the international transmission of interest rate shocks the federal reserve and emerging markets in latin america and asia abstract this paper analyzes the effects of changes in the u s federal reserve s federal funds rate on emerging countries interest rates using high frequency weekly data i also investigate how changes in the u s term structure affect short term rates differentials other shocks include changes in the u s dollar euro exchange rate changes in the international price of oil risk ratings and the degree of capital mobility the results indicate that there is a strong and fairly rapid transmission of changes in the federal funds rate into interest rates in the latin american countries in the sample this effect is equally large in the asian nations in the long run the adjustment path is different across the two regions however adjustment is very fast and cyclical in latin america it is gradual and slower in east asia

the economics of exchange rate regimes a review essay the exchange rate regime issue has taken centre stage in discussions of international economic policy much of the profession appears to have been converted to the hypothesis of the vanishing middle regime for countries well integrated into world capital markets there is little if any middle ground between floating exchange rates and monetary unification this paper considers the exchange rate regime issue in the context of recent books on the subject by w max corden and morris goldstein both authors prescribe managed floating exchange rates supplemented with inflation targeting for emerging market economies under managed floating and with a credible monetary policy the public finances in order and strengthened debt management and prudential regulation the exchange rate is free to act as a market gauge for assessing policies and as a mode of conflict resolution both authors also argue however that no exchange rate regime is a holy grail ultimately a credible exchange rate regime depends upon the trust evoked by governments there is no exchange rate regime whether of the managed floating or hard fix variety that can eradicate a history of failed stabilisation attempts

the possibility of informationally efficient markets abstract a rational expectations equilibrium with positive demand for financial information does exist under fully revealing asset price contrary to a wide held conjecture whereas a continuum of investors is inconsistent with fully revealing equilibrium finitely many investors with average portfolios demand information in equilibrium if they can adjust portfolio size in an additive signal return model more information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off under fully revealing price information market equilibria both with and without information acquisition are pareto efficient

choosy search and the mismatch of talents this article proposes a multi sector matching model where workers have symmetric sector specific skills and the search market is segmented by sector workers choose the range of markets they are willing to participate in i identify a composition externality workers do not take into account the impact of their choice on sector specific mean productivity among the pools of job seekers consequently workers prospect too many market segments and there is room for public policy even when the so called hosios condition holds

capital controls capital flow contractions and macroeconomic vulnerability abstract in this paper i analyze whether restrictions to capital mobility reduce vulnerability to external shocks more specifically i ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows i use three new indexes on the degree of international financial integration and a large multi country data set for 1970 2004 to estimate a series of random effect probit equations i find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant but very small having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction the benefits of flexible rates increase as the degree of capital mobility increases a higher current account deficit increases the probability of a capital flow contraction while a higher ratio of fdi to gdp reduces that probability

dual exchange rates in europe and latin america this article uncovers some important empirical regularities surrounding the operation of formal dual exchange rates in europe and latin america in the 1970s and 1980s although there are some parallels between the european and latin american experiences there are also interesting differences in terms of the size and nature of the distortion created by two official exchange rates the response of the distortion to foreign interest rates real commercial exchange rates and domestic budget deficits and the motives for adopting this exchange rate regime empirical work on dual exchange rate regimes is made difficult by the transitory nature of these regimes and by frequent changes in institutional practices

averting crisis assessing measures to manage financial integration in emerging economies the asian crisis provides heterodox economists with the opportunity to investigate counterfactually whether the financial policies they have proposed would have averted the crisis the paper argues that neo liberal financial integration introduces distinct risks to emerging economies currency flight fragility contagion and sovereignty risks the paper presents the financial policies endorsed by the heterodoxy transactions taxes trip wires and or speed bumps convertibility restrictions the chilean model and a publicly managed mutual fund the paper considers whether these policies mitigate risks and whether they could have prevented the asian crisis and the transmission thereof the paper concludes with policies to avert future crises copyright 2003 oxford university press

european banking bailout bail in and state aid control abstract more than 5 years after the fall of lehman brothers and at a time where the banking union will start with a balance sheet assessment several regulatory initiatives are trying to make bailouts harder and push forward bail in as an alternative this article discusses the pros and cons of these initiatives and stresses in particular looking at various cases of banking crises that financial instability can be much more costly than bailouts it therefore pleads for i not ruling out prefunded bailouts as an alternative complement to bail in especially to deal with negative macroeconomic shocks ii making sure markets will understand that the risk of bail in is concentrated on long term bank liabilities

real and monetary determinants of real exchange rate behavior theory and evidence from developing countries abstract this paper develops a dynamic model of real exchange rate rer behavior in developing countries a three goods economy exportables importables and non tradables is considered residents of this country hold domestic and foreign assets and there is a dual exchange rate regime there is a government that consumes importables and non tradables a distinction is made between equilibrium and disequilibrium movements of the rer the determinants of real exchange rate misalignment are studied with emphasis placed on the role of devaluations and balance of payments crises the implications of the model are tested using data for 12 developing countries the results obtained are generally favorable for the model the issue of rer stationarity is also analyzed

