rethinking the effects of financial globalization during the last few decades many emerging markets lifted restrictions on cross border nan cial transactions in this paper we present a simple model that can account for the observed eects of nancial globalization the model emphasizes the role of imperfect enforcement of domestic debts and the interactions between domestic and foreign debts financial globaliza tion can lead to a variety of outcomes i domestic capital ight and ambiguous eects on net capital ows investment and growth ii capital in ows and higher investment and growth or iii volatile capital ows and unstable domestic nancial markets the model shows how the eects of nancial globalization depend on the level of development productivity domestic

hedging sudden stops and precautionary contractions abstract even well managed emerging market economies are exposed to significant external risk the bulk of which is financial at a moment s notice these economies may be required to reverse the capital inflows that have supported the preceding boom while capital flows crises are sudden nonlinear events sudden stops their likelihood fluctuates over time the question we address in the paper is how should a country react to these fluctuations depending on the hedging possibilities the country faces the options range from pure self insurance to hedging the sudden stop jump itself in between there is the more likely possibility to hedge the smoother fluctuations in the likelihood of sudden stops the main contribution of the paper is to provide an analytically and empirically tractable model that allows us to characterize and quantify optimal contingent liability management in a variety of scenarios we show with a concrete example that the gains from contingent liability management can easily exceed the equivalent of cutting a country s external liabilities by 10 of gdp

reputation in dynamic games abstract we analyze reputation in a game between a large player and a continuum of long lived small players in which state variables affect players payoffs the large player s type is private information we give conditions under which in every nash equilibrium a very patient large player will get almost the largest payoff consistent with the small players choosing a best response in a large finite truncation of the game while our results apply to the time inconsistency problem of optimal government policy we show that for the durable goods monopoly reputation may fail to improve the monopolist s payoff journal of economic literatureclassification numbers c72 c73

perfect equilibria in a trade liberalization game the credibility of temporary protection is examined in a simple infinite horizon perfect information game of timing in which the domestic government uses the threat of future liberalization to induce the domestic firm to invest all pure strategy subgame perfect equilibria are cyclical and surprisingly one of them implements optimal temporary protection however this equilibrium fails to pass another credibility criterion called renegotiation proof the game has a unique stationary subgame perfect equilibrium in mixed strategies copyright 1990 by american economic association

credible public policy abstract credible public policy is defined in a way that incorporates competitive equilibrium behavior for households and subgame perfect nash equilibrium behavior for the government it is shown that the set of all equilibrium outcome paths for credible policies can be constructed by using arguments analogous to those of abreu 1988 for repeated games the results are then extended to systems with state variables simple models of monetary policy and capital taxation are studied by way of example

debt maturity and the international financial architecture this paper presents a theory of the maturity of international sovereign debt and derives its implications for the reform of the international financial architecture the analysis is based on a model in which the need to roll over external debt disciplines the policies of debtor countries but makes them vulnerable to unwarranted debt crises due to bad shocks the paper presents a welfare analysis of several measures that have been discussed in recent debates such as international lending in last resort or the establishment of a mechanism for suspending payments on the external debt of crisis countries jel f34 o19

twin dollarization and exchange rate policy abstract this paper develops a small open economy general equilibrium model with nominal rigidities to study twin dollarization in east asian economies a phenomenon where firms borrow in us dollars and also set export prices in us dollars in this model we endogenize both the currency of liability denomination and the currency of export pricing we show that a key factor that affects firms dollarization decisions is exchange rate policy twin dollarization is an optimal strategy for all firms when exchange rate flexibility is limited which implies that a fixed exchange rate regime may lead to an equilibrium with twin dollarization furthermore we find that twin dollarization can reduce the welfare loss caused by the fixed exchange rate regime as it helps to cushion the economy against domestic nominal risk

