self fulfilling currency crises the role of interest rates abstract we develop a stylized currency crises model with heterogeneous information among investors andendogenous determination of interest rates in a noisy rational expectations equilibrium our modelcaptures three key features of interest rates the opportunity cost of attacking the currency respondsto the investors behavior the domestic interest rate may influence the central bank s preferences fora fixed exchange rate and the domestic interest rate serves as a public signal which aggregatesprivate information about fundamentals we explore the payoff and informational channels throughwhich interest rates determine devaluation outcomes and examine the implications for equilibriumselection by global games methods our main conclusion is that multiplicity is not an artifact ofcommon knowledge in particular we show that multiplicity emerges robustly either when adevaluation is triggered by the cost of high domestic interest rates as in obstfeld 1996 or when adevaluation is triggered by the central bank s loss of foreign reserves as in obstfeld 1986 providedthat the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domesticbond supply are sufficiently small christian helliwigdepartment of economicsuniversity of california los angelesbox 951477los angeles ca 90095 1477arijit mukherjiuniversity of minnesotaaleh tsyvinskidepartment of economicsharvard universitylittauer centercambridge ma 02138 3001

large versus small players a closer look at the dynamics of speculative attacks what is the role of large players e g hedge funds in speculative attacks recent work suggests that large players move early to induce smaller agents to attack however many observers argue that large players move late in order to benefit from interest rate differentials we propose a model in which large players can do both using data on currency trading by foreign large and local small players we find that foreign players moved last in three attacks on the norwegian krone during the 1990s during the attack on the swedish krona after the russian moratorium in 1998 foreign players moved early gains by delaying attack were small however because interest rates did not increase

fixed exchange rates credibility flexibility and multiplicity abstract this paper surveys recent work on the sustainability of fixed exchange rates it considers a dynamic version the barro gordon framework in which the level of a state variable in this case debt determines the pay offs available to the government at each point in time multiple equilibria and self fulfilling runs are possible but only at certain levels of debt a surprise devaluation can either increase or decrease future expected devaluation relative to a no devaluation situation

boom and bust cycles external imbalances and the real exchange rate when the current account balance and net capital outflows do not exactly offset each other international payment flows arise payment flows into a country push the real exchange rate up payment outflows push it down this article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom and bust cycles it shows that during such episodes capital inflows first exceed the deficit on current account strengthening the currency later on when the return on domestic capital reverts to its normal level the current account recovers yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article s theoretical predictions

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

when are fixed exchange rates really fixed abstract this paper analyzes the sustainability of fixed exchange rates by extending the time inconsistency framework to a fully dynamic context in which the level of a state variable in this case debt determines the payoffs available to the government at each point in time the model yields the following results if debt is sufficiently low there is an equilibrium in which the government does not devalue for an intermediate range of debt levels the government devalues in response to an attack but not otherwise so that self fulfilling attacks can occur finally for yet another debt range there can also be sunspot equilibria in which an attack and the corresponding devaluation occurs with positive probability

the fundamental determinants of interest rate differentials in the erm the paper analyses the sources of persistent interest rate differentials vis a vis germany that have existed in belgium denmark france ireland italy and the netherlands in a target zone system like the erm interest rate differentials mainly reflect devaluation expectations which are measured here by raw 1 month euromarket interest rate differentials drift adjusted 1 month differentials and differentials in long term government bond yields the role of a large set of fundamental macroeconomic variables that may have affected these devaluation expectations is investigated within a vector autoregressive var setting by means of granger causality tests impulse response functions and variance decompositions we find no evidence that fundamentals are more relevant to drift adjusted devaluation risk than for unadjusted interest rate differentials a significant impact of inflation budget deficits and unemployment becomes evident for almost all erm participants

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

imposing exchange controls to dampen currency speculation political risk and the french franc 1976 1984 abstract this work offers a portfolio model of exchange rate determination that embodies risk averse agents expectations of shifts in the government s exchange control policy the time dependent probability of the imposition of exchange controls is shown to produce systematic variations in the political risk premium the model examines the effects of french president mitterand s may 1981 imposition of exchange controls on the dollar franc exchange rate while exchange rate risk dominates political risk during the vast majority of the sample period large deviations in the political risk premium are observed around the time of the imposition of controls

the impact of imf programs on asset values abstract this paper provides evidence on the effectiveness of the imf by examining the impact of its program on wealth we analyze all imf press releases about forthcoming aid for 16 emerging countries during the period 1989 1999 together with references in the financial times to possible imf support using event study methodology we measure the impact of these announcements on the prices of a number of assets including equities currencies domestic and foreign bank stocks and sovereign debt our findings suggest that neither the imf announcements nor the ft news have a measurable effect on asset values the exceptions are the announcements in the ft that suggest imf support is less likely to be forthcoming in these cases we observe negative abnormal returns

speculative attacks on the currency with uncertain monetary policy reactions abstract we show that balance of payments crises are accompanied by discrete shifts in the exchange rate if in the pre crisis situation the exchange rate is constrained by set limits and there is uncertainty about monetary policy reactions

