing hypothesis using data from four exchange rate based stabilization erbs episodes it finds that backward looking components of inflation play an important role in inflation dynamics in some cases exceeding the importance of forward looking components the paper then shows that the presence of empirically relevant degrees of inflation stickiness increases the size of the real exchange rate appreciation predicted by an imperfect credibility model of erbs the 12 real appreciation predicted by the sticky inflation model is a 70 improvement over the predictions of the fully forward looking pricing setup but as in other erbs models still falls short of matching the real appreciations observed in practice

relative consumption benchmarks abstract i construct a general multi good model of consumption externalities that allows for relative jealousies and relative keeping up with the joneses effects these relative social consumption contexts have the ability to reinforce or mitigate each other

exchange rate regime durability and performance in developing versus advanced economies abstract drawing on new data and advances in exchange rate regimes classification we find that countries appear to benefit by having increasingly flexible exchange rate systems as they become richer and more financially developed for developing countries with little exposure to international capital markets pegs are notable for their durability and relatively low inflation in contrast for advanced economies floats are distinctly more durable and also appear to be associated with higher growth for emerging markets our results parallel the baxter and stockman classic exchange regime neutrality result though pegs are the least durable and expose countries to higher risk of crisis

currency crises and institutions abstract this study furthers recent literature on currency crises and institutions the main objective is to re evaluate the causes of currency crises by focusing on the role played by a broader array of institutional factors and crisis episodes than have previously been considered while at the same time controlling for economic factors our dataset consists of over 30 countries covering 13 institutional factors for the period 1984 2002 two questions are addressed they are 1 what mix of institutions may contribute to or set the stage for a currency crisis and 2 what mix of institutions may affect the depth of currency crises as measured by a decline in output our findings reveal that institutional as well as economic factors affect the probability of currency crises and that worse institutions are associated with bigger contractions in output during the crisis in general our strongest results regarding institutions show that corruption a de facto fixed exchange rate regime weak government stability and weak law and order increase the probability of a currency crisis we find mixed evidence that deposit insurance the removal of capital controls a lack of central bank independence financial liberalization and civil law increase the chance of crisis we find a similar set of factors worsens the contraction in output during a crisis except for deposit insurance which we find moderates the contraction in output

temporary stabilization predetermined exchange rates the paper analyzes the impact of a stabilization policy based on a temporary reduction in the rate of devaluation against a background in which a constant rate of devaluation has no real effects it is shown that the temporary policy does and furthermore that the real effects tend to become bigger in absolute value as the horizon of the temporary policy is shortened the central discussion is carried out in terms of a one good cash in advance model with perfect capital mobility and ramsey type consumers results are extended to account for home goods and variable velocity the roles of capital mobility and banking liberalization are briefly discussed

a simple dynamic general equilibrium model abstract we analyse a single sector economy with h 1 infinitely lived agents that operate in a continuous time framework utility functions are recursive but not additive both efficient and perfect foresight competitive equilibrium allocations are considered the existence and stability of such allocations are investigated locally i e in a neighbourhood of steady state allocations the model is shown to be useful for explaining the distribution of wealth and consumption across agents and for analysing the way in which wealth redistribution can affect the dynamics of aggregate economic variables

monopolistic competition business cycles and the composition of aggregate demand abstract we develop a dynamic general equilibrium model with monopolistically competitive firms and endogenous markups and show the possibility of equilibria with persistent fluctuations driven by self fulfilling revisions of expectations for some parameter values such fluctuations are characterized by time series properties similar to those observed in u s postwar business cycles in contrast with the existing literature our results do not rely on the presence of increasing returns or nominal rigidities a key ingredient of the model is the link between markups and the composition of aggregate demand some econometric evidence on the latter is also reported journal of economic literature classification number d43 d58 e32

pegging emerging currencies in the face of dollar swings the aim of this article is to study ruptures of exchange rate pegs by focusing on the fluctuations of the anchor currency we test for the hypothesis that currencies linked to the usd are more likely to loosen their peg when the usd is appreciating while sticking to it otherwise to this end we estimate smooth transition regression models for a sample of 28 emerging currencies over the 1994 2011 period our findings show that while the real effective exchange rates of most of these countries tend to co move with that of the usd in times of depreciation this relationship is frequently reversed when the us currency appreciates over a certain threshold