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 tragedy of the commons and economic growth why does capital flow from poor to rich countries we analyze a differential game in which all interest groups have access to a common capital stock we show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons we use this model to analyze capital flight in many poor countries property rights are not well defined since safe bank accounts in rich countries the inferior technology are available to citizens of these countries they engage in capital flight we show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

capital markets and the exchange rate with special reference to the dollarization debate in latin america the paper reviews the main challenges faced by policymakers in emerging market economies em in light of recent financial crises and taking into account salient factors like the existence of partial dollarization imperfect credibility weak financial systems and contagion the standard theory of optimal currency areas is discussed and criticized for omitting the above factors when these factors are taken into account an extreme foreign exchange regime like dollarization is shown to become much more attractive the paper discusses the pros and cons of dollarization and among other things shows that the lack of a lender of last resort is not necessarily a major drawback in em the paper also discusses inflation targeting it in a formal model it is shown that it could be subject to credibility problems similar to those found in exchange rate based stabilization programs

opportunism corruption and the multinational firm s mode of entry abstract the paper develops a theoretical approach to the boundaries of the multi national firm in the context of institutional constraints in host countries focusing especially on corruption the model incorporates two types of corruption petty bureaucratic corruption and high level political corruption the model predicts that in the absence of corruption multinational firms will prefer fdi internal expansion with strong control rights to debt arm s length expansion with loose control rights the weaker the host country s ability to commit however both types of corruption shift the trade off marginally toward debt cross country panel empirical evidence supports these conclusions corruption has a second order marginal effect and matters mostly through its interaction with political risk

incentive problems and the pattern of international risk sharing abstract this paper analyzes the implications of moral hazard and a lack of contract enforcement for risk sharing across countries and regions we demonstrate that both incentive problems can considerably restrict efficient risk sharing however we show that the cross sectional risk sharing component is much more affected than the intertemporal component we argue that this may help to explain several stylized facts of international risk sharing such as the low degree of insurance against permanent shocks

the value of trade agreements in the presence of political pressures an argument often heard in favor of trade agreements is that by committing to free trade a government can credibly distance itself from domestic lobbies but several existing models of endogenous protection suggest that governments have no interest in foreclosing interest group pressures since governments derive rents from the political process we develop a small country model in which factors are sector specific in the short run but mobile in the long run we show that in this setting a government may be worse off in the political equilibrium than under commitment to free trade and hence it may value a trade agreement

policy rule nash equilibria we study how different types of instrument rules affect the outcome of a monetary policy game between the central bank and the private sector policy rules can be independent of output and a shock functions of the shock or functions of output we rank the nash equilibria generated by different types of policy rules according to the central bank s ex ante expected loss if both players can condition on output then the following is true no equilibrium exists if the central bank cares much about output stability and little about price stability and infinitely many equilibria exist otherwise

money is an experience good competition and trust in the private provision of money the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money is studied with commitment trust is automatically achieved and competition ensures efficiency without commitment competition plays no role trust does play a role but requires a bound on efficiency stationary inflation must be non negative and therefore the friedman rule cannot be achieved the quality of money can be observed only after its purchasing capacity is realized in this sense money is an experience good

north south lending and endogenous domestic capital market inefficiencies abstract we develop an open economy model of intertemporal trade under asymmetric information capital market imperfections are endogenous and depend on a country s stage of economic development relative to the perfect information benchmark north south capital flows are dampened and possibly reversed and world interest rates are lower whereas riskless rates are equalized across borders the domestic loan rate is higher in poorer countries the model can be applied to a number of policy issues including the debt overhang problem the indexation of foreign public debts and the effect of income distribution on growth

bond markets initiation and tax revenue mobilization in developing countries we analyze the relationship between the introduction of a sovereign bond market bm and tax revenue mobilization behavior using a large sample of 119 developing countries propensity scores matching estimations reveal that bm participation significantly fosters domestic tax revenue mobilization moreover we find that this favorable effect is sensitive to bm countries characteristics namely the stance of monetary and fiscal policies the exchange rate regime the level of economic development and the degree of financial openness and financial development finally our results show that bm participation fosters internal taxes and reduces their instability compared to international trade taxes these findings highlight the strength of bm in promoting structural reforms in developing countries through encouraging them to increase their tax effort and even by contributing to some extent to the fiscal transition process

learning under fear of floating in recent years a large fraction of economies overcame the fear of floating we study a model that describes the policy of a central bank uncertain about whether currency depreciations cause output to expand textbook model or contract balance sheet model we conclude that the movement away from fear of floating may not be explained by bayesian or robust policies when the private sector anticipates the central bank s policy and endogenously determines the model central banks may fall in a learning trap an increase in financial volatility provides an escape to such trap that replicates patterns in the data

banking panics and policy responses we study how banking panics unfold in av ersion of the diamond and dybvig 1983 model with limited commitment as is well known the banking authority could eliminate the possibility of a run on the banking system by committing to suspend payments to depositors if a run were to start once a run is under way however the banking authority will choose to reschedule rather than suspend payments we construct equilibria in which depositors run on the banking system with positive probability and we show that an equilibrium bank run in this setting is necessarily partial with only some depositors participating we also show that a run naturally occurs in waves with each wave of withdrawals prompting a further policy response from the banking authority the number of waves that occur in equilibrium is stochastic and can be arbitrarily large

