devaluation investment and growth in ldcs abstract this paper examines the short and long run effects of devaluation in a model where following structuralist theories investment is treated as output of a composite good produced by combining domestic and imported components in fixed proportions introducing investment goods of this type alters a number of results most notably the marshall lerner condition is neither necessary nor sufficient for an expansionary outcome and under simple and plausible conditions a devaluation may worsen the payments balance

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

output inflation and stabilization in a small open economy evidence from mexico abstract we study the sources of fluctuation in output and inflation for mexico considering fiscal real money growth exchange rate and asset market disturbances which are identified using an estimable equilibrium model incorporating important features of high inflation economies changes in inflation are influenced by all shocks while output growth is explained by real fiscal and asset shocks the results lend strong support to the fiscal view of inflation and to a lesser degree support the balance of payments view we also find that higher inflation and higher budget deficits cause each other to spiral upward

price flexibility credit availability and economic fluctuations evidence from the united states 1894 1909 the importance of disturbances in financial markets for real economic activity and the positive association between price level and output movements typically are explained by appeal to a combination of nominal aggregate demand shocks particularly money supply shocks and rigid prices we argue that this view is inconsistent with evidence for short run responsiveness of prices and gold flows to nominal disturbances during the pre world war i gold standard era we offer an alternative explanation that connects financial markets and real activity through disturbances to the availability of credit this approach links comovements in prices and output through real effects in credit markets associated with price level shocks empirical analysis using monthly data for the pre world war i period supports the assumption of rapid price adjustment and the credit supply interpretation of the transmission of financial shocks disturbances to credit availability including price shocks contribute substantially to our empirical explanation of output fluctuations during this period

think locally act locally spillovers spillbacks and efficient decentralized policymaking we analyze models with interjurisdictional spillovers among heterogeneous jurisdictions such as co 2 emissions that affect the global environment each jurisdiction s emissions depend upon the local stock of capital which is interjurisdictionally mobile and subject to local taxation in important cases decentralized policymaking leads to efficient resource allocation even in the complete absence of corrective interventions by higher level governments or coordination of policy through coasian bargaining in particular even when the preferences and production technologies differ among the agents the decentralized system can result in globally efficient allocation

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

monetary policy and inflation under the crawling peg some evidence from vars for colombia abstract this paper investigates the effects of monetary policy under the crawling peg in colombia utilizing granger causality tests variance decompositions and impulse response functions from vars several alternative lag selection criteria are used to specify the lag structures of the vars variations in domestic credit appear to affect the balance of payments but not the exchange rate in colombia suggesting that the crawling peg has functioned more like a fixed than a flexible exchange rate the size of the balance of payments offset is relatively large but the models differ on its size domestic credit appears to have a weak effect on national output neither domestic credit nor the exchange rate play much of a role in explaining variation in inflation in colombia inflation appears to be primarily inertial and the result of demand shocks the results are consistent with the recent difficulties encountered in maintaining monetary targets in colombia and the persistence of inflation under contractionary monetary policy

changes in economic instability in 19th century america in contrast to the twentieth century over the nineteenth century economic fluctuations became increasingly severe this paper uses a structural vector autoregression estimated on ante and postbellum data to distinguish the influences of changes in the nature or magnitude of the disturbances from those of changes in the response of the system to shocks i e changes in structure in contributing to this increased economic instability the increased cyclical severity in the postbellum period is found to have been the result of greater sensitivity to monetary disturbances rather than of larger or more volatile shocks copyright 1993 by american economic association

optimal wage bargains recent attempts to provide a theoretical framework for macroeconomics have focused on the nature of wage employment agreements between firms and workers workers are in general unable to purchase insurance against future income fluctuations on grounds of for example moral hazard and consequently firms may find it profitable to offer workers a contract that provides them with partial insurance as well as employment compensation the seminal papers are those of azariadis 1975 and baily 1974 henceforth a b and a useful survey is provided by azariadis 1981 in their model hiring decisions must be made before uncertainty about product market conditions is resolved if firms are risk neutral and severance payments to the unemployed are disallowed then the optimal contract entails a state invariant real wage and the possibility of ex post involuntary unemployment while this model provides important insights it has been criticized on a number of grounds first akerlof and miyazaki 1980 and pissarides 1981 have pointed out that unemployment can occur in the simple a b model only when the marginal revenue product of labour falls below the reservation wage so that unemployment would also occur in a walrasian model and that in general the level of unemployment will be less than would be experienced in spot markets although it does provide a clue to the involuntary nature of that unemployment second the ad hoc exclusion of payments by the firm to the unemployed can be criticized if these are allowed then the optimal contract involves a topping up of the reservation wage to provide complete income rather than wage stabilization and the ex post efficient level of employment will be sustained these criticisms have prompted a number of authors to examine the implications of assuming asymmetric information about the state of nature an early example of this literature is provided by calvo and phelps 1977 who note that under an a b contract because there is a tendency to overemployment in bad states there will be an incentive for firms to misrepresent the state of nature and lay off more workers than previously agreed but that this incentive may be attenuated by making the wage schedule contingent on the level of employment that is assumed to be observed by workers the properties of these contracts usually depend on the precise assumptions of the model however in some versions unemployment may be greater than would occur in the walrasian model hart 1983 for instance considers a model in which severance payments are allowed but firms as well as workers are risk averse then the optimal contract will involve lower wages in bad states of nature in order to spread risk but the only way this information can be conveyed to workers is by lowering the level of employment the papers by grossman and hart 1981 and by azariadis chari green and kahn and grossman and hart in the symposium in the quarterly journal of economics