investment risk taking by institutional investors according to theory institutional investors face both risk management and risk shifting incentives this article assesses the relevance of these conflicting incentives for dutch pension funds and insurance firms over the period 1995 to 2009 using a unique and extended data set we observe a significant positive relationship between capital and asset risk for insurers indicating that risk management incentives dominate in the dutch insurance industry risk shifting incentives however also seem relevant as stock insurers take more investment risk than their mutual peers for dutch pension funds we conclude that overall neither risk shifting nor risk management incentives seem to dominate interestingly we find that professional group pension funds take significantly less investment risk than other types of pension funds this finding is in line with expectations as in professional group pension funds potential incentive conflicts between pension fund participants and the employer are effectively in

the price consumption puzzle of currency pegs abstract a defining stylized fact associated with exchange rate based stabilization programs is that their initial phase is characterized by several years of continuous expansion in private consumption and a gradual appreciation of the real exchange rate this paper shows that a large class of standard optimizing models is unable to account for this empirical regularity in particular models in this class predict that a gradual appreciation of the real exchange rate must necessarily be accompanied by a declining path of consumption the paper suggests several possible solutions to this problem and develops one in detail namely the relaxation of the assumption of time separability in preferences specifically it shows that under habit formation currency pegs induce a positive comovement between consumption and the real exchange rate the paper also establishes that habit formation provides an explanation for why in failed currency pegs a contraction in aggregate demand sets in before the collapse of the program

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

the case for a new fiscal constitution for the first 140 years of u s history the federal budget was effectively constrained by two fiscal rules the formal limits within the constitution on the enumerated spending powers and an informal rule that the government could borrow only during recessions and wars at the end of the 1920s federal expenditures were 2 6 percent of gnp the federal debt was constrained to about equal to 16 percent of gnp the general price level was roughly stable over this long period over the past six decades however federal expenditures have increased to nearly 25 percent of gnp larger and more frequent budget deficits have increased the federal debt held by the public to an amount equal to about 50 percent of gnp and the general price level is now about nine times the level at the beginning of this period this dramatic change in fiscal and monetary conditions occurred without one amendment to the constitution to authorize a change in the fiscal rules our effective fiscal constitution has been transformed into one in which congress and the president may authorize any type or amount of expenditures and taxes subject only to the voting rules for routine legislation how did this happen should economists be concerned about this change in the fiscal constitution what if anything should be done about it

the role of financial development in exchange rate regime choices abstract we make the first attempt in the literature to empirically investigate the role of financial development in the choice of exchange rate regimes using a binary choice model we first show that financially less developed countries are more likely to adopt a fixed exchange rate to further examine the impact of financial development on the conditional probability of exiting from an existing pegged system to a flexible one we then employ hazard based duration analysis we find strong evidence that countries with higher levels of financial development are more likely to exit a pegged system and interestingly financial development only matters to orderly exits but not disorderly exits our results are robust to controlling for endogeneity and sample selection

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

when to dollarize implicit in the debate over dollarization are two very different views of the sequencing of policy measures one view is that dollarization to work smoothly and yield more benefits than costs must wait on the completion of complementary reforms the other view is that dollarization need not wait on these other reforms because the very act of dollarizing will produce the changes needed to smooth the operation of the new regime in this paper i consider these arguments as they apply to the cases of labor market reform fiscal reform and financial sector reform i conclude that neither theory nor evidence suggests that removing all scope for an independent monetary policy will necessarily accelerate the pace of reform

the international transmission of economic fluctuations abstract this paper suggests that for a wide class of international real business cycle models including models with imperfect competition the traditional channels of international transmission of business cycles through world interest rate and terms of trade variations cannot explain the cyclical response of the canadian economy to innovations in u s output empirically testable quantitative models of the effects on canadian economic activity of shocks to the u s economy are developed and their empirical relevance is tested by comparing impulse responses estimated from vector autoregressions to the quantitative predictions of the theoretical models