regulating capital flows to emerging markets an externality view abstract we show that capital flows to emerging market economies create externalities that differ by an order of magnitude depending on the state contingent payoff profile of the flows those with pro cyclical payoffs such as foreign currency debt generate substantial negative pecuniary externalities because they lead to large repayments and contractionary exchange rate depreciations during financial crises conversely capital flows with an insurance component such as fdi or equity are largely benign we construct an externality pricing kernel and use sufficient statistics and dsge model simulations to quantify the externalities that materialized during past financial crises we find stark differences depending on the payoff profile justifying taxes of up to 3 for dollar debt but close to zero for fdi these findings contrast with the existing literature which has suggested that policymakers should focus on reducing over borrowing rather than changing the composition of external liabilities

credible monetary policy in an infinite horizon model recursive approaches abstract this paper develops recursive methods to study optimal and time consistent policy in dynamic models we analyze a version of calvo s 1978 monetary model and show that its time consistent outcomes can be completely characterized as the largest fixed point of either of two operators recursive application of these operators provides a computing algorithm which always converges to the set of time consistent outcomes finally we obtain valuable information about the nature of time consistent outcomes it is discovered in particular that all such outcomes are markovian the methods obtained are intuitive and should be useful for many applications journal of economic literatureclassification numbers e61 e52 c61

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

complementarity between import competition and import promotion abstract growth in the import competing output is usually accompanied by a decline in the volume of imports of the product this result may change when we consider intermediate goods we develop a multi sector general equilibrium model to show that larger local output of an intermediate good may also imply larger imports of the same journal of economic literature classification numbers f1 f11 f13

does short term debt increase vulnerability to crisis evidence from the east asian financial crisis abstract does short term debt increase vulnerability to financial crisis or does short term debt reflect rather than cause the incipient crisis we study the role that short term debt played in the collapse of the east asian financial sector in 1997 1998 we alleviate concerns about the endogeneity of short term debt by using long term debt obligations that matured during the crisis we find that debt obligations issued at least three years before the crisis had a negative albeit sometimes insignificant effect on the probability of failure our results are consistent with the view that short term debt reflects rather than causes distress in financial institutions

does strengthening collective action clauses cacs help does improving creditor coordination by strengthening cacs lead to efficiency gains in the functioning of sovereign bond markets we address this question in a model featuring both debtor moral hazard and creditor coordination under incomplete information conditional on default we characterize the interim efficient cac threshold and show that strengthening cacs away from unanimity results in interim welfare gains however once the impact of strengthening cacs on debtor s incentives is taken into account we demonstrate the robust possibility of a conflict between ex ante and interim efficiency we calibrate our model to quantify such a welfare trade off and discuss the policy implications of our results

globalization and risk sharing we study the effects of globalization on risk sharing and welfare like the previous literature we assume that governments cannot commit to enforce the repayment of debts owed by their citizens unlike the previous literature we assume that governments cannot discriminate between domestic and foreign creditors when enforcing debt payments this creates novel interactions between domestic and international trade in assets i increases in domestic trade raise the benefits of enforcement and facilitate international trade in fact in our set up countries can obtain international risk sharing even in the absence of default penalties ii increases in foreign trade raise the costs of enforcement and hamper domestic trade as a result globalization may worsen domestic risk sharing and lower welfare we show how these effects depend on various characteristics of tradable goods and explore the roles of borrowing limits debt renegotiations and trade policy

reputation and time consistency recent work has shown that reputational arguments based on trigger strategies can sometimes be used to deal with the problem of time inconsistency in government policy this idea was exploited by robert barro and david gordon 1983 in a model of inflation and by v v chari and patrick kehoe 1988 in a model of capital taxation here it is shown that reputational arguments of this sort are widely applicable 2 a general policy model is developed based on an economy that is stationary over time contains identical households and has no endogenous state variables it is shown in general that the infinite horizon version of this model has equilibria in trigger strategies that yield outcomes strictly better than those attainable as equilibria in the one period model