exchange rate behavior with currency inconvertibility abstract the paper analyzes exchange rate dynamics in a world where the domestic currency is inconvertible into foreign currency and there is a black market for foreign exchange the official exchnage rate is thus set by policy but the black market rate is determined by portfolio balance the stock of domestic money changes with the reported current account and the stock of foreign assets of the private sector changes with smuggling and other unreported current account transactions the effects of capital and current account disturbances as well as the effects of changes in the level and the rate of crawl of the official rate on the black market premium and on the currency substitution ratio are analyzed in variants of the basic model

trade unions and the efficiency of the natural rate of unemployment decentralized wage setting in search equilibrium models is inefficient because the meeting firm and worker ignore the dependence of job matching probabilities on the number of firms and workers engaged in search this paper investigates whether risk neutral monopolistic unions will have an incentive to internalize this externality i find that the externality will be internalized only if the union s policy is chosen by unemployed persons if employed persons influence union policy both the union wage and unemployment will be too high a tax on the union wage combined with an employment subsidy to firms can correct this inefficiency

strong form efficiency with monopolistic insiders we study market efficiency in an infinite horizon model with a monopolistic insider the insider can trade with competitive market makers and noise traders and observes privately the expected growth rate of asset dividends in the absence of the insider this information would be reflected in prices only after a long series of dividend observations thus the insider s information is long lived surprisingly however the monopolistic insider chooses to reveal her information very quickly within a time converging to zero as the market approaches continuous trading although the market converges to strong form efficiency the insider s profits do not converge to zero

competitive rational expectations equilibria without apology abstract consider a financial market with n risk averse asymmetrically informed traders when n grows at the same rate as noise trading prices in competitive and in strategic rational expectations equilibrium converge to each other at a rate of 1 n equilibria in the two scenarios are close when noise trading volume per informed trader is large in relation to risk bearing capacity both equilibria converge to the competitive equilibrium of a limit continuum economy as the market becomes large at a slower rate of 1 n the results extend to endogenous information acquisition and the connections with the grossman stiglitz paradox are highlighted

crisis transmission evidence from the debt tequila and asian flu crises the increasing globalization of the economy has put the issue of the international transmission of crises in the front line although the word contagion is a rather new concept in international finance it is the focus of a large number of policy oriented seminars and debates the clustering of crises by both region and time are at the heart of this discussion there are several important questions that need to be answered in this chapter we focus on a subset of them i what are the propagation channels of international crises across countries other than common shocks ii was the debt crisis contagious and iii are there useful policy instruments to shield countries from contagion in particular do capital controls exchange rate flexibility and the external debt maturity structure affect contagion we seek to answer these questions using evidence from three key events the 1982 debt crisis the 1994 mexican devaluation and the 1997 asian crisis

the federal reserve the emerging markets and capital controls a high frequency empirical investigation in this paper i use weekly data from seven emerging nations four in latin america and three in asia to investigate the extent to which changes in fed policy interest rates have been transmitted into domestic short term interest rates during the 2000s the results suggest that there is indeed an interest rates pass through from the fed to emerging markets however the extent of transmission of interest rate shocks is different in terms of impact steady state effect and dynamics in latin america and asia the results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances changes in the slope of the u s yield curve including changes generated by a twist policy affect domestic interest rates in emerging countries i also provide a detailed case study for chile

oil shocks and financial systemic stress international evidence abstract by conducting a structural var analysis on the financial systemic stress in 20 countries this paper provides international evidence that oil structural shocks impact not only stress in individual financial markets but also their connectedness the oil structural shocks explain a large fraction of the variation in the connectedness among various financial markets the effect of oil structural shocks on financial systemic stress is largely dependent on the origins of oil price changes and a country s net oil export position in most oil importing economies financial systemic stress is negatively impacted by supply and aggregate demand shocks and positively impacted by oil market specific demand shocks opposite patterns are detected in oil exporting economies the effects of the spillovers are asymmetrically related with market conditions during normal periods more risks are spilled over from the oil market to financial systems but during financial crises the opposite occurs in periods of financial crises and oil price collapses there is noticeable contagion between the oil market and financial systems

equilibrium price formation and the value of private information an economy is analyzed in which agents first choose whether to acquire costly information about the return to a risky asset and then choose demand functions that determine the allocation of assets it is a well known paradox that if agents are price takers and prices are fully revealing then an equilibrium with costly information acquisition does not exist it is shown that if the price formation process is modeled explicitly and agnets are not price takers then it is possible to have an equilibrium with fully revealing prices and costly information acquisition article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

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

competition for aid and trade policy this paper considers the optimal allocation of a given amount of foreign aid between two recipient countries it is shown that given consumer preferences a country following a more restrictive trade policy would receive a smaller share of the aid if the donor country maximises its own welfare in allocating aid if on the other hand the donor country allocates aid in order to maximize the sum of the welfare of the two recipient countries the result is just the opposite finally we analyze the situation where the recipient countries compete with each other for the given amount of aid it is shown that this competition tends to lower the level of optimal tariffs in the recipient countries

capital controls in brazil stemming a tide with a signal controls on capital inflows have been experiencing a renaissance since 2008 with several prominent emerging markets implementing them in recent years we focus on brazil which instituted five changes in its capital account regime in 2008 2011 using the synthetic control method we construct counterfactuals i e brazil with no policy change for each of these changes we find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows but we observe some modest and short lived success in preventing further declines in inflows when the capital controls were relaxed we hypothesize that price based capital controls only perceptible effect is to be found in the content of the signal they broadcast regarding the government s larger intentions and sensibilities in the case of brazil its left of center government s willingness to remove controls was perceived as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be