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

political business cycles democratization and economic reform the case of africa abstract this paper presents cross country evidence that political business cycles are alive and well in the nascent democracies of the developing world africa provides fertile ground for the study of political business cycles this paper uncovers systematic electorally timed interventions in five monetary and four fiscal policy variables in a panel of african countries these findings are consistent with the predictions of rational opportunistic political business cycle theory if africa s increasingly frequent elections are associated with reversals of fiscal and monetary policy reform there is a potential conflict between political and economic reform

the monetary model strikes back evidence from the world abstract we revisit the dramatic failure of monetary models in explaining exchange rate movements using the information content from 98 countries we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals we also find fundamentals based models very successful in beating a random walk in out of sample prediction

explaining the duration of exchange rate pegs abstract this paper is an empirical investigation of the duration of exchange rate pegs in 16 latin american countries and jamaica we identify factors that influence peg duration using logit analysis the real exchange rate and the level of international liquidity are significant determinants of the monthly likelihood of devaluation structural variables such as the openness of an economy and its geographical trade concentration and political variables such as changes in the executive also significantly affect the likelihood of a devaluation there is some evidence that the likelihood of a devaluation first rises and subsequently declines during the first year of a peg

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

short termism of long term investors the investment behaviour of dutch insurance companies and pension funds countercyclical investment strategies of large institutional investors such as insurance companies and pension funds can support financial stability while procyclical investment behaviour is consi

exchange rate management in the same week that the pound sterling and the italian lira were forced by speculative pressures to suspend their participation in the exchange rate mechanism erm of the european monetary system ems a study was published which concluded that exchange market intervention was a far more potent instrument for managing exchange rates than the conventional wisdom had held catte galli and rebecchini i 992 a i shall argue in this paper that far from providing instant refutation of the new optimism regarding the potency of intervention what we currently understand about exchange rate theory is consistent with both the tumult in the exchange markets in september i992 and the new optimism the paper seeks to draw the implications of current knowledge for what exchange rate management can and cannot hope to accomplish the first section of the paper reviews where exchange rate theory stands a second section discusses what we know about the possibility of managing exchange rates and how that ties in with the theory the final section explores how exchange rate management needs to vary depending on whether it is intended to use the exchange rate as a nominal anchor or to limit misalignments in a more keynesian approach to policy design

resurrecting the weak credibility hypothesis in models of exchange rate based stabilization abstract we analyze how weak credibility affects the volatility of consumption spending in a model of exchange rate based stabilization that allows for both durable and nondurable goods the inclusion of durables greatly improves the explanatory power of the weak credibility hypothesis the hypothesis can account for the main qualitative properties of the boom bust cycle provided the elasticity of durables expenditure with respect to tobin s q is greater than the intertemporal elasticity of substitution moreover the quantitative effects are very large in numerical simulations based on conservative assumptions about the expenditure share of durables 20 and wealth effects none aggregate consumption increases 17 22 and the real exchange rate appreciates 24 26 when the crawl decreases from 100 to zero for 3 years in variants of the model that incorporate supply effects the consumption boom is equally strong but appreciation of the real exchange rate rises to 30 40

second moments in speculative attack models panel evidence abstract the paper tests two popular asset based models of speculative attacks and in particular their emphasis on the second moments of monetary aggregates analyzing monthly panels of appropriate countries in three regions it finds evidence for the importance of money reserve ratios predicted by both models as well as the variance of the ratio of m2 to reserves

consumption habits in a new keynesian business cycle model consumption habits have become an integral component in new keynesian models however consumption habits can be modeled in a host of different ways and this diversity is reflected in the literature i examine whether different approaches to modeling consumption habits have important implications for business cycle behavior using a standard new keynesian business cycle model i show that to a first order log approximation the consumption euler equation associated with the additive functional form for habit formation encompasses the multiplicative function form empirically i show that whether consumption habits are internal or external has little effect on the model s business cycle characteristics

fiscal discipline and the choice of a nominal anchor in stabilization abstract the conventional wisdom is that exchange rate based stabilizations induce more fiscal discipline than money based programs the latin american experience does not support this view among the major stabilization programs implemented since 1960 the mean increase in the primary balance to gdp ratio was 3 2 percentage points under money based programs as opposed to only 0 2 percentage points under exchange rate based programs we present a model where fiscal policy is set by an optimizing but non benevolent government that replicates this stylized fact if the policy maker is impatient a money based stabilization provides more discipline and higher welfare for the representative agent than does an exchange rate based stabilization