the structure of public debt and the choice of exchange rate regime this paper explores the relationship between the denomination of public debt and the choice of exchange rate regime three types of debt nominal indexed and foreign and two regimes fixed and flexible are considered indexed debt is insulated against unexpected inflation the real domestic currency value of foreign debt is subject to valuation effects from real exchange rate shocks the fear of floating result that foreign debt makes pegging more attractive is shown to hold unambiguously only if the peg is fully credible if the peg lacks credibility a critical factor is the perceived likelihood of using the escape clause of a switch to a float which raises the costs of pegging foreign debt increases the temptation to resort to the escape clause so when a peg is not fully credible as is almost always the case in reality pegging tends to be less attractive than floating in the presence of foreign debt ce memoire explore le rapport entre la denomination de la dette publique et le choix d un regime de taux de change trois types de dettes sont considerees nominale indexee etrangere et deux types de regimes taux fixes et taux flexibles la dette indexee est immunisee contre l inflation imprevue la valeur reelle en monnaie domestique de la dette etrangere est sujette a des effets attribuables aux chocs dans les taux de change reels la peur de laisser flotter le taux de change aide a comprendre qu une dette etrangere rend le taux fixe plus attrayant mais ce resultat est sans ambiguite seulement si le taux fixe est pleinement credible si le taux fixe manque de credibilite un facteur critique est la perception de la probabilite qu on va utiliser l echappatoire du passage au taux flottant ce qui augmente les cots d un taux fixe la dette etrangere accroit la tentation d avoir recours a la clause echappatoire ce qui fait que quand un taux fixe n est pas pleinement credible comme c est a peu pres toujours le cas en realite un regime de taux de change fixe tend a tre moins attrayant qu un regime de taux de change flottants quand il y a dette etrangere

factor trade and goods trade world equilibria with trade in both goods and some factors are studied when international factor endowment differences are the cause of trade a generalized heckscher ohlin theorem is presented the goods trade patterns with and without factor trade are compared factor trade and goods trade tend to be substitutes complements if traded and non traded factors are cooperative non cooperative

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

inefficient foreign borrowing a dual and common agency perspective studying the implications of uncoordinated borrowing the paper first looks at whether and when countries borrow too much in the aggregate it then revisits the original sin debate analyzing whether and when equity portfolio investment international portfolio diversification domestic currency denomination and longer maturities enhance borrowing countries access to international lending the paper thereby relates a country s level and quality of access to international capital markets to a variety of institutional features such as the level of domestic savings their location the extent of control rights held by political authorities and the interests of dominant domestic political forces

persistence of dollarization after price stabilization credit contracts in developing countries are often denominated in foreign currencies even after many of these economies succeeded in controlling inflation this paper proposes a new interpretation of this apparent puzzle based on the demand for insurance against real shocks the fact that devaluations occur more frequently in adverse states of the world provides a motive for holding dollar assets this approach implies a complementarity between the optimal monetary policy and the currency denomination of contracts when a large proportion of liabilities is denominated in a foreign currency the optimal exchange rate volatility is low which reinforces the demand for dollar assets

poverty and economic development evidence for the brazilian states abstract in the present study our primary concern is to examine the effects of poverty on economic development across the brazilian states from 1980 to 2015 many studies assess the effects of economic growth and economic development on poverty incidence but there is almost no one trying to measure the impact of poverty prevalence on economic development the results of this paper indicate that poverty incidence is essential in the economic development of the brazilian states poorer brazilian states have lower income per worker even when controlling for investment in physical capital human capital stock and the effective depreciation of capital the results point to the variables measuring extreme poverty as having more influence on the economic development of the brazilian states in relation to the variables quantifying poverty

institutional investors and long term investment evidence from chile developing countries are trying to develop long term financial markets and institutional investors are expected to play a key role this paper uses unique evidence on the universe of institutional investors from the leading case of chile to study to what extent mutual funds pension funds and insurance companies hold and bid for long term instruments and which factors affect their choices the paper uses monthly asset level portfolios to show that despite the expectations mutual and pension funds invest mostly in short term assets relative to insurance companies the significant difference across maturity structures is not driven by the supply side of debt or tactical behavior instead it seems to be explained by manager incentives related to short run monitoring and the liability structure that combined with risk factors tilt portfolios toward short term instruments even when long term investing yields higher returns thus the expansion of large institutional investors does not necessarily imply longer term markets