capital controls on inflows exchange rate volatility and external vulnerability abstract we use high frequency data and a new econometric approach to evaluate the effectiveness of controls on capital inflows we focus on chile s experience during the 1990s and investigate whether controls on capital inflows reduced chile s vulnerability to external shocks we recognize that changes in the controls will affect the way in which different macro variables relate to each other in particular we consider the case where controls co exist with an exchange rate band aimed at managing the nominal exchange rate we develop a methodology to deal explicitly with the interaction between these two policies the main findings may be summarized as follows a a tightening of capital controls on inflows depreciates the exchange rate and b we find that a tightening of capital controls increases the unconditional volatility of the exchange rate but makes it less sensitive to external shocks

block ownership and firm specific information this study examines the impact of block ownership on the firm s information environment previous research shows that stock price efficiency depends on the cost of acquiring private information as well as on the precision of this information blockholders have a clear advantage over diffuse atomistic shareholders in terms of the precision and acquisition cost of their private information we hypothesize that this informational advantage will manifest itself primarily in the firm specific component of stock returns our empirical findings confirm that blockholders increase the probability of informed trading and idiosyncratic volatility and decrease the firm s stock return synchronicity these results hold for both inside and outside blockholders but are insignificant for blocks controlled by employee stock ownership plans esops overall our findings support the contention that ownership structure plays a significant role in shaping the firm s information environment

is financial globalization beneficial this lecture examines whether financial globalization is beneficial to developing countries by first examining the evidence on financial development and economic growth and concludes that financial development is indeed a key element in promoting economic growth it then asks why if financial development is so beneficial it often does not occur it then goes on to examine whether globalization particularly of the financial kind can help encourage financial and economic development and argues that it can however financial globalization does not always work to encourage economic development because it often leads to devastating financial crises the issue is thus not whether financial globalization is inherently good or bad but whether it can be done right

not your grandfather s imf global crisis productive incoherence and developmental policy space the response by the international monetary fund imf and developing country national governments to the current global financial crisis represents a moment of what i term productive incoherence which has displaced the constraining neoliberal coherence of the past several decades productive incoherence refers to the proliferation of inconsistent and even contradictory strategies and statements by the imf that to date have not congealed into any sort of new organised regime those who see continuity at the imf emphasise the reassertion of the imf s authority the reiteration of pro cyclical policy adjustment and the maintenance of existing governance patterns within the institution in contrast evidence of discontinuity includes a world now populated by increasingly autonomous states in the south the normalisation of capital controls and fund conditionality programmes that are inconsistent in key respects in the face of this evidence it is best to understand the current conjuncture as an interregnum that is pregnant with new development possibilities

compositional effects of capital controls theory and evidence this paper examines the effects of capital controls on the composition of inter national capital flows paying particular attention to debt inflows versus equity inflows a two period small open economy model with stochastic second period output and asymmetric information between domestic agents and international financiers is utilised to generate predictions regarding the effects of capital controls on the relative use of debt versus equity for financing first period investment these capital control implications are then investigated with quarterly frequency panel data for latin america capital controls are found to significantly affect the composition of the capital account

behavior of output during currency crises abstract this paper documents the behavior of output and its association with other macroeconomic variables in 195 episodes of currency crises in developing countries during 1970 2000 we find that about 60 of the crises are contractionary while the rest are expansionary crises are one and a half times more likely to be contractionary in emerging markets than in other developing economies the number of contractionary crises or their severity does not increase in the 1990s economies which experience capital inflows in the years prior to the crisis or an increase in external debt burden during the crisis are more likely to slow down during crises while those with restrictions on capital flows prior to the crisis or are more open to international trade are less likely to do so the results are robust to different ways of measuring changes in output during crises

volatility dependence and contagion in emerging equity markets abstract in this paper we use weekly stock market data for a group of latin american countries to analyze the behavior of volatility through time we are particularly interested in understanding whether periods of high volatility are correlated across countries the analysis uses both on univariate and bivariate switching volatility models our results do not rely on the correlation coefficients but on the co dependence of volatility regimes the results indicate that high volatility episodes are in general short lived lasting from 2 to 12 weeks we find strong evidence of volatility co movements across countries especially among the mercosur countries

global financial instability framework events issues two of the key questions facing policymakers today are how to reduce the risk of global financial instability and how to cope with it when it occurs this paper starts by defining financial instability and then showing how it harms economic activity it then uses this framework to describe what happened during the recent financial crises in mexico and east asia the paper ends by raising several key policy issues not coincidentally these issues are addressed in the remaining papers in the symposium

black markets for foreign exchange real exchange rates and inflation abstract the black market foreign exchange premium is a tax on exports creating a conflict between the financing of government spending and the allocative goal of stimulating exports the premium is solved for in a model that includes private portfolio choice dual exchange markets and money financing of the fiscal deficit the inflationary implications of switching to floats as a means of unifying official and black market rates are then analyzed inflation could rise substantially if the lost revenues from exports are replaced with a higher tax on money the paper is motivated with examples from sub saharan africa