innovation accounting for the impact of fluctuations in u s variables on the canadian economy innovation accounting is conducted on a nine variable vector autoregression estimated using u s and canadian monthly data for january 1971 to december 1983 this reveals inter alia a positive impact of the u s interest rate on the canadian rate with the role the exchange rate plays in cushioning this impact being clearly apparent a positive effect of the u s money supply on both u s and canadian interest rates a positive albeit muted response of canadian production to a shock in u s production and a persistent influence of u s prices on production negatively and prices positively in canada are also detected l impact des fluctuations dans les variables americaines sur l eonomie canadienne une analyse utilisant la technique d innovation accounting les auteurs utilisent la technique d innovation accounting dans le cadre d un systeme a neuf variables estime comme autoregression vectorielle a l aide de donnees mensuelles canadiennes et americaines couvrant la periode de janvier 1971 a decembre 1983 cette analyse revl un effet positif de la masse monetaire americaine a la fois sur les taux d interet canadiens et americains une reaction positive mais en sourdine du niveau de production au canada a un choc dans le niveau de production americaine et une influence persistence des niveaux de prix americains sur le niveau de production au canada influence negative ainsi que sur les niveaux de prix canadiens influence positive we should like to thank gordon anderson douglas clarke john kennan john kuszczak angelo melino and stanely winer for a number of helpful discussions earlier versions of the paper were presented at the meetings of the canadian economics association in vancouver in june 1983 at the winter meetings of the econometric society in san francisco in december 1983 and in a session of invited papers at the meetings of the canadian economics association in guelph in june 1984 our discussants jacques raynauld in vancouver thomas doan and stephen king in san francisco and allan gregory in guelph offered many useful comments as too did the members of the money macro workshop at the university of western ontario alan harrison also thanks the economics department at the university of warwick for its hospitality and the social science and humanities research council of canada for financial support canadian journal of economics revue canadienne d economique xviii no 4 november novembre 1985 printed in canada imprime au canada 0008 4085 85 784 98 1 50 canadian economics association this content downloaded from 40 77 167 14 on fri 16 sep 2016 06 02 12 utc all use subject to http about jstor org terms impact of fluctuations in us variables 785

intertemporal dependence impatience and dynamics abstract this paper develops simple geometric methods for analyzing consumer behavior under recursive but intertemporally dependent tastes since the preferences studied need not be time additive they allow the marginal utility of consumption on a given date to vary with consumption on other dates intertemporal dependence is induced by the presence of a variable individual rate of time preference the optimal consumption responses to transitory and anticipated changes in incomes and interest rates are easily derived and are similar in many respects to the responses implied by the standard constant time preference model intuitive explanations of the first order conditions describing optimal paths are provided

seventy five years of investing for future generations university endowments invest for future generations so their strategy should reflect their long horizon we researched whether they really do behave like long term investors we examined the behav

exchange rate based stabilizations under real frictions the role of endogenous labor supply abstract this paper studies exchange rate based stabilization programs in the context of a model of a small open economy where labor supply is endogenous agents derive utility from both consumption and leisure in environments where consumption is subject to a cash in advance constraint a cut in the rate of devaluation lowers the nominal interest rate and hence alters the optimal mix of consumption and leisure the paper shows that in the presence of adjustment costs of investment a perfectly credible cut in the devaluation rate causes simultaneously a consumption and output boom a cumulative current deficit a sustained real appreciation of the domestic currency and an increase in labor supply over time it is also shown that an imperfectly credible stabilization program in this environment would have effects similar to the perfectly credible program but generate richer dynamics such as an initial boom in output followed by a recession which begins prior to the end of the program the model has clear welfare implications in that permanent reductions in inflation are unambiguously welfare enhancing

the dynamics of exchange rate regimes fixes floats and flips the impermanence of fixed exchange rates has become a stylized fact in international finance the combination of the mirage view that pegs do not really peg with the fear of floating view that floats do not really float generates the conclusion that exchange rate regimes are in practice unimportant for the behavior of the exchange rate this is consistent with evidence on the irrelevance of exchange rate regimes for general macroeconomic performance recent studies however show that the exchange rate regime matters this can be understood by considering the dynamics of exchange rate regimes we demonstrate that the mirage view is somewhat misleading and incomplete pegs frequently break but many do last also there is a high degree of flipping that is the re formation of pegs that have broken thus a fixed exchange rate today is a good predictor that one will exist in the future we also investigate the quantitative effect of fixed exchange rates while the fear of floating view suggests little actual difference in fixed and floating rates with respect to exchange rate volatility we show that fixed exchange rates exhibit considerably greater bilateral exchange rate stability than flexible rates both today and in the future 2007 elsevier b v all rights reserved