seigniorage revenue deficits and self fulfilling currency crises abstract this paper examines potential resolutions to the conflict between a fixed exchange rate and seigniorage revenue requirement of a stylized developing economy that gives rise to a currency crisis the government has an informational advantage and can decide when it is optimal to invoke an escape clause i e to drop the peg and float speculators must guess when the crisis will happen based on their assessment of the probability of collapse and this makes pegged exchange rate equilibria unstable

do countries falsify economic data strategically some evidence that they might we find evidence supporting the hypothesis that countries at times misreport their economic data in a strategic manner among those suspected are countries with fixed exchange rate regimes high negative net foreign asset positions or negative current account balances which corroborates the intuition developed with a simple economic model we also find that countries with bad institutional quality rankings and those in africa middle east eastern europe and latin america release economic data of questionable veracity our evidence calls for models with public signals to consider strategic misinformation and for establishing independent statistical agencies to assure the delivery of high quality economic data

intellectual property rights violations and spillovers in north south trade abstract the article examines the role of technological spillovers when northern and southern firms compete in quantities on the common world market and when only the northern firm is supposed to conduct innovative activity the intensity of spillovers is interpreted as an indicator of the strength of intellectual property rights ipr protection in this light the paper reconsiders the questions raised in the recent economic analysis of ipr protection in north south relations when and whether the southern countries benefit in welfare terms from protecting ipr how the north fares in this story how large is the conflict between the north and south and what is the optimal level of ipr protection at the world level the paper shows that the common belief that the south generally benefits from relaxing ipr protection while the north is worse off does not carry over in the applied duopoly model with spillovers in this respect the congruence of interests between north and south with respect to southern ipr protection regime should not be an exceptional or even impossible state of affairs

a markov switching analysis of contagion in the ems abstract this paper applies the multivariate version of the forbes and rigobon 2002 contagion test as proposed by dungey et al 2005a to detect contagion effects in the exchange rate mechanism erm of the european monetary system ems crisis and non crisis observations are determined endogenously via a markov switching vector autoregression msvar we show that the msvar is suitable for this purpose as it does particularly well in identifying the 11 realignments of the erm we examine whether denmark s rejection of the maastricht treaty and italy s competitiveness problems affected other ems participants and find evidence for contagion

destabilizing effects of exchange rate escape clauses abstract this paper studies policy rules with escape clauses analyzing as an example fixed exchange rate systems that allow member countries the freedom to realign in periods of stress while well designed escape clause rules can raise society s welfare in principle limited credibility makes it difficult to implement such rules in practice an ems type institution that imposes political costs on policymakers who realign may raise welfare but can also produce equilibria far inferior to an irrevocably fixed exchange rate switches between multiple equilibria may have the character of sudden speculative attacks

speculative currency attacks and balance of payments crises abstract this paper reviews the recent theoretical literature on collapsing exchange rate regimes using a combination of technique intuition and realworld observation we discuss the literature s main insights point out some unresolved questions and offer suggestions for future research the survey should be of interest to both specialists and non specialists in the field of international macroeconomics

consequences of discretion in the formation of commodities policy abstract in a simple model of endogenous primary commodity price support policy i policy is affected by private inventories and ii private inventories are affected by speculative attempts to forecast policy the interaction between these two forces is rich yielding bubbles and extrinsic volatility thus helping to explain some odd episodes observed in commodity markets in addition under some conditions a government that wishes to support the price but is unable to commit to future action may be impotent and a government that does not want to support the price may be trapped into doing so by speculative activity

self fulfilling expectations speculative attack and capital controls this paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime it is shown that if there exists a nonzero probability that the policymaker s response to a significant decrease in official foreign reserves will be the introduction of controls a speculative attack may occur even when current and expected monetary policy is consistent with a permanently viable control free fixed exchange rate regime consequently capital controls may be the outcome of self fulfilling expectations rather than the result of imprudent economic policies copyright 1993 by ohio state university press

asian currency and financial crises lessons from vulnerability crisis and collapse this paper presents an analytical framework for understanding the east asian crises we argue that vulnerability was created by the boom and bust incurred under pegged exchange rates and by liberalisation in the presence of a bank based financial regime with implicit promises of bail out these vulnerabilities were interconnected negative shocks precipitated both currency devaluation and financial crisis and the latter created obligations for the government to bail out the financial sector the critical feature which led to collapse was we argue the fact that currency depreciation led to a worsening of the financial crisis due to massive unhedged borrowing in foreign currency to which the fixed exchange rate regime had led financial collapse resulted when the currency devaluation was sufficiently large that those who had lent to the financial system came to believe that government guarantees could not be honoured this in turn triggered fears of sovereign insolvency which turned currency depreciation into currency collapse

speculation and the decision to abandon a fixed exchange rate regime this paper investigates the extent to which it is possible for speculative attacks to be predictable given information on economic fundamentals a standard model of predictable attacks is extended to incorporate an optimizing monetary authority it is shown that while incorporating a forward looking monetary authority improves our understanding of many observed phenomena it also implies that the branch of the literature that places emphasis on predictable movements in fundamentals cannot generate predictable speculative attacks in addition the model provides useful insights into the viability of temporary nominal anchor policies and a theoretical foundation for an important empirical methodology