the union threat this paper studies the impact of unions on wage inequality output and unemployment to do so it proposes a search and matching model of union formation in which unions arise endogenously through a voting process within firms in a union firm workers bargain their wages collectively in a nonunion firm each worker bargains individually with the firm because of this wage setting asymmetry a union lowers the profit of a firm and compresses the wage distribution of the workers furthermore to prevent unionization nonunion firms distort their hiring decisions in a way that also lowers the dispersion of wages after being calibrated on the united states the model shows that even though a partial equilibrium estimate would predict a small impact of unions on inequality removing the threat of unionization increases the variance of wages substantially completely outlawing unions increases wage inequality further moreover outlawing unions increases welfare and output and lowers unemployment these results suggest that even with a small membership unions might have a significant impact on the economy through general equilibrium mechanisms and the way they distort firms decisions i am greatly indebted to nobuhiro kiyotaki esteban rossi hansberg and oleg itskhoki for their invaluable advice and support throughout this project special thanks go to esteban for suggesting the title i also wish to thank manuel amador orley ashenfelter francisco buera jeff campbell pablo fajgelbaum henry farber baris kaymak david lee thomas lemieux benjamin moll justinas pelenis edouard schaal andrew shephard christopher sims liz tennant as well as seminar participants at princeton university and the chicago fed rookie seminar for helpful comments and suggestions i gratefully acknowledge financial support from the fonds quebecois de recherche sur la societe et la culture email mtascher princeton edu address 001 fisher hall department of economics princeton university princeton nj 08544 for the most recent version go to http sites google com site mathtd

capital account liberalization what do cross country studies tell us capital account liberalization it is fair to say remains one of the most controversial and least understood policies of our day one reason is that different theoretical perspectives have very different implications for the desirability of liberalizing capital flows another is that empirical analysis has failed to yield conclusive results the answer another influential strand of thought contends is that this efficient markets paradigm is fundamentally misleading when applied to capital flows limits on capital movements are a distortion it is an implication of the theory of the second best that removing one distortion need not be welfare enhancing when other distortions are present

firm heterogeneity internal finance and credit rationing this paper assesses the role of internal net worth holding constant investment opportunities in the allocation of credit in the presence of asymmetric information in the capital market the authors consider an economy in which both symmetric information and information intensive entrepreneurs seek funds from the capital market and they develop a simple general equilibrium model of credit allocation their emphasis is on shocks to borrower net worth depending on levels of net worth the symmetric information allocation a credit collapse or intermediate allocations are possible the model yields predictions corresponding to accelerator effects on investment and output as well as real effects of collateral redistributions copyright 1990 by royal economic society

exchange rate regimes in transition italy 1974 in order to explain the behavior of the lira during the operation of the italian two tier exchange market in 1973 74 we develop a model of exchange rate regimes in transition on the assumption that the market will set exchange rates so as to eliminate speculative profits at the time of transition the model indicates that expectations of a transition combined with uncertainty about the nature of the post transition regime can cause a jump in exchange rates at the moment of transition as well as volatile exchange rate movements prior to the transition the model suggests that the perceived temporariness of an exchange rate regime should be treated as a market fundamental

exchange rate differential and balance of payments under dual exchange markets abstract this paper develops a model of an economy that uses two exchange markets an official market in which the exchange rate is determined by central bank intervention and a free market in which the exchange rate is determined by market forces the official market handles selected imports and exports while the free market handles the remaining imports and exports and capital transactions the model is used to discuss the effects of various policies on the differential between the free and the official exchange rates and on the balance of payments

optimal foreign aid and tariffs this paper investigates the optimal choice of foreign aid when trade policies are decided in a non cooperative fashion three alternative scenarios depending on the timing of the actions and on whether aid is tied are analyzed it is shown that in the case where aid is decided before tariffs untied aid can lead to the reduction of the recipient s optimal trade tax when the donor can tie the aid to a reduction in the recipient s tariff the optimal aid level is always positive and the world can always achieve a pareto efficient equilibrium

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

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

rational expectations information acquisition and competitive bidding most rational expectations market equilibrium models are not models of price formation and naive mechanisms leading to such equilibria can be severely manipulable in this paper a bidding model is developed which has the market like features that bidders act as price takers and that prices convey information higher equilibrium prices convey more favorable information about the quality of the objects being sold than do lower prices bidders can benefit from trading only if they have a transactions motive or if they have access to inside information apart from exceptional cases prices are not fully revealing a two stage model is developed in which bidders may acquire information at a cost before bidding and for which the equilibrium price is fully revealing resolving a well known paradox

black and official exchange rates in morocco an analysis of their long run behaviour and short run dynamics 1974 1992 using vector error correction vec model estimation on monthly data from morocco for the period january 1974 to december 1992 this article tests the hypothesis that there is a long run stable relationship between the official and the black market exchange rates for us dollars we also examine the short run dynamics in the relationship between the two markets the econometric results indicate that the two exchange rates are cointegrated furthermore we reject weak exogeneity in the case of the official exchange rate but fail to reject it in the case of the black market rate granger causality tests show that the black market rate causes the official exchange rate the results seem to support the efficiency hypothesis suggesting that participants in the black market are able to anticipate changes in the official exchange rate the findings also suggest that morocco s decision in january 1993 to introduce only current account convertibility and keep controls on capital accounts was wise