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

can debt crises be self fulfilling abstract several papers argue that debt crises can be the result of self fulfilling expectations that no one will lend to a country triggering default and rationalizing the refusal to lend i show these coordination failures can be eliminated by a combination of state contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well this suggests that runs on the debt of a single borrower such as the government can be eliminated and that self fulfilling features are more plausible when externalities among many decentralized borrowers allow for economy wide debt runs to occur

uncertainty capital flows and maturity mismatch abstract this paper explores a how the financial uncertainty generated by volatile international capital flows interacts with maturity mismatch on the balance sheets of nonfinancial firms to increase the volatility of output investment and total factor productivity tfp in emerging market economies i build a model of a small open economy in which financial frictions force firms to fund long term projects with short term debt in response to changes in the level of uncertainty regarding the availability of foreign borrowing firms adjust their long term investment contributing to the volatility of investment and output as well as generating endogenous fluctuations in aggregate productivity using data from a panel of major emerging markets i show that the volatility of portfolio debt flows negatively affects output by dampening investment while the volatility of equity flows which do not generate maturity mismatch has no effect consistent with the mechanism in the model the negative impact of capital flow volatility is larger at low levels of financial development and in industries with longer time to build lags my estimates imply that shocks to capital flow volatility account for one fifth of the excess output volatility of the emerging markets in my sample relative to a set of small open advanced economies

fiscal increasing returns hysteresis real wages and unemployment european unemployment is widely regarded as a problem of excessive real wages this view as it is usually expressed carries the disturbing implication that there is a sharp conflict between the interests of those currently employed and the unemployed because it suggests that increases in employment will require reductions in the real wages of those currently employed the first part of this paper shows that increases in employment in europe are likely to be associated with rising real take home pay for workers because of fiscal increasing returns increases in employment and output will make possible reductions in taxes sufficiently large to offset any effects of diminishing returns to labor the second part of the paper considers alternative explanations for the failure of nominal wages to adjust so as to restore full employment and their implications for the efficacy of fiscal policies it concludes that under a variety of plausible conditions tax cuts would succeed in stimulating employment this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

cheating for the common good in a macroeconomic policy game abstract this paper presents a simple repeated game model of interaction between an optimizing government and the private sector two polar cases are considered a the private sector is represented by a single agent and b there is a continuum of heterogenous atomistic private agents in both cases the government starts each repetition by making a non binding announcement about its future actions the players have complete and perfect information with one exception the private agents do not know whether or not the government will act as announced thus each private agent i either behaves with probability i as if it trusted the announcement or plays with probability 1 i as a stackelberg leader after observing the reaction of the private sector the government implements the actual policy measures finally the private agent s update i as a function of the payoffs received we show that although the government s announcements are never respected acting as if they were true leads to an outcome that simultaneously improves the situation of the government and of those players that trust it compared to the standard equilibrium solutions an overwhelming majority of private agents very rapidly learns to behave as if the announcements were true the other agents also experience higher payoffs due to an herding effect the fact that the announcements are always reneged is crucial for the solution to be pareto improving these results are in stark contrast to the conclusions usually presented in the related economic literature

animal spirits investment and international capital movements abstract in the aftermath of the debt crisis developing countries are endeavoring to repatriate flight capital and to resume domestic private investment yet investment and the associated capital inflows continue to be disappointing and highly uneven over time in many cases this paper provides a model of investment and capital movements in and out of such countries central to the paper is the introduction of fiscal increasing returns to domestic capital into a standard dynamic optimizing model the resulting system may display multiple steady states and surprising dynamic behavior initial conditions and expectations both matter in selecting the equilibrium on which the economy converges for some initial conditions animal spirits can determine the course of investment and capital flows a limit cycle may occur around one of the welfare inferior equilibria along that cycle capital stocks and relative prices display endogenous fluctuations

capital inflows fiscal discretion and exchange rate policy many writers have argued for the benefits of a credible fixed exchange rate a hard peg as a commitment device in an open economy but historically fixed exchange rates have often been associated with large current account deficits and episodes of over borrowing this paper develops a model of capital inflows that are linked to the exchange rate regime because of endogenous fiscal policy the key message of the paper is that a hard peg is undesirable in the absence of commitment in fiscal policy in face of a credible fixed exchange rate the fiscal authority subsidizes capital inflows the economy will engage in inefficiently high international borrowing and in welfare terms may end up worse off than under capital market autarky to eliminate the incentive to subsidize borrowing the monetary authority must follow a flexible exchange rate rule in which capital inflows lead to exchange rate appreciation if fiscal policy must be financed by money creation rather than direct taxation then a fixed exchange rate rule may cause both over borrowing and a subsequent exchange rate crisis r 2005 elsevier b v all rights reserved