for a few dollars more reserves and growth in times of crises abstract based on a dataset of 112 emerging economies and developing countries this paper addresses the question whether the accumulation of international reserves has effectively protected countries during the 2008 09 financial crisis more specifically the paper investigates the relation between international reserves and the existence of capital controls we find that the level of reserves matters countries with high reserves relative to short term debt suffered less from the crisis particularly when associated with a less open capital account this suggests some degree of complementarity between reserve accumulation and capital controls

mexico s balance of payments crisis a chronicle of a death foretold this paper claims that the roots of mexico s balance of payments crisis are found in the prevailing high degree of capital mobility and financial globalization under these circumstances shifts in foreign capital flows and anticipation of a banking system bailout may produce large imbalances between stocks of financial assets and foreign reserves threatening the sustainability of currency pegs econometric analysis suggests that half of mexico s reserve losses could be accounted for by these phenomena large financial imbalances are also fertile ground for self fulfilling prophesy crises which lead devaluations to produce deep recessions these difficulties can be partly remedied by appropriate policies

the role of media in the credit crunch the case of the banking sector using a vector autoregression framework this paper investigates the dynamic relationship between the intensity of negative media speculation and the market performance of financial institutions evidence is provided that over the sub prime crisis period pessimistic coverage granger caused the returns on banking indices while causality in the opposite direction proved weaker these findings may imply that journalists not only report on the state of economic reality but also play an active role in creating it investors acting upon sentiment implicit in media reports would have been able to improve their investment performance as measured by sharpe ratios and jensen s alphas

a currency crisis model with an optimising policymaker abstract a model is presented in which the abandonment of a fixed exchange rate regime is triggered by an optimising policymaker who wants to loosen monetary policy and boost aggregate demand agents in the foreign exchange market know the policymaker s objective function and build expectations of a regime switch into interest differentials the resulting rise in interest rates affects the policymaker s decision to switch regime it is shown that a rational expectations equilibrium exists where the fixed rate is abandoned in response to adverse demand shocks in some circumstances multiple equilibria arise which may lead to self fulfilling crises

shadow rates and multiple equilibria in the theory of currency crises abstract this note generalizes to second generation models of currency crises the arbitrage based approach first applied by flood and garber to first generation models deriving policy switching rules based on the shadow exchange rate facilitates the comparative analysis of the literature using the shadow rate we provide and discuss an example of a common mechanism generating multiple equilibria in both first and second generation models

information manipulation coordination and regime change this article presents a model of information manipulation and political regime change there is a regime that can be overthrown but only if enough citizens participate in an uprising citizens are imperfectly informed about the regime s ability to resist an uprising and the regime can engage in propaganda that taken at face value makes the regime seem stronger than it truly is this coordination game with endogenous information manipulation has a unique equilibrium and the article gives a complete analytic characterization of the equilibrium s comparative statics holding fixed the number of signals available to citizens if the per unit signal precision is sufficiently high then the regime is harder to overthrow in contrast if the number of signals increases so that both total signal precision and the regime s costs of manipulation rise together then the regime is easier to overthrow unless there are strong economies of scale in information control

endogenous inflows of speculative capital and the optimal currency appreciation path this paper examines the optimal appreciation path of an undervalued currency in the presence of speculative capital inflows that are endogenously affected by the appreciation path a central bank decides its appreciation policy based on three costs i misalignment costs associated with the gap between the actual and long run equilibrium exchange rates ii short term adjustment costs due to resource reallocation and iii capital losses due to speculative capital inflows our model finds 1 when speculators face no liquidity shocks the central bank tends to appreciate the currency quickly to discourage speculative capital 2 when speculators face liquidity shocks the central bank optimally pre commits to a slower appreciation path and the appreciation takes the longest time when the probability of liquidity shocks takes intermediate values 3 the central bank tends to appreciate the currency more quickly when it conducts discretionary policy ce memoire examine le sentier optimal d appreciation d une monnaie sous evaluee quand il y a des flux de capitaux speculatifs qui sont affectes de maniere endogene par la nature du sentier une banque centrale decide de sa politique d appreciation a partir de la prise en compte de trois couts i les couts de desalignement associes a l ecart entre les taux de change actuels et ceux qui correspondent a l equilibre de long terme ii les couts d ajustement attribuables a la reallocation des ressources et iii les pertes de capital attribuables aux flux de capitaux speculatifs on decouvre que 1 quand les speculateurs ne font pas face a des chocs de liquidite la banque centrale tend a apprecier la monnaie rapidement pour decourager le capital speculatif 2 quand les speculateurs font face a des chocs de liquidite la banque centrale se pre engage optimalement a suivre un sentier d appreciation plus lent et l appreciation prend le plus de temps quand la probabilite de chocs d appreciation a des valeurs intermediaires 3 la banque centrale tend a faire s apprecier la monnaie plus rapidement quand elle mene une politique discretionnaire