employment with asymmetric information in an economy without informational and other distortions entrepreneurs and workers can write labor contracts that support a pareto optimal allocation of resources this paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers asymmetric information generally results in a suboptimal allocation of both risk and worker effort in particular if consumption and leisure are perfect substitutes employment will be less than fully pareto optimal in all but the most favorable states of nature

a traditional interpretation of macroeconomic fluctuations under the traditional interpretation of macroeconomic fluctuations aggregate demand shocks move output and prices in the same direction while aggregate supply shocks move output and prices in opposite directions this paper examines the joint behavior of u s output unemployment prices wages and nominal money and asks whether it is consistent with this interpretation the answer is a qualified yes

permanent income liquidity and expenditure on automobiles evidence from panel data several recent papers have tested the permanent income cum rational expectations hypothesis using data on nondurable or semidurable consumption we show how this approach can be extended to the case of durables an application to panel data on automobile expenditures reveals no evidence against the permanent income hypothesis this result is unchanged in subsamples segregated by family holdings of liquid assets

devaluation a critical appraisal of imf s policy prescriptions it is by now well understood that the use of the extended facility of the fund or approval for standby loans involve the undertaking of comprehensive programs of adjustment that include policies required to correct structural imbalances even after the fund s internal review of its guidelines on conditionality in march 1979 approval of standby agreements almost always requires severe tightening of expenditures through contractionary fiscal and monetary policy measures such as the imposition of ceilings on net government borrowing and or net domestic assets of the central bank or an upward adjustment of nominal interest rates in those cases where rates are fixed by the government approval also involves an understanding with the fund on exchange rate policy and exchange rate arrangements the understanding usually includes a substantial devaluation of the currency devaluation thus becomes part of a restrictive policy package which aims at improving the balance of payments of the country and its foreign exchange reserve position the advocacy of the same short run demand oriented policy package in different countries at different times has created the belief that underlying the policy prescriptions there exists a uniform imf line of thought and more importantly for our purposes here a consistent and uniform analytical model a cursory review of recent documents and mission reports however reveals that often the same policy prescriptions are based on different analytical arguments some justified and some not that cast some doubt on the widespread acceptance within the imf of a particular theoretical structure as a guideline for policy thus by 1982 as theoretical advances in macroeconomics and international finance have cast substantial doubt on the empirical if not theoretical validity of a simplistic monetary approach to the balance of payments the analytical arguments that are used to sustain the traditional policy line have become by necessity murkier and more cumbersome this is nowhere more clear than in the analysis of exchange rate policy which is the focus of this short paper the use of exchange rate adjustment as an active policy tool is critically analyzed in the following in terms of its effectiveness as a stabilization policy tool and as a substitute for tax or redistribution policy

are devaluations contractionary in mena countries currency depreciation reduces aggregate supply by raising cost of imported inputs and increases aggregate demand by increasing its net export component depending on the relative strength of the two effects depreciation could be expansionary or contractionary we employ the bounds testing approach to cointegration and error correction modelling to evaluate the effects of exchange rate depreciation on output growth both in the short and in the long run across a sample of mena countries exchange rate fluctuations are found to be important to fluctuations in real output growth in the short run anticipated exchange rate depreciation may induce long run expansionary or contractionary effects on output supply consistent with theory s predictions the expansionary effect of unanticipated depreciation is only transitory on output growth nonetheless unanticipated depreciation is found to have a contractionary effect on output growth in the long run via an increase in the cost of imported inputs

assessing the impact of nigeria s naira depreciation on output and inflation empirical evidence in support of the argument that keeping real exchange rate persistently devalued may lead to a permanent higher level of inflation have been provided kamin 1985 calvo et al 1994 however probably because of the relatively recent origin of serious exchange rate depreciation in sub saharan africa countries especially nigeria when compared with other regions e g latin america and asia not many studies have been reported on the subject the existing studies on effect of persistent exchange rate depreciation in nigeria are based on either regression or simulation approach rather than var approach this present study intends to fill these gaps by not only focusing the study on nigeria but also adopting restricted vector autoregressive model thereby providing basis for comparison with existing results obtained for other countries this abstract was borrowed from another version of this item