risky public domestic debt composition in emerging economies abstract this paper explains why public domestic debt composition in emerging economies can be risky namely in foreign currency with a short maturity or indexed it analyses empirically the determinants of these risk sources separately developing a new large dataset compiled from national sources for 33 emerging economies over 1994 2006 the paper finds that economic size the breadth of the domestic investor base inflation and fiscal soundness are all associated with risky public domestic debt compositions yet to an extent that varies considerably in terms of magnitude and significance across sources of risk only inflation impacts all types of risky debt underscoring the overarching importance of monetary credibility to make domestic debt compositions in emerging economies safer given local bond markets rapid development monitoring risky public domestic debt compositions in emerging economies becomes increasingly relevant to global financial stability

foreign lenders and the real sector we develop a theory of the interaction between the entry of lenders and the real sector the high liquidation skills of incumbent lenders render them too tough in terminating high risk return projects being foreign to the market newcomers have lower ability to liquidate than incumbents this makes them softer in liquidating high risk return projects but renders their funding more costly we show that the entry of lenders and the share of high risk return projects can reinforce each other through firms liquidation values this interaction dampens the output impact of liquidity shocks hence financial liberalization can enhance stability

optimal cartel equilibria with imperfect monitoring abstract there exist optimal symmetric equilibria in the green porter model 4 8 having an elementary intertemporal structure such an equilibrium is described entirely by two subsets of price space and two quantities the only production levels used by firms in any contingency the central technique employed in the analysis is the reduction of the repeated game to a family of static games

currency mismatches and monetary policy a tale of two equilibria we develop a model of a small economy whose residents choose whether to borrow in domestic or foreign currency the central bank in turn chooses fixed or flexible exchange rates taking the currency denomination of debts as given we characterize the simultaneous determination of portfolios and exchange rate regime both floating and fixed rates can occur as equilibrium outcomes fear of floating may emerge endogenously and in association with a currency mismatch in assets and liabilities if equilibria with both fixed rates and floating rates coexist the latter is pareto superior lessons for current de dollarization proposals are discussed

input substitution export pricing and exchange rate policy abstract this paper develops a small open economy model with sticky prices to show why a flexible exchange rate policy is not desirable in east asian emerging market economies we argue that weak input substitution between local labor and import intermediates in traded good production and extensive use of foreign currency in export pricing in these economies can help to explain this puzzle in the presence of these two trade features the adjustment role of the exchange rate is inhibited so even a flexible exchange rate cannot stabilize the real economy in face of external shocks instead due to the high exchange rate pass through exchange rate changes will lead to instability in domestic inflation as a result a flexible exchange rate regime becomes less desirable in a very limited parameter space a fixed exchange rate can be superior to monetary policy rules with high exchange rate flexibility such as non traded good price targeting in most cases however non traded good price targeting still delivers higher welfare

should fiscal policy be different in a non competitive framework abstract this paper studies if imperfections in the labor market justify a different fiscal policy we present a dynamic general equilibrium model with a ramsey planner deciding about public spending labor taxes and debt two different labor market setups are considered first we assume a competitive labor market and then we introduce a union with monopoly power both models reach the same conclusion as regards to the cyclical properties of the optimal policy it is not optimal to implement a countercyclical fiscal policy we also find that government spending should be larger under perfect competition these main results arise both under complete and incomplete markets for the debt

does the currency regime shape unhedged currency exposure abstract this paper examines how unhedged currency exposure of firms varies with changes in currency flexibility a sequence of four time periods with alternating high and low currency volatility in india provides a natural experiment in which changes in currency exposure of a panel of firms is measured and the moral hazard versus incomplete markets hypotheses tested we find that firms carried higher currency exposure in periods when the currency was less flexible our results support the moral hazard hypothesis that low currency flexibility encourages firms to hold unhedged exposure in response to implicit government guarantees

why do emerging economies borrow short term the authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long term debt they first present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders by issuing long term debt the government lowers the probability of a liquidity crisis transferring risk to bondholders in equilibrium this risk is reflected in a higher risk premium and borrowing cost therefore the government faces a tradeoff between safer long term borrowing and cheaper short term debt second the authors construct a new database of sovereign bond prices and issuance they show that emerging economies pay a positive term premium a higher risk premium on long term bonds than on short term bonds during crises the term premium increases with issuance shifting toward shorter maturities this suggests that changes in bondholders risk aversion are important to understand emerging market crises