dual exchange markets for countries facing financial crises abstract in dual exchange markets there is an exchange market for capital transactions separate from the foreign exchange market for current transactions developing countries experiencing financial crises should avoid both a substantial decline in the exchange value of their currency and a reduction of their imports to the point at which their production and consumption of essentials are grossly impaired it is suggested that a temporary system of dual exchange markets will prevent capital outflow from reducing foreign exchange for imports of goods and services both markets should be free of exchange controls except those needed to maintain separation of the markets

on the tying of aid to tariff reform this paper considers the welfare effects of foreign aid that is tied to changes in the recipient s tariff by constructing a three country model with tariffs and by allowing for changes both in the amount of aid and in the tariff rates we are able to consider the welfare implications of two different rules of aid conditionality i a rule which leaves the donor s welfare unchanged and ii a rule which leaves the recipient government s total revenue unchanged it is shown that the tying of aid to a tariff reform can inter alia be used to ensure pareto improvement

recovery from a currency crisis some stylized facts abstract using a comprehensive data set of over 100 developing countries this paper examines how economies recover from a currency crisis some of the regularities found are listed below first it takes less than 3 years for the gdp growth rate to fully recover its tranquil period average the level of gdp however remains permanently below its initial trend suggesting that the shocks underlying a crisis are persistent second the credit crunch problem lasts much longer than the reduction in the gdp growth rate third the pre crisis credit expansion and reserve inadequacy which have been widely recognized as the main causes of a crisis also are closely related to the extent of the post crisis recession fourth crisis episodes that are caused mainly by illiquidity rather than by insolvency tend to exhibit a sharp recovery

unions in a frictional labor market abstract a labor market with search and matching frictions where wage setting is controlled by a monopoly union that follows a norm of wage solidarity is found vulnerable to substantial distortions associated with holdup with full commitment to future wages the union achieves efficient hiring in the long run but hikes up wages in the short run to appropriate rents from firms without commitment in a markov perfect equilibrium hiring is too low both in the short and the long run the quantitative impact is demonstrated in an extended model with partial union coverage and multiperiod union contracting

stock market cycles financial liberalization and volatility in this paper we analyze the cycles of the stock markets in four latin american and two asian countries and we compare their characteristics we divide our sample in two subperiods in order to account for differences induced by the financial liberalization processes of the early 1990s we find that cycles in emerging countries tend to have shorter duration and larger amplitude and volatility than in developed countries however after financial liberalization latin american stock markets have behaved more similarly to stock markets in developed countries whereas asian countries have become more dissimilar concordance of cycles across markets has increased significantly over time especially for latin american countries after liberalization

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

lessons from the asian crisis abstract this paper provides an asymmetric information analysis of the recent east asian crisis it then outlines several lessons from this crisis first there is a strong rationale for an international lender of last resort second without appropriate conditionality for this lending the moral hazard created by operation of an international lender of last resort can promote financial instability third although capital flows did contribute to the crisis they are a symptom rather than an underlying cause of the crisis suggesting exchange controls are unlikely to be a useful strategy to avoid future crises fourth pegged exchange rate regimes are a dangerous strategy for emerging market countries and make financial crises more likely

international investment agreements and services markets locking in market failure summary bilateral investment treaties bits and investment chapters in preferential trade agreements have become popular measures to guarantee investor friendly policies while they reassure multinational firms they also constrain host country authorities in regulating markets to stimulate competition these problems are widespread in service industries characterized by significant economies of scale this paper presents case studies of the difficulties the chilean regulatory authorities faced in regulating the financial services telecom and energy industries it concludes that able regulators are necessary but that international agreements need to also leave enough policy space

deeper integration in east asia regional institutions and the international economic system sea change in east asian perceptions of the international economic system is causing a determined thrust toward deeper east asian integration through regional financial and trade institutions the financial crisis of 1997 98 contributed to this change by revealing weaknesses in the international financial architecture at the same time that it bared weaknesses in domestic policies and institutions in east asia many east asians felt the existing international financial system failed to provide them with adequate prescriptions or aid at a time of great need in response governments are intensifying regional policy cooperation and have begun to develop regional institutional capacity to head off future financial crises and manage them if they occur this change in perceptions of the international economic system has been reinforced by paralysis in the world trade organisation wto the failure of governments to launch a new round of multilateral trade negotiations at the november 1999 wto ministerial meeting in seattle is helping to propel regional approaches to trade liberalisation deeper integration in east asia is a potentially substantial development which will influence the future shape of the international economic system in section 2 i review the primary factors contributing to the financial crisis and discuss the implications for policy makers in east asia in a context of diminished confidence in global institutions the emphasis is on macroeconomic policy management structural reforms changing incentive systems overhauling crisis

welfare effects of aid under quantitative trade restrictions the paper examines the effects of tied aid on the welfare of both the donor and the recipient countries we depart from the previous literature by assuming preexistence of quantitative trade distortions to mitigate these distortions the donor country provides aid that is tied to the rationed good conditions for the presence of the transfer paradox and of the enrichment of both countries are derived and interpreted under the stability of the system furthermore we show that whereas untied aid cannot increase global welfare tied aid unambiguously does so

evaluation of currency regimes the unique role of sudden stops this paper tackles two established puzzles in international macroeconomics literature the first is the lack of systematic differences in the macroeconomic performance across exchange rate regimes the second is the absence of a clear empirical relationship between macroeconomic performance and capital account liberalization we suggest that these negative findings may be due to empirical methods that fail to account for a latent economic crisis state influenced by exchange rate and capital account regimes and to allow that latent variable to influence the growth effects of policy regimes in practice we model and estimate the latent state of the economy as a crisis probability our proposed framework of analysis allows exchange rate and capital market liberalization regimes to have both a direct effect on short term growth and an indirect effect on growth that is channelled through their effects on the crisis probability the empirical decomposition of the total effect into two conflicting effects helps resolve the puzzles assaf razin and yona rubinstein

capital controls in brazil effective abstract a large theoretical literature emerged in recent years analyzing the positive and normative effects of capital controls begging for empirical studies to validate it no emerging market experimented as actively with controls on capital inflows as brazil did since late 2009 this paper analyzes the impact of those measures these policies had some success in segmenting the brazilian from global financial markets as measured by the spread between onshore and offshore dollar interest rates as well as adr premia relative to the underlying local stocks the measures adopted from late 2009 to mid 2011 did not translate into significant changes in the exchange rate suggesting limited success in mitigating exchange rate appreciation however the exchange rate strongly depreciates after a tax on the notional amount of derivatives is adopted in mid 2011 the last of the three restrictions studied may have depreciated the brazilian real in the range from 4 to 10 percent that strong response may have been driven by complementarities with the previous measures as well as an unexpected easing in monetary policy

capital controls and recovery from the financial crisis of the 1930s abstract we examine the first widespread use of capital controls in response to a global or regional financial crisis in particular we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the great depression we find evidence that they stemmed gold outflows in the year following their imposition however time shifted difference in differences dd estimates of industrial production prices and exports suggest that capital controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

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

is the accumulation of international reserves good for development international reserves accumulation has been the preferred policy recently adopted by developing economies to achieve financial stability the aim of this policy is to increase liquidity and thus reduce the risk of suffering a speculative attack the main concern expressed in the literature has been related to its cost most of the studies conclude that the opportunity cost of international reserves accumulation is around 1 of gdp however these studies have not analysed whether this strategy is or could be more broadly supportive of development an issue that must be of central interest for developing economies the aim of this paper is to show that the stockpiling of international reserves is not optimal for developmental purposes and that there exist alternative policies that can be applied to achieve financial stability policy autonomy and a better performance in terms of development

net trade and market efficiency in grossman and stiglitz 1980 abstract in this paper we correct part b of theorem 6 of grossman and stiglitz gs 1980 we demonstrate that when the private signal tends to be perfect the market converges to strong form efficiency and thus informed and uninformed traders have almost homogeneous beliefs about the stock payoff but there is still significant net trade rather than no trade as erroneously shown by gs we further show that when the stock price becomes more informative and thus traders beliefs about the stock payoff become closer the net trade may increase

capital mobility and coalitional politics authoritarian regimes and economic adjustment in southeast asia this article investigates the coalitional bases of authoritarian rule to explain striking variation in adjustment policy to the asian financial crisis in indonesia and malaysia given currency depreciation with financial sector fragility holders of mobile assets prefer to maintain an open capital account while owners of fixed assets and labor favor restrictions of capital mobility to facilitate expansionary macroeconomic policies differences in adjustment policy across the two countries reflect differences in the political coalitions supporting the authoritarian regimes these findings illuminate the nature of political conflict during financial crises and show how a nuanced view of the coalitions supporting authoritarian rule can yield powerful insights into the political economy of authoritarianism and economic adjustment in a global economy

financial instability in latin america in this paper i deal with a number of issues related to financial instability in latin america i first discuss from a macroeconomic research perspective what i believe are some of the most important policy issues faced by the latin american nations these include the effectiveness of controls on capital inflows the effect of exchange rate depreciation on output and the international transmission of the business cycle second i argue that the economic research agenda on latin america should not ignore history in latin america more so than in any other region in the world there has been a self destructing tendency for repeating history 2003 elsevier ltd all rights reserved

demand for international reserves in developing nations a quantile regression approach abstract i estimate the determinants of the demand for international reserves using quantile regressions employing a dataset of 108 developing nations over the period of 1980 2007 i find considerable differences at different points of the conditional distribution of reserves the estimates of elasticities that were found to be insignificant in ordinary least squares regressions become statistically significant at various quantiles of the distribution furthermore majority of the explanatory variables have lower coefficients for the nations that are located on the right tail of the conditional reserve distribution this finding shows that the level of reserves is as important as the other determinants of the demand for reserves

the place premium bounding the price equivalent of migration barriers large international differences in the price of labor can be sustained by differences between workers or by natural and policy barriers to worker mobility we use migrant selection theory and evide

does collective wage bargaining restore efficiency in a search model with large firms existing search and bargaining models show that firms hire an inefficiently large number of workers we ask whether decentralised collective wage bargaining may result in a second best allocation collective bargaining restores efficiency when the bargained wage is independent of employment conditions that we characterise firms then behave as if collective bargaining was over both wages and employment thus linking the large firm search and bargaining environment to the efficient bargaining model mcdonald and solow 1981 under more realistic conditions workers can bargain for a share of output so that the wage is then a function of employment in equilibrium firms are too large and firm entry is inefficient

on the provision of official and private foreign aid abstract the provision of official relative to private foreign aid varies considerably between donor countries we explain the variations in terms of country size household composition income distribution and the government s ability to commit to aid and derive inter alia the results 1 official aid crowds out private aid 2 total aid and official aid collected from each household are lower in more populous countries 3 total aid is lower if i the distribution of income favors the more altruistic households and ii the government can credibly commit to a certain level of aid evidences suggest that the theoretical results can explain stylized facts

capital controls re examined the case for smart controls the global financial crisis which began in east asia in 1997 is not over neither is the inquest into its implications for adjustment policy in the wake of this crisis we focus here on the role of capital controls which formed a much publicised part of the crisis coping strategy in one country malaysia and less openly were also deployed by other crisis afflicted countries evaluation so far has examined different target variables with different estimation methods generally concentrating on efficiency and stability indicators and ignoring equity measures it has also typically treated control as a one zero dummy variable ignoring the quality of intervention and in particular the extent to which efficiency gains are obtained in exchange for controls partly because of these limitations the literature has reached no consensus on the impact of controls nor therefore about where they fit within the set of post crisis defence mechanisms we propose an approach in which the government plays off short term political security against long term economic gain the more insecure its political footing the greater the weight it gives to political survival which is likely to increase the probability of controls being imposed the modelling of this approach generates a governmental policy reaction function and an impact function for controls which are estimated by simultaneous panel data methods across a sample of thirty developing and transitional countries between 1980 2003 using for the period since 1996 the new imf dataset which differentiates between controls by type we find that controls appear to cause increases in income equality and are significantly associated with political insecurity and relatively low levels of openness to trade they do not in our analysis materially influence the level of whole economy productivity or gdp across the sample of countries examined although they do influence productivity in particular sectors in particular manufacturing but the dispersion around this central finding is wide the tendency for controls to depress productivity by encouraging rent seeking sometimes is and sometimes is not counteracted by purposive government policy actions to maintain competitiveness whether or not this happens whether as we put it controls are smart and the manner in which they are smartened is vital on both efficiency and equity grounds we devise a formula for and make the case for capital controls which are time limited and contain an inbuilt incentive to increased productivity as a means of improving the sustainability and equity of the adjustment process whilst keeping to a minimum the cost in terms of productive efficiency

public debts and private assets explaining capital flight from sub saharan african countries we investigate the determinants of capital flight from 30 sub saharan african countries including 24 countries classified as severely indebted low income countries for the period 1970 1996 the econometric analysis reveals that external borrowing is positively and significantly related to capital flight suggesting that to a large extent capital flight is debt fueled we estimate that for every dollar of external borrowing in the region roughly 80 cents flowed back as capital flight in the same year capital flight also exhibits a high degree of persistence in the sense that past capital flight is correlated with current and future capital flight the growth rate differential between the african country and its oecd trading partners is negatively related to capital flight we also explore the effects of several other factors inflation fiscal policy indicators the interest rate differential exchange rate appreciation financial development and indicators of the political environment and governance we discuss the implications of the results for debt relief and for policies aimed at preventing capital flight and attracting private capital held abroad

dual exchange rates under pegged interest rate and balance of payments crisis this paper develops a model of dual exchange rates and pegged interest rate it shows that under perfect asset substitutability the financial exchange rate dynamics is unrelated to current account imbalances it also demonstrates that if the emergence of a current account deficit is expected to give rise to a devaluation of the commercial exchange rate there will be an instantaneous depreciation of the financial exchange rate and further depreciation along the adjustment path this is in sharp contrast to the established result that under dual rates a current account deficit is associated with an appreciating financial rate jel e52 f31

capital controls and the real exchange rate do controls promote disequilibria abstract the consensus view is that capital controls can effectively lengthen the maturity composition of capital inflows and increase the independence of monetary policy but are not generally effective at reducing net inflows and influencing the real exchange rate this paper studies the adjustment dynamics of the real exchange rate towards its long run equilibrium and presents empirical evidence that capital controls increase the persistence of misalignments allowing the speed of adjustment to vary according to the intensity of restrictions on capital flows it is shown that the real exchange rate converges to its long run level at significantly slower rates in countries with capital controls this result is stronger when the exchange rate is undervalued and is independent of confounding factors such as the exchange rate regime and other forms of heterogeneity affecting the speed of adjustment i also find evidence that controls on capital inflows have greater effects than controls on outflows in addition while the combination of capital controls with a fixed or managed exchange rate regime significantly increases the persistence of misalignments controls appear to loose traction under more flexible exchange rate arrangements

capital controls and stock market volatility in frequency domain abstract the link between capital controls and stock market volatility is examined using frequency domain techniques conventional analyses of the second moments can produce spurious results if the high frequency volatility is reduced increased while the overall volatility is increased reduced

capital mobility in developing countries some measurement issues and empirical estimates an economy s financial integration with the outside world the extent of capital mobility across its borders is a key determinant of some of its most important macroeconomic properties yet little is known about this characteristic of many developing economies an important stumbling block in the empirical assessment of financial integration openness is the many approaches to measuring it the author describes and evaluates different tests of capital mobility surveys existing evidence and applies four tests of capital mobility to assess the degree to which the many developing countries tested have achieved integration with the world financial markets the four tests are the 1 magnitude of gross capital flows 2 uncovered interest rate parity 3 strength of saving investment correlations and 4 behavior of domestic consumption over time the evidence suggests that most developing countries can be considered to be financially open in only 18 of the 57 developing countries classified did the data fail to show financial openness and that many countries may be experiencing an increased degree of integration with world financial markets

capital account liberalisation and poverty how close is the link the literature on the theoretical and empirical aspects of the relationship between finance and economic growth is both substantial and extensive the same cannot be said on the relationship between financial development and poverty reduction an equally important aspect in this study we visit the theoretical arguments and conduct an empirical analysis of the relationship between the capital account dimension of financial liberalisation and poverty for developing countries for the period 1985 2005 in particular we employ the system gmm technique to test whether capital account liberalisation has helped alleviate poverty and also whether the extent to which capital account liberalisation affects poverty depends on the quality of institutions we also use ols and iv techniques to verify our findings our findings indicate that there is no statistically significant relationship between the degree of capital account liberalisation during the period and the poverty rate developing countries with higher institutional quality have lower poverty rates but the effect has low statistical significance a higher degree of capital account liberalisation is associated with a lower income share for the poor

mobility costs frictional unemployment and efficiency with imperfect job information flows it is plausible that the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed with word of mouth communication this condition is derived given this condition steady state equilibrium is not efficient with welfare increased by the introduction of unemployment compensation even though all agents are risk neutral in this way workers become more selective in the jobs they accept

regulation of capital flows effects on liquidity and the role of financial reporting quality abstract capital controls as restrictions on capital flows are a tool proposed as a cure to the destabilizing market movements of the 1970s i e tobin 1978 despite the criticism that they have received edwards 1999 capital controls resurfaced during the european financial crisis and the restrictions imposed on capital flows in cyprus and greece these were the first instances of capital control implementation in the european union s history and had various effects on firms financial positions by using a sample of eu countries and distinguishing between austerity and capital controls periods we assess the effects of capital controls on the stock liquidity of firms all of the sample countries have a common financial reporting framework international financial reporting standards ifrs and some of them implemented a range of different measures from less intensive such as increases in tax rates to more intensive such as the enforcement of capital controls in their effort to stabilize their economies for the task at hand we specifically engage two accounting determinants of information asymmetry namely conditional conservatism and the level of earnings management our results show that financial reporting quality as measured by higher conditional conservatism and lower earnings management is beneficial for liquidity however during the capital controls period the relation between conditional conservatism and liquidity becomes negative and this negative relation relates to less risky firms thus the negative relation between conditional conservatism and liquidity is likely due to investors keeping more conservative firms in their portfolios as a measure against the crisis

unification of dual exchange markets abstract this paper develops the model of an economy under a dual exchange system comprising an official market with a crawling exchange rate and a free market with a floating exchange rate after analyzing the behavior of the economy under the dual system the paper discusses the effects that switching to a unified floating system or a unified crawling peg system has on the exchange rate and on the balance of payments particularly in the short run the paper shows that these effects depend on the composition of the private sector s portfolio at the time of unification which in turn depends on the various policies that were followed while the economy was under the dual system

controls on capital inflows do they work abstract this paper analyzes the effectiveness of controls on capital inflows in particular we analyze in great detail the chilean experience with the use of the unremunerated reserve requirement we examine the effects of the controls applied in chile in 1991 1998 on interest rates real exchange rate and the volume and composition of capital inflows the effects are elusive and it is difficult to pin down long run effects although after the unremunerated reserve requirement was introduced there was an increase in the interest rate differential the econometric evidence does not show it has a significant long run effect also we detect very small effects on the real exchange rate however the more persistent and significant effect is on the composition of capital inflows tilting composition toward longer maturity

a multisectorial matching model of unions abstract we develop an equilibrium matching model where unions have an important institutional presence monopolistic competition characterizes the goods market where only some sectors are unionized thus the model can vary the coverage of collective bargaining it can vary the degree of coordination between unions and alternatively consider national and sectorial unions calibration to the union premium implies a workers rent extraction parameter much lower than assumed in the matching literature we introduce unemployment insurance to study the interactions of policies with unions and find that unions only push for more generous benefits if this does not entail higher payroll taxes

the influence of capital controls on long run growth where and how much abstract the financial crisis in east asia generated a revival of interest in the merits of financial openness the ensuing debate on the benefits of openness has focused more on short and medium run issues than on the long run effects within the empirical literature on economic growth little or no attention has been paid to the effects of financial openness contrary to the orthodox position the few results that exist suggest that capital controls have no effect on economic growth this paper argues that this conclusion emerges from a failure to account for underlying differences across countries with similar degrees of capital controls we show that the degree of ethnic and linguistic heterogeneity in a country plays a significant role in explaining the effects of controls on economic growth for countries with relatively higher degrees of ethnic heterogeneity the effects are particularly adverse whereas for countries with high degrees of homogeneity capital controls actually have a net positive effect on economic growth on balance more developing countries suffered due to controls than not within the sample of 57 non oecd countries that did implement controls for the period 1975 1995 as many as 39 saw a reduction in their growth rates this result is robust to a number of variables commonly used in the economic growth regressions