intellectual property rights licensing and innovation in an endogenous product cycle model abstract we develop a dynamic general equilibrium model of the product cycle to study the effects of stronger intellectual property rights iprs in the south on the incentives of firms in the north to innovate and to license advanced technologies innovation and licensing are random processes requiring resources stronger iprs increase the licensor s share of rents and reduce the costs of licensing contracts thus the returns to both licensing and innovation would rise while additional resources would be available for r d in consequence innovation and technology transfer would rise however the effect of stronger iprs on relative wages between regions is ambiguous

collapsing exchange rate regimes shocks and biases abstract patterns in domestic credit creation stemming from inconsistent fiscal policies have received widespread attention for their role in aggrevating speculative attacks on central bank foreign exchange reserves and contributing to the collapse of exchange rate regimes this paper acknowledges the importance of monetary and fiscal discipline but also emphasizes the importance of other random shocks to the domestic money market most notably shocks from external credit supplies and relative prices policies of the domestic fiscal authorities are only partial catalysts for speculative attacks on a currency expansion of domestic credit stemming from the monetization of fiscal imbalances may be dominated by involuntary domestic credit expansions which are necessitated by surprise shortages in supplies of external capital further the unexpected availability of external capital translates into a lower net critical reserve floor making the depletion of central bank reserves by a speculative attack more difficult to accomplish relative price shocks also randomize the demand for nominal money balances and therefore may also have a strong direct influence on the probability of an exchange regime collapse empirical studies of exchange rate crises that neglect these considerations will produce biased estimates of both expected collapse probabilities and anticipated post collapse exchange rates

heterogeneous technologies strategic groups and environmental efficiency technology gaps for european countries abstract this paper measures technology tg and environmental efficiency technology gaps eetgs in 25 european countries over two distinct periods 2002 and 2008 examining the possible effect of adopted environmental regulations and the kyoto protocol commitments on environmental efficiency technology gaps however the introduction of the metafrontier in our analysis puts into our discussion the role of heterogeneous technologies and its effect on the above mentioned measures employing a directional distance function we investigate whether there is an actual difference in terms of environmental efficiency and efficiency performance among european countries considering the technological frontiers under which they operate the construction of individual frontiers has been realized employing a large number of variables that are highly correlated with countries learning and absorbing capacity new technological knowledge and using economic theory and classical frontier discrimination like developed vs developing north vs south and participation in the eurozone or not the overall results indicate a crucial role of heterogeneous technologies for technology gaps in both periods moreover a significant decrease for both measures although in different percent has been recorded emphasizing the key role of knowledge spillovers

sovereign default and the euro the introduction of the euro meant that countries with sovereign debt problems could not use monetization and devaluation as a way to prevent default the institutional structures of the euro were also widely thought to prevent a country in difficulties being bailed out by other euro members or having its sovereign debt purchased by the european central bank ecb despite these restrictions there was relatively little discussion about sovereign default in pre economic and monetary union debates among economists and financial markets priced in almost no default risk in the pre crisis years the crisis has seen bailouts and bond purchases by the ecb but there has also been a sovereign default inside the euro and further defaults seem likely the introduction of the euro was intended to bring greater stability by ending devaluations triggered by self fulfilling runs on a currency while this particular scenario can no longer happen this paper discusses mechanisms whereby expectations that a country may leave the euro can lead to this outcome occurring copyright 2013 oxford university press

determinants and costs of current account reversals under heterogeneity and serial correlation using large panel data sets for analysis of determinants and costs of reversals asks for controls of latent heterogeneity among countries this article performs a bayesian analysis which allows for a parsimonious yet flexible handling of country specific heterogeneity via random coefficients and serially correlated errors consideration of persistence within the employed macroeconomic data is important to gauge the impact of explaining variables suggested by theory correctly bayesian specification tests provide evidence in favour of models incorporating heterogeneity and serial correlation the results suggest that costs of reversals are overestimated when country specific heterogeneity is neglected and stress the importance of external variables in explaining current account reversals results are checked for robustness against the underlying reversal definition

learning large deviations and recurrent currency crises this article studies a version of obstfeld s journal of international economics 43 1997 61 77 escape clause model the model is calibrated to produce three rational expectations equilibria two of these equilibria are e stable and one is unstable dynamics are introduced by assuming that agents must learn about the government s decision rule it is assumed they do this using a stochastic approximation algorithm it turns out that as a certain parameter describing the sensitivity of beliefs to new information gets small the algorithm converges to a small noise diffusion process the dynamics of exchange rate changes are then characterized using large deviation techniques from freidlin and wentzell random perturbations of dynamical systems second edition berlin springer verlag 1998 these methods describe the sense in which the limiting distribution of exchange rate changes is approximated by a two state markov switching process where the two states correspond to the two e stable equilibria the model is calibrated to the exchange rate histories of argentina brazil and mexico currency crises in these countries resemble the predicted escape routes of the model a key feature of these escape routes is that expectations of a devaluation erupt suddenly without large contemporaneous shocks this is consistent with evidence showing that crises are often poorly anticipated by financial markets