exchange rate regimes and independent central banks a correlated choice of imperfectly credible institutions theory and empirical evidence show that low inflation is a precondition for economic growth independent central banks and fixed exchange rates are institutional mechanisms that help keep inflation low by lending monetary policy credibility to governments however the two institutions are commonly analyzed as substitutes that tie the hands of inflation prone governments thus the literature has difficulties describing why governments would adopt both institutions and the interaction between them this paper presents a model that allows policymakers the simultaneous choice of monetary institutions and shows that imperfectly credible institutions will overlap when exchange rates are fixed but adjustable and central bank independence is not fully ascertainable governments choose both institutions more generally the paper generates hypotheses about the conditions that make fixed exchange rates and independent central banks complements or substitutes thus contributing to an explanation of the diversity of global monetary institutions in the post bretton woods period

financial policy and speculative runs with a crawling peg argentina 1979 1981 abstract in this paper we present a model of a balance of payments crisis and examine the argentine experiment with a crawling peg between december 1978 and february 1981 the approach taken allows us to examine the evolution of a crisis when a collapse is not perfectly foreseen and yields plausible estimates of one month ahead probabilities of a collapse of the crawling peg the results suggest that the viability of an exchange rate regime depends on the consistency of exchange rate policy with domestic credit policy if the two are not consistent confidence in exchange rate policy is undermined

improving policy credibility is there a case for african monetary unions abstract this paper analyzes experience with monetary policy in africa focusing on countries that have participated in rule based regional monetary agreements cfa zone east african currency board and rand monetary area we show that african countries have generally lacked the political institutions necessary for governments to commit credibly on an individual basis to financial stability we argue that monetary unions can provide an alternative means of credible commitment to sound macroeconomic policies but only under certain conditions first exit from a union must be made costly by the existence of parallel regional agreements and or links to the financial and technical assistance of industrial countries second governance structures of monetary unions must be designed so as to maximize chances for enforcement of monetary rules and third if a state seeks to break the rules of a union other member governments must actively oppose such attempts

does relative risk aversion vary with wealth evidence from households portfolio choice data we analyze whether relative risk aversion varies with wealth we first derive theoretical predictions on how risky shares respond to wealth fluctuations in a portfolio choice model with both external habits and time varying labor income our analytical results indicate that 1 for each household there are two channels through which the risky share responds to wealth fluctuations the habit channel and the income channel 2 across households there are heterogeneous responses through the habit channel those who experience large negative income shocks reduce their share of risky assets and 3 two potential mis identification problems arise when both the heterogeneity in responses through the habit channel and the income channel are ignored we then test the theoretical predictions with data from the panel study of income dynamics contrary to the existing literature our empirical results show evidence of relative risk aversion varying with wealth over time after correcting those two mis identification problems

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

nominal interest rates consumption booms and lack of credibility a quantitative examination abstract exchange rate based stabilization programs in chronic inflation countries have often been accompanied by an initial expansion of private consumption followed by a contraction this consumption cycle has been attributed to lack of credibility in the sense that the public views the reduction in the devaluation rate as temporary this paper assesses the quantitative relevance of the temporariness hypothesis by comparing the predictions of a simple model to the actual figures for seven major programs the paper concludes that nominal interest rates must fall substantially for the temporariness hypothesis to account for an important fraction of the observed consumption booms

lending booms sharp reversals and real exchange rate dynamics abstract emerging markets in the 1990s experienced periods of booms followed by collapses in gross domestic product consumption traded and non traded sector output and real exchange rate movements alongside unprecedented movements in foreign investor participation in these economies an important feature of these episodes is the asymmetry in the pattern of booms and collapses we introduce a natural search friction into the foreign investment decision in a small open economy and demonstrate that this can generate the asymmetry observed in the data the magnitude of the reversals predicted by the model can be quantitatively large and empirically relevant

asset allocation dynamics and pension fund performance using a data set on more than 300 u k pension funds asset holdings this article provides a systematic investigation of the performance of managed portfolios across multiple asset classes we find evidence of slow mean reversion in the funds portfolio weights toward a common time varying strategic asset allocation we also find surprisingly little cross sectional variation in the average ex post returns arising from the strategic asset allocation market timing and security selection decisions of the fund managers strategic asset allocation accounts for most of the time series variation in portfolio returns while market timing and asset selection appear to have been far less important copyright 1999 by university of chicago press

inflation stabilisation and the consumption of durable goods exchange rate based stabilisations in chronic inflation countries have often been characterised by an initial consumption boom which is most evident in the behaviour of durable goods followed by a later contraction this paper provides an explanation for such a boom recession cycle based on the timing of purchases of durable goods the initial fall in inflation results in a wealth effect which induces many consumers to bring forward their purchases of durable goods thus generating an aggregate consumption boom since most consumers replenish their stock of durable goods at the beginning of the programme a later slowdown follows

stabilization with exchange rate management stabilization programs in open economies typically consist of two stages in the first stage the rate of currency devaluation is reduced but the fiscal adjustment does not eliminate the fiscal deficit that causes growth of debt and loss of reserves making a future policy change necessary only later at a second stage is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit we study how different second stage policy changes affect economic dynamics during the first stage these changes include tax increases budget cuts on traded and nontraded goods and increases in the growth rate of money

fixed versus flexible exchange rates which provides more fiscal discipline abstract conventional wisdom holds that fixed rates provide more fiscal discipline than do flexible rates in this paper we show that this wisdom need not hold in a standard model in which fiscal policy is endogenously determined by a maximizing fiscal authority the claim that fixed rates induce more discipline stresses that sustained adoption of lax fiscal policies must eventually lead to an exhaustion of reserves and thus to a politically costly collapse of the peg hence under fixed rates bad behavior today leads to punishment tomorrow under flexible rates bad behavior has costs as well the difference is in the intertemporal distribution of these costs flexible rates allow the effects of unsound fiscal policies to manifest themselves immediately through movements in the exchange rate hence bad behavior today leads to punishment today if fiscal authorities are impatient flexible rates by forcing the costs to be paid up front provide more fiscal discipline and higher welfare for the representative private agent the recent experience of sub saharan countries supplies evidence that matches the predictions of the model

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32

elections exchange rates and reform in latin america abstract in this paper we study the link between real exchange rate rer depreciation and elections in latin america our contribution is threefold first we employ a statistical model that takes into account the pervasive conditional heteroskedasticity found in financial data and includes a wide range of macroeconomic variables as regressors second we test whether the wave of central bank reform that swept the region has had any effect on the existence or strength of the electoral cycle in exchange rates third we test an additional hypothesis namely that financial liberalization may also be an important variable explaining changes in electoral effects on the real exchange rate in a panel of 9 latin american countries with available macroeconomic data and a history of exogenous election dates we confirm the previous findings that real depreciation intensifies after elections even when modeling the significant conditional heteroskedasticity in these data we also show for the first time in the literature that post election exchange rates are significantly less predictable we go on to test whether central bank reform has influenced the way in which elections affect the rer in latin america if reform has been effective at reducing political manipulation of the exchange rate then any relationship we see between elections and the rer before central bank reform should be mitigated in the post reform era we find that the relationship disappears after reform and that post reform real exchange rates are also significantly less volatile finally we show that financial liberalization seems to have a stronger effect on the conditional variance of the rer than does central bank reform but reform has a stronger impact on the conditional mean

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

macroeconomic policy exchange rate dynamics and optimal asset accumulation the paper develops a model of exchange rate and current account determination for a small economy peopled by infinitely lived utility maximizing households in this setting a central bank purchase of foreign exchange has no real effects when central bank foreign reserves earn interest at the world rate and proceeds are returned to the public in contrast an increase in the monetary growth rate does have real effects even in the long run the model developed here implies that an increase in government spending may lead to a surplus on current account the external adjustment process predicted by the model is one in which consumption real balances and external assets all rise or fall simultaneously

the reflections of a grump over time maybe a consequence of ageing i have become somewhat of a grump i have increasing difficulty with child proof packaging as my eyesight has weakened i am only partially comforted by the illusion of greater strength when i was a kid for example i could hardly lift 10 worth of groceries now i can hardly see 10 worth of groceries

exchange rate based stabilisation durables consumption and the stylised facts in this article we show that a model featuring durable consumer goods imperfect substitution between domestic and foreign assets and weak credibility can explain the qualitative and quantitative aspects of the stylised facts associated with exchange rate based stabilisation including the tremendous increase in real interest rates following a temporary reduction in the crawl total consumption spending rises 14 26 the real exchange rate appreciates 20 37 and the current account deficit swells to 10 15 of gross domestic product despite large capital inflows the real interest rate increases from 10 to 20 100