on the effect of devaluation during stabilization programs in ldcs this paper is a cross section study of the effect of real devaluations on capacity utilization during stabilization programs in ldcs it finds that such devaluations had a significant negative effect on output as predicted in many recent papers this was not because devaluation caused a rise in aggregate saving but more because of a sharp contraction in investment external factors such as terms of trade and the capacity to import had a significant positive impact while monetary and fiscal policy played only a minor role copyright 1992 by mit press

does devaluation cause stagflation the traditional view that devaluation tends to increase domestic real income and output has been challenged in recent years on the grounds that trade flows including factor imports are relatively insensitive to exchange rate changes especially in developing countries this paper presents a simple macro economic model in which devaluation influences real income and output both through the cost of imported inputs on the supply side of the economy and through exports imports and expenditures on the demand side statistical estimates of the structural parameters of the model for a group of ten industrial and developing countries are used to show that the demand effects dominate the cost effects in most cases thus supporting the traditional view that devaluation has positive real effects in these countries in the short to medium run est ce que la devaluation engendre la stagflation le point de vue conventionnel veut que la devaluation tende a accroitre le niveau du revenu et de la production domestiques c est un point de vue qui a ete remis en question ces dernieres annees parce que dit on les flux de commerce international y compris les flux d importation de facteurs de production semblent relativement insensibles aux changements dans le taux de change ce memoire developpe un modele macro economique simple dans lequel la devaluation influence le niveau de revenu et de production en termes reels via le co ut des facteurs de production importes du cote de l offre et via les exportations les importations et les niveaux de depenses du c6te de la demande les auteurs utilisent la calibration statistique des parametres structurels du modele pour un groupe de dix pays industrialises et en voie de developpement pour montrer que les effets du cot6 de la demande dominent les effets de cofuts dans la plupart des cas voila qui supporte le point de vue traditionnel qui veut que la devaluation ait un impact positif reel dans les pays devaluateurs a court et a moyen tenne

exchange rate management and stabilization policies in developing countries abstract we outline three channels via which a devaluation has a direct contractionaly impact on the aggregate supply side of the economy local currency costs of intermediate imports wage indexing in the presence of food imports and reduced volume of real credit to firms contractionary effects via the supply side are more damaging than krugman taylor effects via aggregate demand since a cut in aggregate supply leads to upward pressure on inflation while a cut in aggregate demand tends to abate inflation upward pressure on inflation may over time threaten the increase in competitiveness a nominal devaluation also intends to achieve we also discuss the implications of a substantial foreign debt we demonstrate that a successful devaluation raises the real in terms of domestic goods debt service burden causing a krugman taylor like contractionary effect on aggregate demand we then analyse the effects of a preannounced slowdown of the rate of depreciation our results of course do not imply that a devaluation should never be considered they do suggest however that a devaluation is likely to be an ineffective tool for demand management since it may cut aggregate supply as much or more in the short run

effects of usd euro parity on a small open economy evidence from turkey this study assesses the effect of usd euro parity on a small open economy where exports are predominantly denominated in euros and imports are denominated in usd empirical evidence from turkey suggests that a positive change in the usd value of the euro appreciates the local currency decreases inflation and increases output

stagflationary effects of monetary stabilization policies a quantitative analysis of south korea this paper presents a macro model of the korean economy that focuses on short run macro economic adjustment and more in particular on the transmission channels of monetary policy between the financial and the real sector of the economy in addition to the usual link between monetary policy and aggregate demand via investment the link between monetary policy and the supply side of the economy via the financing of working capital with borrowed funds is incorporated this link can potentially reverse the short run impact of tight money on inflation and aggregate the impact on output both export prices and domestic prices show a significant sensitivity to cost of financing working capital this credit supply side link gives a stagflationary bias to restrictive credit policies the empirical relevance of this phenomenon is strongly supported by the simulation results derived with the model structurally section 2 of the paper focuses on the real sector part of the model section 3 discusses the financial sector in section 4 different monetary stabilization packages are simulated using the model presented in sections 2 and 3 and alternative policy measures are discussed the simulation runs show strong short run stagflationary effects of tight money policies

credit policy inflation and growth in a financially repressed economy this report analyzes credit policy in an open economy macro model incorporating stylized facts about the financial sector of ldc s absence of security markets existence of a curbmarket these facts are incorporated in the financial sector part of a keynes wicksell growth model it focuses on a transmission channel of monetary policy into the supply side of the economy via the cost of working capital it shows that ignoring this effect when analysing restrictive credit policy leads to underestimates of inflation and overestimation of output and current account improvements it is shown that a credit crunch can be stagflationary in the short run a cut in the real stock of credit is shown to lead to a lower steady state capital stock