the production life cycle tasks in production have different dynamics in comparison with individual products we build a general equilibrium model where three forces offshoring learning and wage interact to determine how production fragmentation evolves over time we show that the production process follows a life cycle its fragmentation emerges deepens and converges our model is stylized and versatile which can be used to tractably characterize the loci of global output productivity welfare and value added distribution as production fragmentation progresses this article is protected by copyright all rights reserved

the making of the turkish financial crisis abstract at the turn of the century the turkish economy was in need of an urgent stabilization in order to halt a treacherous process of inflation unsustainable public debt accumulation and increasing financial fragility resulting from irresponsible policies and lack of fiscal discipline that had been endemic since the early 1980s the stabilization program launched with support from the imf has however failed to deliver its promises plunging the economy into an unprecedented recession largely because of serious shortcomings in its design as well as in crisis intervention which appears to have drawn no useful lessons from recent crises in emerging markets

capital flight from russia this paper documents the scale of capital flight from russia compares it with that observed in other countries and reviews policy options the evidence from other countries suggests that capital flight can be reversed once reforms take hold the paper argues that capital flight from russia can only be curbed through a medium term reform strategy aimed at improving governance and macroeconomic performance and strengthening the banking system capital controls result in costly distortions and should gradually be phased out as part of that medium term strategy copyright blackwell publishers ltd 2001

can globalisation stop the decline in commodities terms of trade in this paper we address the following question would a fully integrated world economy eliminate the widely reported decline in the terms of trade of primary commodities we address the question by looking at the terms of trade within the us a highly integrated economy our findings show two results first us internal real commodities terms of trade over the 1947 1998 period experienced slowly declining but significant trends second once we control for the effect of us prices on international terms of trade we find a long run relationship between the us and international relative prices these findings support the view that the decline of commodities terms of trade bears no relationship with the process of globalisation this seems to indicate that if world terms of trade behaved as the us terms of trade neither increased integration nor protectionist measures would eliminate this trend

a model for valuing new technologies under a pull incentives environment abstract investment in innovation and research development r d projects is one of the key strategies that firms need to implement to enhance growth increase profitability and create value on the other hand r d projects are characterized by significant levels of risk due to limited information and uncertainty over both the investment costs and the expected returns in order to encourage the development of high risk but relevant r d projects some risks can be mitigated by other project stakeholders through the use of pull incentives such as a minimum guaranteed demand in this article we propose an adaptation of a real option model for valuing r d projects where we incorporate a pull incentive for the final product using a market sales function that decreases in time and is strictly positive over the product s life cycle we apply this model to the case of the development of a power line communication modem plc for smart grids in the brazilian electricity market where a power utility firm agreed to bear part of the development risk by means of a minimum guaranteed demand and solve using monte carlo simulation the results suggest that this guarantee has significant impact on the project value which is not captured by traditional valuation methods or even real option methods that do not incorporate this concept

dynamics of the exchange rate in anticipation of pegging abstract this paper studies an economy in which agents expect the current floating rate regime to be interrupted on a specific future date by a transitional fixed rate policy when the new peg is not revealed in advance the path of the floating rate in anticipation of pegging is determined by the interaction between what agents perceive to be the objectives and the constraints of the central bank the paper highlights the role of the pegging date the duration of the fixed rate interval the quantity of reserves available to the authorities and the nature of policies expected after pegging is terminated

prices and output in the mexican economy emperical testing of alternative hypotheses abstract this paper derives and compares alternative formulations of price and output formation for the mexican economy over the period 1961 1981 a structuralist type model with working capital is found to dominate its monetarist and keynesian counterparts a breakdown of the causes of inflation is offered and some simulations are carried out to highlight some trade offs among real wages the real exchange rate real interest rates and output

speculative attacks with multiple sources of public information we propose a speculative attack model in which agents receive multiple public signals it is characterised by its focus on an informational structure which sets free from the strict separation between public information and private information diverse pieces of public information can be taken into account differently by players and are likely to lead to different appreciations ex post this process defines players private value the main result is to show that equilibrium uniqueness depends on two conditions i signals are sufficiently dispersed ii private beliefs about the relative precision of these signals sufficiently differ we derive some implications for information dissemination policy transparency in this context is multi dimensional it concerns the publicity of announcements the number of signals disclosed as well as their precision especially it seems that the central bank has better not publishing its forecast errors in order to maintain stability an illustration to our analysis is the recent debate concerning the optimal monetary policy committee structure of central banks

technological innovations capital mobility and the product cycle innorth south trade this paper constructs a general equilibrium model of north south tradein which the north continually introduces new goods the rate at whichtechnology diffuses to the south is a function of differences in the cost of production in the two regions the key result of the model is that labor force growth in the south initially increases real wages inthe north a standard result in classical trade models but in the long run reduces northern wages by accelerating the transfer of technology and drawing capital out of the north as well copyright 1986 by american economic association

appropriate technology in a model of multinational duopoly this paper seeks to motivate the observed tendency of multinationals with home bases in ldcs to adopt labour intensive technology relative to their counterparts in industrial countries two multinationals play a spatial duopoly game in which the location mode of market service exports or on site production and technology choice of the third world multinational are simultaneously determined the model is calibrated using observed data on transport costs factor shares research intensity and international income distribution ldc firms are shown to prefer labour intensive technological adaptation even when the option of producing on site in high income markets is available

scale economies wage differentials and north south trade abstract this paper attempts to isolate the effect of external economies of scale in production on the pattern of north south trade the results show that when the relative wage is higher in the north and only the north innovates the south produces and exports those goods with the lowest economies of scale while the remaining set of goods is produced and exported by the north production subsidies offered by the south raise southern income and welfare but if the north introduces a new set of goods the benefits of the subsidies to the south dissolve

fixed exchange rates as a means to price stability what have we learned abstract the paper discusses what we have learned from last year s currency crises in erm and the nordic countries about fixed exchange rates as a means to achieve price stability after discussing the explanations for the crises the paper concludes that fixed exchange rates are not a shortcut to price stability monetary stability and credibility have to be built at home and cannot easily be imported from abroad fixed exchange rates are more fragile and difficult to maintain than previously thought they may even be in conflict with price stability by inducing a procyclical destabilizing monetary policy and by inducing an inflation bias building monetary credibility is even more important with flexible exchange rates

public information private information and the multiplicity of equilibria in coordination games abstract i study coordination games with incomplete public and private information and relate equilibrium convergence to convergence of higher order beliefs as the players signals become more and more precise the equilibrium manifold converges to the correspondence of common knowledge equilibria whenever the variance of the public signal converges to 0 at a rate faster than one half the rate of convergence of the variance of private signals the same condition also determines the convergence of common p belief to common knowledge which leads to a simple intuition for its origin and an immediate generalization of the former results about equilibrium convergence journal of economic literature classification numbers c72 d82

currency crises and contingent liabilities a contingent liability is a future spending commitment that is realized with some probability international organizations emphasize the dangers of contingent liabilities when providing advice why one answer is obvious if significant contingent liabilities are realized they commit governments to substantial fiscal costs there is a further reason by taking on a contingent liability the government can increase the probability of the underlying shock taking place this paper describes how the issuance of government guarantees and the methods by which they are financed affect the probability of crises taking place it also discusses the determinants of post crisis inflation and depreciation

a model of the joint distribution of banking and currency crises abstract we develop a simple framework for studying the joint distribution of banking and currency crises we make two points first banking and currency crises are related but they are not the same thing viewing crises in isolation or as joint events biases estimates of the likelihood of crises second the proliferation of government promises such as adding a promise to bail out bank depositors to the promise of fixing the exchange rate reduces the likelihood of keeping any individual promise when the resources devoted to keeping the promises are fixed

intellectual property piracy in a north south context empirical evidence the protection of intellectual property rights ipr has been a contentious issue for more than 20 years industrialized nations have moved to knowledge based economies and simultaneously trade barriers have fallen making intellectual property ip vulnerable adding to this vulnerability are conflicting international institutional environments belief systems and economic realities the debate over ipr protection has become a significant global trade issue pitting the net technology producing north against the net technology consuming south with this in mind there has been much debate about the impact of alternative ipr regimes tight or loose on the welfare of southern economies policy makers in both the south and the north search for arguments to convince recalcitrant southern countries to follow the northern model of strict ipr regimes the south faced with a dilemma searches for arguments to justify looser regimes or convince its populace that tighter regimes are in the best interest of the nation the objective of this research is to add empirical clarity about the welfare impacts of weak ipr on the firm and host country to this end we employ a novel methodological design and unique context the research design is deductive in that we use the empirical setting of pioneer argentina s a a seller of bioengineered agricultural seeds to test the existing theory of weak ipr impacts in a north south context

the mexican peso crisis sudden death or death foretold abstract we argue that allowing for the possibility of a self fulfilling panic helps to understand several features of the recent mexican crisis self fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short term dollar debt we present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt but not for others lastly we argue that the imperfect credibility of mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994 our model formalizes the reasons why this is so

speculative attacks with unpredictable or unknown foreign exchange reserves during a currency crisis speculators usually do not know the value of a central bank s foreign exchange reserves in this paper i show that modelling speculators as having imperfect knowledge of reserves enriches the predictions of the classical model of specula tive attacks with realistic lags in reserve reporting and costs to unsuccessful speculation successful speculative attacks will involve a jump depreciation unsuccessful attacks may occur attacks may occur when fundamentals are improving attacks may not be preceded by large increases in interest rates and fixed exchange rates may be abandoned with no attack and no decline in the money supply jel classification f3 1 attaques speculatives quand les reserves de devises etrangeres sont soit imprevisibles soit inconnues au cours d une crise monetaire les speculateurs ne connaissent pas normalement la valeur des reserves de devises etrangeres que la banque centrale a en main ce memoire montre qu une modelisation des speculateurs en postulant qu ils ont une connaissance imparfaite des reserves permet d enrichir les predictions du modele classique des attaques speculatives a partir d une evaluation realiste des delais dans les rapports sur la quantite de reserves et des couits d une speculation ratee on deter mine que les attaques speculatives reussies vont impliquer que se produise une deprecia tion discontinue que des attaques speculatives ratees puissent se produire que des attaques peuvent se produire quand les donnees fondamentales s ameliorent que des at taques ne peuvent pas etre precedees par de fortes augmentations des taux d interet et que des taux de change fixes peuvent etre abandonnes sans attaques et sans chute dans

europe s great depression coordination failure after the first world war in this paper i survey and reinterpret the extensive literature on europe s great depression i argue that europe could not exploit its vast economic potential after 1918 because the war had not yet come to an end indeed it did not end before 1945 both domestic and international institutions suffered from a lack of reciprocal trust and commitment which can be clearly illustrated in the realm of monetary policy but affected many other areas of policy making such as energy or migration policies these institutions in turn affected expectations and thereby the extent to which for example expansionary policies could be effective

signaling in a global game coordination and policy traps this paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs while exogenous asymmetric information has been shown to select a unique equilibrium we show that the endogenous information generated by policy interventions leads to multiple equilibria the policy maker is thus trapped into a position in which self fulfilling expectations dictate not only the coordination outcome but also the optimal policy this result does not rely on the freedom to choose out of equilibrium beliefs nor on the policy being a public signal it may obtain even if the policy is observed with idiosyncratic noise

monetary contracting between central banks and the design of sustainable exchange rate zones abstract an exchange rate system is a contract which commits central banks to intervene in the foreign exchange market the design features of the system include the rules of intervention the limits placed on exchange rates and the crisis scenario describing possible transitions to new regimes this paper considers the various trade offs one faces in designing an exchange rate system one of these pertains to the amount of reserves which the central banks must have on hand in order to forestall a speculative attack and make the system sustainable the amount of reserves needed depends crucially on the assumed crisis scenario

self fulfilling risk predictions an application to speculative attacks abstract we show that changing market beliefs about currency risk can generate a self fulfilling speculative attack on a fixed exchange rate the attack does not require a later change in policies to make it profitable we illustrate this point by introducing an endogenous risk premium into a first generation model of a speculative attack the model is further modified to take account of sterilization debt financed fiscal deficits and anticipatory price setting behavior we use the model to interpret the 1994 mexican peso crisis

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

a decision theoretic model of innovation technology transfer and trade we analyse a dynamic north south model of innovation technology transfer and trade northern firms conduct r d using labour which has alternative uses producing in the r d sector or a nontraded good sector since technology transfer prevents the north from fully appropriating benefits of r d the optimal rate of innovation for either profit maximizing firms or a utility maximizing northern planner is less than globally optimal an increased transfer rate intensifies competition of lower wage southern workers with northern workers in production so profit maximizing northern firms irrespective of their number or cooperation in r d reallocate labour toward r d

rational and self fulfilling balance of payments crises speculative attacks on a pegged exchange rate must sometimes occur ifasset price paths are to be free of abnormal profit opportunities suchattacks are fully rational as they reflect the market s response to aregime breakdown that is inevitable the authors shows that under someexpectations about policy balance of payments crises can also be purely self fulfilling events in such cases even a permanently viableregime may collapse and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis the behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack copyright 1986 by american economic association

managing exchange rate crises evidence from the 1890s abstract this paper investigates the effectiveness of the monetary authority s borrowing policies in resolving exchange rate cises it shows why obtaining loans or lines of credit in foreign currency may avoid at least temporarily the devaluation of a fixed rate and discusses the problem of the optimal size of the loan and or the line of credit the analysis focuses on a particular episode of foreign exchange rate pressure during the troubled years between 1894 to 1896 the results suggest that the borrowing policy followed by the us treasury in those years was effective in avoiding the collapse of the united states gold standard and that the amount of the borrowing undertaken by the treasury might have been optimal

target zones for exchange rates and policy changes abstract we extend a target zone model to allow for occasional changes in the stochastic process driving fundamentals a key implication is that seeming speculative attacks may be triggered by market perceptions that macroeconomic policy has switched say from tight to loose this fundamental based explanation for large exchange rate changes accompanied by no discernible contemporaneous change in the fundamental is an alternative to theories based on self fulfilling expectations without relying on intra marginal intervention this model is better able to reproduce empirical exchange rate distributions with more mass at the center and less at the edges of the band

coordination of speculation abstract we extend the models of krugman journal of money credit and banking 11 1979 311 and flood and garber journal of international economics 17 1984 1 on balance of payments crises to a multi country setting such that coordination among speculators is important for a focal point to emerge the moment of successful coordination when the currency is devalued is shown to depend on initial beliefs the degree of imperfect communication the rate of domestic credit creation and the number of countries that have overvalued currencies contagion arises naturally in our framework subsequent speculative attacks occur faster and faster and communication among speculators results in fluctuating stocks of reserves prior to the attack

a viable gold standard requires flexible monetary and fiscal policy national domestic credit expansion dce policies which offset the effect of money demand shocks on international gold reserves the gold standard collapses with certainty in finite time through a speculative selling attack against one of the currencies various policies for postponing a collapse are considered when a responsive dce policy eliminates the danger of a run on a country s reserves the exogenous shocks disturbing the system which previously were reflected in reserve flows now show up in the behaviour of the public debt unless the primary non interest government deficit is permitted to respond to these shocks the public debt is likely to rise or fall to unsustainable levels for the idealized gold standard analysed in the paper viability can be achieved only through the active and flexible use of monetary and fiscal policy

the lifetime of a unilateral target zone some extended results abstract in dumas and svensson journal of international economics 36 1994 467 the lifetime of a krugman quarterly journal of economics 106 1991 669 682 type target zone model is found to be extremely long this paper shows that the lifetime of the identical target zone regime can be much lower when real disturbances occur in particular the mean lifetime is found to be very low when real disturbances occur and the real exchange rate elasticity of the demand for domestic goods is very low it is also shown that allowing for monetary disturbances to have real effects has very little effect on the lifetime the results indicate the conditions under which real disturbances might trigger currency crises

capital controls and foreign exchange market crises in the ems abstract it is widely held that capital controls are necessary to prevent foreign exchange market crises in a fixed but adjustable exchange rate system like the ems it was therefore argued that capital market liberalization which came in july 1990 might lead to recurrent crises in the ems events since july 1990 have shown that capital controls were not necessary for the stability of the ems this paper shows that even with capital controls the system might enter turbulent periods and might experience a self fulfilling balance of payments crisis if the authorities are perceived to dislike high domestic interest rates a crisis can then be triggered by any small shock if the authorities are not willing to raise domestic interest rates sufficiently to defend the exchange rate

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

product and process innovation in the product life cycle estimates for u s manufacturing industries many theoretical analyses of international trade focus on the effects and endogenous determination of product innovation technology transfer and product obsolescence despite these theoretical innovations few direct tests of the empirical power of product cycle models have been conducted although a number of studies have examined general relationships between trade and innovation usually measured by expenditures on research and development rd and then estimate these predictions using data for eleven two digit manufacturing industries in the united states during the period from 1974 to 1988 the distinction between productand process oriented technological change is important because it yields predictions that aid in assessing the power of the product cycle models most empirical studies aggregate productand process oriented technological change with the notable exceptions of the studies of productivity growth by link 22 and terlecky 31

foreign exchange futures prices under fixed exchange rates abstract this paper develops three models for the determination of foreign exchange futures prices under fixed exchange rates and expectations of devaluation these models show that certain characteristics of futures prices behavior that have been used as proof of inefficiency may be present even if the market is efficient they also have several implications that are consistent with the observed behavior of mexican pesos futures prices

the timing of exchange rate collapse abstract recent episodes of exchange rate collapse have renewed interest in models of speculative attacks these episodes have been considered by some observers to be inconsistent with fundamentals models of attack since there was no prolonged period of policy misalignment and declining reserves as required by such models this paper develops a fundamentals model in which collapse is instantaneous at the time of unexpected policy change and or a change in the expectations of future policy even for a reserve abundant country

time consistency of optimal monetary and fiscal policy in a small open economy abstract this paper characterizes conditions under which optimal monetary and fiscal policy is time consistent in a stylized small open economy with a flexible foreign exchange rate regime it shows that these conditions depend on the way in which leisure is assumed to enter preferences and or on the process which productivity is assumed to follow this paper further argues that these conditions may fail to be sufficient if the small open economy implements a fixed foreign exchange rate regime thus a credible fixed exchange rate regime does not necessarily help render optimal policy time consistent

moving up or moving out a unified theory of r d fdi and trade abstract this paper introduces industrial heterogeneity in r d productivity into the quality ladder model of the north south trade to study how firms choices made between r d and foreign direct investment fdi vary across industries and how such choices consequently determine the evolution of comparative advantage and trade it shows that trade reveals product cycle dynamics in medium tech industries but remains static in others high tech industries experience continued innovation in the north with no migration of product lines medium and low tech industries migrate south via fdi to exploit low production costs with the south then replacing the north as the dominant exporter however medium tech industry production eventually shifts back to the north when superior products are marketed by northern innovators making the end of one complete product cycle and the start of the next because of marginal r d productivity the relocated low tech industries are not presented with the option of moving up and thus stagnate

crises and prices information aggregation multiplicity and volatility crises are volatile times when endogenous sources of information are closely monitored we study the role of information in crises by introducing a financial market in a coordination game with imperfect information the asset price aggregates dispersed private information acting as a public noisy signal in contrast to the case with exogenous information our main result is that uniqueness may not obtain as a perturbation from perfect information multiplicity is ensured with small noise in addition we show that a multiplicity may emerge in the financial price itself b less noise may contribute toward nonfundamental volatility even when the equilibrium is unique and c similar results obtain for a model where individuals observe one another s actions highlighting the importance of endogenous information more generally

prospective deficits and the asian currency crisis this paper argues that a principal cause of the 1997 asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems the expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in asia we articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises we present empirical evidence in support of the key assumptions underlying our interpretation of the crisis