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

sequential equilibria in a ramsey tax model this paper presents a full characterization of the equilibrium value set of a ramsey tax model more generally it develops a dynamic programming method for a class of policy games between the government and a continuum of households by selectively incorporating euler conditions into a strategic dynamic programming framework we wed two technologies that are usually considered competing alternatives resulting in a substantial simplification of the problem

presidential address debt and money financial constraints and sovereign finance economic analyses of corporate finance money and sovereign debt are largely considered separately i introduce a novel corporate finance framing of sovereign finance based on the analogy between fiat liabilities for sovereigns and equity for corporations the analysis focuses on financial constraints at the country level making explicit the trade offs involved in relying on domestic versus foreign currency debt to finance investments or government expenditures this framing provides new insights into issues ranging from the costs and benefits of inflation optimal foreign exchange reserves and sovereign debt restructuring

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

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

time inconsistency of protectionist programs protectionist trade policies have long been advocated as second best instruments to achieve certain national objectives in situations where there is a market imperfection in essence protection provides time and resources for firms to undertake cost reducing investments recently there has been an emergence of new arguments to justify the implementation of a national industrial policy to encourage investment and to ensure the competitiveness of targeted industries also at the theoretical level a new argument known as strategic trade policy has emerged according to this argument protectionism gives domestic firms strategic advantage against foreign firms to capture a greater share of export markets where rents are not competed away actually the performance of protectionist programs has been grim industries have not adapted and protection has had to be renewed again and again arguments justifying protection have avoided this issue by implicitly assuming that authorities can credibly precommit to eliminate protection this is a very strong assumption in fact government actions are not exogenous but they are rather the result of an optimization process or they are best responses to political pressures as stressed in the public choice literature 2 therefore if authorities capitulate to protectionist pressures in the present they are unlikely to resist them in the future in the event that the targeted firm would not have adapted the inability of authorities to precommit to the unconditional elimination of protection generates a trade off for the firm if during the program the firm does not invest sufficiently in cost

education quality and development accounting this paper measures the role of quality adjusted years of schooling in accounting for cross country output per worker differences while data on years of schooling are readily available data on education quality are not i use the returns to schooling of foreign educated immigrants in the u s to measure the education quality of their birth country immigrants from developed countries earn higher returns than do immigrants from developing countries i show how to incorporate this measure of education quality into an otherwise standard development accounting exercise the main result is that cross country differences in education quality are roughly as important as cross country differences in years of schooling in accounting for output per worker differences raising the total contribution of education from 10 to 20 of output per worker differences copyright 2012 oxford university press

the relative importance of total factor productivity and factors of production in income per worker evidence from the brazilian states income per worker gap in different regions of brazil is stunning to assess the relative importance of factor of production and total factor productivity tfp in those income per worker disparities development accounting exercises were carried out for the 1970 1980 1990 2000 and 2010 years in 1970 both types of capital stocks and tpf gaps were associated with the brazilian states lower relative income in comparison to sao paulo state over the decades up to the year 2000 the brazilian states have experienced a relevant capital deepening process which account for income per work catching up however the tfp gaps in relation to the reference state remain almost stable and their reduction is fundamental to the maintenance of the brazilians states income per worker catching up process the conclusions remain similar when the analysis is conducted by means of distinct proxies of physical capital when considering the human capital qualitative aspect we noticed a greater human capital gap among the brazilian states in relation to sao paulo state and as a consequence a reduction in the tfp relative gap

country solidarity in sovereign crises when will solidarity which emerges spontaneously from the fear of spillovers be reinforced through contracting the optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing a borrowing cap but no joint liability while joint liability augments total surplus the borrowing country cannot compensate the deep pocket guarantor by contrast the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability provided that shocks are sufficiently independent spillovers sufficiently large liquidity needs moderate and available sanctions sufficiently tough

international lending with moral hazard and risk of repudiation in this paper i examine the constrained optimal pattern of capital flows between a lender and a borrower in an environment in which there are two impediments to forming contracts the first impediment to contracting arises from the assumption that lenders cannot observe whether borrowers invest or consume borrowed funds this assumption leads to a moral hazard problem in investment the second impediment arises from the assumption that the borrower as a sovereign nation may choose to repudiate his debts the optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of national output occur this seemingly perverse capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment