a seniority arrangement for sovereign debt a sovereign s inability to commit to a course of action regarding future borrowing and default behavior makes long term debt costly the problem of debt dilution one mechanism to mitigate this problem is the inclusion of a seniority clause in debt contracts in the event of default creditors are to be paid off in the order in which they lent the absolute priority or first in time rule in this paper we propose a modification of the absolute priority rule suited to sovereign debts contracts and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default jel e32 e44 f34 g15 h63 o16 o19

the quality effect does financial liberalization improve the allocation of capital abstract we document evidence of a quality effect of financial liberalization on allocative efficiency as measured by dispersion in tobin s q across firms we predict that financial liberalization by equalizing access to credit is associated with reduced variation in expected marginal returns we test this prediction using a new financial liberalization index and firm level data for five emerging markets india jordan korea malaysia and thailand we find robust evidence that financial liberalization rather than financial deepening is associated with improved allocative efficiency

endogenous borrowing constraints and stagnation in latin america latin america has had striking changes in economic performance over time none more striking than consumption consumption per capita in the year 2004 was roughly the same as it was in 1980 latin america is also an open economic region with several international debt crises this paper studies the time path of consumption using a small open economy real business cycle model with limited commitment i compare the distortions to the planner s pareto weights and investment that are generated endogenously by the model to those that can be recovered from an international extension of a business cycle accounting exercise in the spirit of chari kehoe and mcgrattan 2007 i find that the limited commitment model does a good job at explaining the behavior of latin american consumption and that the endogenous distortions to the planner s pareto weights are very similar to those recovered from the accounting exercise

the formal divide customary rights and the allocation of credit to agriculture in tanzania abstractit is generally held that one mechanism to enable inclusive growth in tanzania is enabling farmers to access credit to raise productivity and incomes the formalisation of property rights in tanzania is being undertaken by a multiplicity of actors at great expense to donors individuals and the government while there have been a variety of different justifications for allocating certificates of customary rights of occupancy ccros to farmers in tanzania perhaps the most prominent argument is that it will enable farmers to finally overcome the divide between informal customary rights and the formal banking sector ccros would provide the collateral that would induce banks to lend money to small scale farmers as part of a six year investigation in manyara mbeya and dodoma regions our research team evaluated the impact of formalisation on farmers access to credit the paper will present the results while pointing to the continuing institutional and market imperfections that perpetuate the fo

financial markets and development my views on this subject have been greatly affected both by the experience of developing countries during the past quarter century and by the major shift evolutionary if not revolutionary in the economists paradigm over that period we have seen that capital accumulation is not enough even the extremely high rates of savings of many of the socialist economies have not managed to compensate for their lack of ability in allocating capital and these countries have for the most part not fared well but extreme free market solutions have fared little better perhaps best illustrated by the experience of chile true believers in the doctrines of the left and the right have this in common they both claim that if the patient had only followed the doctor s orders more precisely the medicine would have worked

the informational content of initial public offerings the ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once a model is developed in which there is price risk from holding equity between periods when the uncertainty is small there must be pooling in the first period when uncertainty is large the pooling equilibria dominate the separating equilibrium the size of an entrepreneur s initial public offering of equity can be informative this point was made in leland and pyle 1977 and stiglitz 1982 an entrepreneur with a good project can signal the value of the project by his or her willingness to retain equity an implicit assumption of this analysis is that the entrepreneur has only one opportunity to sell equity the assumption of a single sale is important since once the entrepreneur has signalled his or her project value by retaining equity investors should be willing to purchase the remaining equity however if entrepreneurs with bad projects foresee this they too may wish to retain equity initially and render themselves indistinguishable from entrepreneurs with good projects the current paper develops a model with two trading periods to capture the impact of having repeat sales of equity there is a public offering in the first period then the entrepreneur can make an open market sale in the second period however there is exogenous price risk which makes it costly for the entrepreneur to wait to sell in this context the value of the entrepreneur s project may not be revealed in the first period retaining equity is not very costly when uncertainty is small and there will only be pooling equilibria in this case in such a situation no information is revealed in the first period when the level of uncertainty is great there does exist a separating equilibrium however the pooling equilibria pareto dominate the separating equilibrium throughout the analysis the focus will be on paretooptimal equilibria the idea that an informed agent can profitably trade over time has been examined in related contexts kyle 1985 looked at the optimal trading strategy for an insider whose sequence of purchases is hidden in the aggregate order flow in equilibrium the insider s information is not completely incorporated into the market price until the close of trading

computing multi period information constrained optima this paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi period including infinite period continuum agent unobservedeffort economy actual solutions are displayed illustrating cross sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time the optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full information economy and various restricted contracting regimes

the government financial system and large private enterprises in the economic development of south korea abstract the paper investigates the main characteristics of the government business relationship in south korea in the past three decades to find out how it may have contributed to south korea s economic development it proposes that the government and large private enterprises in south korea should be viewed as constituting an internal organization namely a quasi internal organization as such extensive intervention by the government with south korea s financial system can be viewed as an internal capital market and consequently it could have led to a more efficient allocation of credit than possible in a free market financial system it also argues that the quasi internal organization has made it possible for the government to efficiently implement its developmental policies it is however pointed out that for the quasi internal organization to be successful in accelerating the pace of economic development the country must have a political leadership committed to the goal of economic development and must adopt an outward oriented development policy

the scope and limits of financial liberalisation in developing countries a critical survey this article reviews the growing literature on financial reform in developing countries we draw both on the theoretical contributions outlining the case for and against liberalisation as well as on the experience of many developing countries with liberalisation we argue that the existence of market failures in financial markets hampers the liberalisation process and indeed suggests that the simple liberalising strategy envisaged in much of the literature is inappropriate we argue instead for an alternative strategy which integrates some aspects of liberalisation with the development of appropriate financial institutions designed to serve best the needs of the real economy

the great east asian capital flow reversal reasons responses and ramifications the exodus of foreign capital combined with the flight of domestic funds abroad caused massive depreciations especially against the us dollar of the indonesian rupiah thai baht malaysian ringgit philippines peso and south korean won the currencies of the economies hereafter termed the asian 5 it also caused dramatic stockmarket falls in the greater east asian region including hong kong and singapore at times in us terms the indonesian rupiah was worth only one fifth of its june 1997 value while the thai baht and korean won lost around half their former values the philippines peso and malaysian ringgit fell some 40 per cent below pre crisis values this paper briefly examines the build up and subsequent sharp reversal of international investment in east asia in the 1990s before addressing the international public policy issue of whether international capital flows considered too unpredictable volatile and destablising by many economists should again be restricted finally the paper suggests that the impact of the redirection of international investment on the world economy should generate alternative export opportunities in other advanced and emerging regions thus minimising the contractionary effect of the asian crisis on the world economy

quantifying the impacts of energy price reform on living expenses in saudi arabia abstract as part of vision 2030 saudi arabia has initiated a broad based energy reform programme aimed at gradually reducing its dependence on oil this paper assesses the impacts of energy price reforms on living expenses of various household groups in saudi arabia for this purpose the input output table combined with household expenditure data are used to model the impacts results show that the distributional impacts of energy price reforms are regressive with low income households experiencing a higher increase in living expenses compared to high income households the impacts are primarily instigated by rising prices of energy intensive products after decomposing the impacts into direct and indirect effects it was found that indirect effect is not only responsible for a considerable rise in household expenditure on energy intensive products but it is also distributionally regressive it is therefore vital for policymakers to review and fine tune the social protection system to protect poor households against reforms

the variable rate of growth effect in the life cycle saving model the rate of growth in real gnp g affects the aggregate saving rate positively in life cycle saving models this rate of growth effect is invariably estimated as the coefficient of g in the saving function we show that other determinants of the saving rate influence the rate of growth effect in other words the rate of growth effect is not constant specifically the real rate of return on financial assets and the population dependency ratio determine the timing of saving over the life cycle and hence alter the rate of growth effect the dependency ratio also has an effect on the saving rate which is independent of g because it together with the foreign saving rate determines the level of saving over the life cycle

equilibrium interest rates and financial liberalisation in developing countries it is a central argument of the financial repression literature that interest rates should be determined by the market to reflect the true cost of capital this article suggests that the notion of an equilibrium interest rate may be undefined since the rate required to balance financial markets differs from that required to equilibrate savings and investment thus liberalisation introduces an intrinsic instability into the financial system as a result of portfolio adjustment the article examines the chilean and korean experiences and concludes that a sustainable reform requires positive but low real interest rates and broad regulation of the financial system to ensure macroeconomic stability

how institutions create historically rooted trajectories of growth this paper is concerned with approaches to growth theory that argue for historically created institutionally rooted national development trajectories there are varied ways of organizing market economies and there is more than just one kind of capitalism the institutional approach begins with the observation that markets embedded in political and social institutions are the creation of government and politics indeed all economic interchange takes place within institutions and groups markets do not exist or operate apart from the rules and institutions that establish them and that structure how buying selling and the very organization of production takes place consequently there are multiple market capitalisms and in a global economy international competition among members must be understood as an interplay of these various national market systems focus is on the historically rooted national institutions which frame the choices of individuals and structure the terms on which issues such as agency problems and contract problems are confronted the approach proposed in this paper is a necessary complement to an institutionalism more familiar in economics this historical institutionalism frames problems and provides answers to puzzles that concern microeconomic based institutionalism the particular historical course of each nation s development creates a political economy with a distinctive institutional structure for governing the markets of labor land capital and goods the institutional structure induces particular kinds of corporate and government behavior by constraining and by z laying out a logic to the market and policy making process that is particular to that s political economy these typical strategies routine approaches to problems and shared o decision rules create predictable patterns in the way governments and companies go v about their business in a particular national political economy the paper then applies 1 these notions to the debate about national systems of innovation empirically there is evidence of distinct national technological trajectories the questions are why the j trajectories exist and why they have particular form national systems arguments need an institutional theory that would permit us to apply both evolutionary and new growth arguments about economic development to particular national cases

what do we know about carbon taxes an inquiry into their impacts on competitiveness and distribution of income abstract the kyoto protocol to the united nations framework convention on climate change unfccc has set legally binding emissions targets for a basket of six greenhouse gases and timetables for industrialised countries it has also incorporated three international flexibility mechanisms however the articles defining the flexibility mechanisms carry wording that their use must be supplemental to domestic actions this has led to the open debates on interpretations of these supplementarity provisions such debates ended at the resumed sixth conference of the parties cop to the unfccc held in bonn july 2001 and at the subsequent cop 7 in marrakesh november 2001 the final wording in the bonn agreement reaffirmed in the marrakesh accords at least indicates that domestic policies will have an important role to play in meeting annex b countries emissions commitments carbon taxes have long been advocated because of their cost effectiveness in achieving a given emissions reduction in this paper the main economic impacts of carbon taxes are assessed based on a review of empirical studies on existing carbon energy taxes it is concluded that competitive losses and distributive impacts are generally not significant and definitely less than often perceived however given the ultimate objective of the framework convention future carbon taxes could have higher rates than those already imposed and thus the resulting economic impacts could be more acute in this context it has been shown that how to use the generated fiscal revenues will be of fundamental importance in determining the final economic impacts of carbon taxes finally we briefly discuss carbon taxes in combination with other domestic and international instruments

the interest elasticity of savings in developing countries the existing evidence abstract this paper presents a critical analysis of some of the most recent empirical work on the interest elasticity of savings in developing economies supported by a set of empirical results the paper argues that a the real interest elasticity of savings is not easily detected using the existing empirical models which generally yield insignificant interest rate parameters in the seventies b the existing models suffer from serious defects that make if very difficult to interpret the estimated parameters

the macro impacts of korea s heavy industry drive re evaluated the korean heavy industry hci drive has been criticised for the misallocation of capital and for negative spillover effects on growth inflation the current account and debt however such criticism places too much blame on hci for the late 1970s economic deterioration and gives hci insufficient credit for the subsequent economic rebound korean hci was a catch up exercise which attracted cheap foreign capital to accelerate structural change nevertheless the mid 1970s decision to pursue hci as a big push was flawed since it did result in project bunching that strained implementation capacity despite the safeguards which korea built into its hci strategy

debt dilution and sovereign default risk we measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects we calibrate a baseline model with endogenous debt duration and default risk in which debt can be diluted using data from spain we find that debt dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt by almost 2 years eliminating dilution also increases consumption volatility but still produces welfare gains the debt covenants we study could help enforcing fiscal rules

financial restriction and the developmental state in east asia toward a more complex political economy recent financial crises in asia have renewed debates over the appropriate degree and scope of government intervention in financial markets governments in two countries affected by financial crises

sistema financeiro e desenvolvimento regional um estudo sobre o financiamento bancario da atividade industrial no brasil this paper aims in analyzing the interaction between the productive and financial economic spheres it discusses the characteristics of the brazilian financial system and examines the evolution of bank financing of the industrial activity by brazilian region stressing the importance of banking to development a principal component analysis confirms the existence of spatial correlation between financial and industrial variables and a panel data test for the brazilian states demonstrated the existence of different regional impacts of financial variables over the level of industrial employment by different sectors

financial liberalisation institutional transformation and credit allocation in developing countries the world bank and the internationalisation of banking the paper documents and analyses the world bank s promotion of foreign ownership of banking in developing countries in the wake of two decades of financial crises following exercises of orthodox financial reform the world bank has not only continued to push privatisation but now sees foreign banks as the missing component that will deal with the downside risks of financial liberalisation concerns that foreign banks might reduce small and medium enterprise sme loan access because of information problems are largely dismissed by the bank in fact the world bank argues for the very opposite the existence of foreign banks is likely to have the effect of pushing local banks into sme markets where they have a greater comparative advantage the question of access to credit for the private sector particularly the locally owned small and medium size enterprises is central to the issue of employment generation and poverty reduction in developing countries where the bulk of new jobs are typically created by these companies this article traces the development of the world bank s agenda on foreign ownership it critically assesses the arguments and empirical work underlying the world bank analysis and draws on alternative empirical testing and case studies to raise serious questions about the downside risks associated with the internationalisation of banking copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

the effect of financial liberalization on the efficiency of credit allocation some evidence from korea abstract this paper examines korea s recent experience with financial liberalization to find empirical evidence for the mckinnon shaw hypothesis regarding the effect of financial liberalization on the allocative efficiency of credit this involves analyzing changes in the variation of average borrowing costs across different sectors and industries using consolidated balance sheets and income statements from firms it demonstrates that there has been a substantial improvement in the efficiency of credit allocation since 1980 when the korean government started to implement various financial liberalization reforms

an evaluation of the impact of reducing energy subsidies on living expenses of households abstract a policy of subsidizing energy has been pursued in the islamic republic of iran to help the poor and to utilize the relative advantages of the country but it has been realized that energy subsidy has led to market distortion and welfare loss hence elimination of energy subsidy is considered as a crucial matter changes in energy policy are hindered by the uncertainty on the impact of reducing energy subsidy on the living expenses of population in the present article the distribution of resources through energy subsidy is evaluated and the direct and indirect effect of eliminating energy subsidies on the living expenses is estimated with the help of an analytical tool that has been developed it is then concluded that additional financial resources obtained from reduction of energy subsidies could be allocated for compensating the decrease in purchasing power of households the results of analysis reveal that more egalitarian distribution of resources and helping the poor could be achieved through implementation of a progressive policy of social security that is supported by financial resources available from elimination of energy subsidies

economics of energy subsidy reforms in bangladesh abstract as in many countries around the world subsidies to energy in bangladesh impose a significant fiscal burden with benefits that disproportionately accrue to high income households using a computable general equilibrium model this study investigates the economy wide impacts of the removal of direct subsidies in the electricity sector and indirect subsidy in natural gas in bangladesh the study finds that the removal of energy subsidies would be beneficial to the economy and would increase gdp the magnitude of the economic impact depends on how the budgetary savings from the removal of electricity subsidy and the increased revenues due to the removal of indirect subsidies to natural gas are reallocated to the economy recycling the savings or the new revenues to fund investment would benefit the country most followed by the case of utilizing them to fund cuts in income taxes and finally to fund cuts in indirect taxes while the reallocation of budgetary savings to households through lump sum transfers is found inferior to other recycling options considered it could be the preferred from the distributional perspective however further analysis is needed to confirm this

optimal maturity of government debt without state contingent bonds abstract this paper shows that state contingent debt can be synthetically constructed using non contingent debt of different maturities a main policy implication of this principle is that the ramsey allocation with complete markets can be sustained with non contingent debt only by properly managing its maturity structure the numerical experiments however suggest that this policy implication ought to be taken with care we find that the debt positions that sustain the ramsey allocation are very high on the order of a few hundred times total gdp for a very simple four state economy and increasing in the number of states in addition they are very sensitive to small variations in the parameters of the model

capital flows under moral hazard abstract i analyze a model with moral hazard and limited enforcement in a small open economy i find that when state contingent contracting is allowed adding the moral hazard friction improves the model s predictions along several dimensions first it justifies why non contingent debt is an optimal way to finance an emerging economy second it explains the limited consumption risk sharing and high volatile and counter cyclical interest rates third it generates realistic crisis like dynamics in which capital inflows are brought to a halt and interest rates sky rocket the model also has a strong internal propagation mechanism limited enforcement friction alone or together with moral hazard has nearly no effect on the model s performance i also construct a simple empirical test to distinguish between the two frictions and it favors moral hazard over limited enforcement friction

from miracle to cronyism explaining the great asian slump explanations are about the only thing not in short supply in the asian crisis for all their diversity they can be collapsed into two meta interpretations reflecting deeper differences in beliefs about rationality and markets those whose world view emphasizes rationality self adjusting markets and market failure as exceptional except when governments introduce distortions tend to see the crisis as the result of rational calculations in a situation of market distorting government interventions and institutional weaknesses in asian economies those whose world view stresses non rationality or a different kind of rationality than that assumed by neoclassical theory routine failure of well working markets and the need for government interventions to modify market outcomes tend to see it as the result of non rational calculations in under regulated financial markets both national and international

optimal security design and dynamic capital structure in a continuous time agency model we derive the optimal dynamic contract in a continuous time principal agent setting and implement it with a capital structure credit line long term debt and equity over which the agent controls the payout policy while the project s volatility and liquidation cost have little impact on the firm s total debt capacity they increase the use of credit versus debt leverage is nonstationary and declines with past profitability the firm may hold a compensating cash balance while borrowing at a higher rate through the credit line surprisingly the usual conflicts between debt and equity asset substitution strategic default need not arise in this paper we consider a dynamic contracting environment in which a riskneutral agent or entrepreneur with limited resources manages an investment activity while the investment is profitable it is also risky and in the short run it can generate arbitrarily large operating losses the agent will need outside financial support to cover such losses and continue the project the difficulty is that while the probability distribution of the cash flows is publicly known the agent may distort these cash flows by taking a hidden action that leads to a private benefit specifically the agent may i conceal and divert cash flows for his own consumption and or ii stop providing costly effort which would reduce the mean of the cash flows therefore from the perspective of the principal or investors that fund the project there is the concern that a low cash flow realization may be a result of the agent s actions rather than the project s fundamentals to provide the agent with appropriate incentives investors control the agent s wage and may also withdraw their financial support for the project and force its early termination we seek to characterize an optimal contract in this framework and relate it to the firm s choice of capital structure we develop a method to solve for the optimal contract given the incentive constraints in a continuous time setting and study the properties of the credit line debt and equity that implement the contract as in the discrete time model of demarzo and fishman 2003 the continuous time setting offers several peter m demarzo is from stanford university and yuliy sannikov is from u c berkeley we

informal financial markets under liberalization in four african countries abstract this paper presents survey evidence from four countries on how informal financial agents serve market niches that banks cannot readily reach their methodologies are effective in keeping down transaction costs and default risk relative to banks although informal agents exercise monopoly power in dualistic markets liberalization of repressive financial policies has had little effect on formal financial deepening while informal finance has continued to grow the paper concludes that informal financial institutions are an important vehicle for mobilizing household savings and financing small businesses and it recommends that informal finance be better integrated into financial development strategies

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

monetary and exchange rate policies for international financial stability a proposal w v ithout a common monetary standard the remarkable integration of western european north american and the industrialized asian economies in both commodity trade and financial flows is less efficient and becoming untenable dissatisfaction with wildly fluctuating relative currency values euphemistically called floating or flexible exchange rates is a prime cause of the resurgence in protectionism in 1986 87 the overvalued yen forced japanese industrialists to close factories retire workers and write off once valuable investments in plant and equipment this parallels what their american counterparts were forced to do between 1981 and 1985 when the dollar suddenly became overvalued similarly the paring down of the british manufacturing base was precipitated when the pound unexpectedly became a strong petrocurrency in 1979 81 in agriculture japan and european countries are determined to insulate their domestic prices of farm products from unsettling international influences including volatile fluctuations in the yen dollar or mark dollar exchange rates thus unless exchange stability is first achieved the american government s attempt to broaden the general agreement on tariffs and trade to encompass agriculture and services is likely to fail but what keeps the three major industrial blocs from developing a common monetary standard to prevent exchange rate fluctuations although many people

partisanship and the path to financial openness the effect of traditional left right economic preferences on countries international financial openness is more subtle than existing studies have recognized the authors investigate the role that partisan politics played in the liberalization of international financial markets within 12 western european democracies from 1960 to 1986 the authors find that right governments tended to be active liberalizers of the capital account they were more likely than left governments to enact liberalizations and liberalizations were especially likely when new right governments entered office left governments typically acquiesced to these changes although less likely to enact liberalizations they were no more likely to impose new restrictions the authors findings are consistent with studies that show how financial integration does not undermine welfare states but is still subject to partisan contention

south korean and taiwanese development and the new institutional economics the publication of books by both alice amsden and robert wade provide an opportune moment to reflect on the study of east asian development after an initial surge of interest beginning in the 1970s the field has reached a plateau and scholars recently have cast a wide net in searching for ways to extend the field in assessing the state of the art regarding the economic development of the east asian newly industrialized countries nics this review will treat three themes first i will argue that the focus on states versus markets is becoming stale and that much of the scholarly interest lies in the politics behind the economics second i argue that political scientists have underexplored the historical origins of korean and taiwanese capitalism and that such attention promises to strengthen both theories and explanations of development third i argue that the international system has been more important in promoting development in east asia than accounts in the first wave have recognized the purpose of this review is to assess the field reveal

efficient sovereign default in this article i show that the key aspects of sovereign debt crises can be rationalized as part of the efficient risk sharing arrangement between a sovereign borrower and foreign lenders in a production economy with informational and commitment frictions the constrained efficient allocation involves ex post inefficient outcomes that resemble sovereign default episodes in the data and can be implemented with non contingent defaultable bonds and active maturity management defaults and periods of temporary exclusion from international credit markets happen along the equilibrium path and are essential to supporting the efficient allocation furthermore during debt crises the maturity composition of debt shifts towards short term debt and the term premium inverts as in the data

unions role in argentine and chilean pension reform abstract the 1981 privatization of chilean pensions created immediate winners and observable benefits it also created a model for latin american pension reform this study compares the chilean and argentine experiences by using political economy models of social welfare development as a framework for discussion we suggest privatizing pensions could divide workers or create opportunities for unions to garner control over financial capital investments the argentine pension reform may diverge substantially if unions increase their participation in the pension fund management and worker education

efficiency and equality in a simple model of efficient unemployment insurance abstract this paper describes the efficient allocation of consumption and work effort in an economy in which workers face idiosyncratic employment risk and considerations of moral hazard prevent full insurance we impose a lower bound on the expected discounted utility that can be assigned to any agent from any date onward and show with this feature added that the efficient unemployment insurance scheme induces an invariant cross sectional distribution of individual entitlements to utility the paper thus provides a simple prototype model suited to the study of the normative question what is the trade off between equality and efficiency in resource allocation journal of economic literature classification numbers d31 d63 d82 j65

household heterogeneity impact of removing energy subsidies in china direct and indirect effect abstract reforming subsidies for fossil fuels is a challenging prospect for many governments the impact of such a reform on households is a major concern for the government this paper investigates the heterogeneous impacts of eliminating energy subsidies on households in china from direct and indirect perspectives the results of the direct effects show that the removal of energy subsidies particularly for removing electricity and gas subsidies has a greater negative impact on the poor than on the rich from an indirect perspective this article shows that the lower the per capita disposable income the higher the proportion of consumption to disposable income and the greater the indirect impact of eliminating subsidies meanwhile the impact is not only related to household income but consumer goods moreover the indirect effects of eliminating subsidies on households differ across energy types specifically eliminating electricity subsidies has the greatest effect on households followed by transportation fuel and gas we suggest that targeted supportive measures need to be taken towards the implementation of subsidy reform particularly in countries with greater inequality to minimize the negative effects on the poor

south korea s 1980s financial reforms good bye financial repression maybe hello new institutional restraints abstract south korea s financial reforms in the 1980s have been consistent with high rates of savings and financial deepening but they have not followed liberal reform lines the korean financial system operates under the umbrella of an industrial policy and economic goals have been attained by means of investments in institutions rather than by exclusive reliance on the price mechanism

from central planning to market economy some microeconomic issues the economies that we are concerned with here fall somewhere between the two extremes of a very traditional centrally planned economy and a wellestablished market type economy recent and on going reforms are moving hungary and poland and in due course probably some of the other eastern european countries too to a position somewhat closer to the market economy end of the spectrum though with important qualifications that we come to later in the light of such reform intentions it is important not only to consider the particular measures that have been taken or are envisaged but to examine them within a framework that helps to throw some light on the most effective sequencing priority for economic reform since some reforms will in the short term be accompanied by highly unpopular outcomes for certain groups of the population e g high unemployment for a time increases in food and other consumer goods prices and so on it is clearly also important to examine future reforms in the context of the political social environment within which they must take place this necessarily includes taking account of each country s current economic situation partly because it is one of the factors creating pressure for economic reforms partly because present difficulties might constrain what reforms are actually feasible in this paper much of the more detailed discussion concerns hungary largely because it is the economy which has already moved furthest towards a market type economy it therefore sets out the path which other eastern european countries are likely to follow very soon however section 2 outlines some general issues of microeconomic reform while sections 3 and 4 then deal with some specific topics development of competition privatisation the position of large enterprises in the hungarian context on this basis section 5 widens the discussion again to consider the question of transition to a market economy section 6 provides some concluding observations

the asian debt and development crisis of 1997 causes and consequences abstract interpretations of the asian crisis have coalesced around two rival stories the death throes of asian state capitalism story about internal real economy causes and the panic triggering debt deflation in a basically sound but under regulated system story that gives more role to external and financial system causes the paper presents the stories and assesses the evidence the evidence in particular the chronology of the crisis supports the second rather better than the first the paper discusses the interests driving capital account liberalization without a framework of regulation the single most irresponsible act of public authorities in the whole crisis us and uk financial firms allied with their treasuries and with the imf the wto and the oecd saw themselves at a chronic disadvantage in the asian system of long term relationships and patient capital this alliance supported by segments of asian political and financial elites achieved dramatic domestic financial sector liberalization and capital account opening in asia over the 1990s setting up the conditions for crisis paradoxically the crisis may be looked back upon not as the triumph of benign globalization and neoliberal economic doctrine but as the beginning of its end

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

the effect of financial liberalization on the capital structure and investment decisions of indonesian manufacturing establishments this article analyzes the consequences of financial liberalization using a large panel of indonesian manufacturing establishments it discusses whether financial reforms have had an impact on investment and on the allocation of credit and whether the effects differ depending on the type of firms the overall conclusion is that shifting from administrative toward market based allocation of credit has increased borrowing cost particularly for smaller firms but at the same time has benefited firms by giving them widened access to finance

competitive equilibria with limited enforcement we show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations in a pure exchange economy these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt in an economy with capital these allocations can be decentralized if the government can tax capital income as well as default on foreign debt the tax on capital income is needed to make private agents internalize a subtle externality the decisions of the government can arise as an equilibrium of a dynamic game between governments

a theory of financing constraints and firm dynamics there is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival in this paper we model a multiperiod borrowing lending relationship with asymmetric information we show that borrowing constraints emerge as a feature of the optimal long term lending contract and that such constraints relax as the value of the borrower s claim to future cash flows increases we also show that the optimal contract has interesting implications for firm dynamics in agreement with the empirical evidence as age and size increase mean and variance of growth decrease and firm survival increases

the effects of the energy price reform on households consumption in iran abstract the substantial subsidizing of energy prices over the years has led to high energy consumption inefficiencies fiscal pressures and environmental problems in iran to address the increasing socio economic problems associated with the energy subsidies the government embarked on an aggressive energy price reform through which energy subsidies were removed and cash handouts were given to all households in 2010 in this paper i analyze the effectiveness of the energy price reform in iran by estimating energy demand elasticities for households in different income groups i apply a two stage consumer optimization model and estimate the system of energy expenditures shares using the household budget survey data for the period 2001 2008 the results show that the overall price elasticities of demand are small but income elasticities are close to one the results also indicate heterogeneous responses to energy price and income changes in different income groups specifically the urban households show stronger response to price changes but rural households particularly mid income households to income changes these findings suggest that the current policy of price increases would not solely be able to reduce energy consumption and therefore it should be geared towards increasing energy efficiency through a series of price and non price measures

models of financially repressed developing economies abstract the past decade has witnessed an explosion of research on financial sector models of financially repressed developing economies for the most part financial repression is interpreted to be the technique of holding interest rates particularly deposit rates of interest below their free market equilibrium levels the recent spate of activity in this field was produced by the simultaneous publication in 1973 of books by mckinnon and shaw both authors demonstrate how economic theory can be applied to the analysis of the effects of financial conditions on investment and the real rate of economic growth since 1973 models of financially repressed developing economies have been formalized mathematically extended to open economies in order to analyse exchange rate policies and tested empirically this paper presents a critical survey of the major contributions to the literature in this field since 1973

distributional effects of reducing energy subsidies evidence from recent policy reform in argentina abstract we analyze the distributional effects of the reduction in energy subsidies in argentina since 2016 as the policy reform also includes the introduction of a scheme to protect less well off families social tariff we also review how well the targeting mechanism works we apply traditional benefit incidence analysis using household surveys and administrative data focusing on residential subsidies to piped natural gas and electricity in the buenos aires metropolitan area we find that the social tariff is relatively pro poor with significantly higher coverage among the poorest households there are some exclusion errors in the low income deciles and large inclusion errors in the medium and high income deciles the distributive incidence of subsidies does not appear to have changed substantially energy subsidies in argentina albeit lower in aggregate terms continue to be although progressive pro rich this is in large part due to the prevalence of the general flat subsidy rate mechanism over the social tariff mechanism regarding energy budget shares monthly spending on electricity has increased from 1 1 of total household income to 3 4 monthly spending on piped natural gas rose from 1 3 to 3 3 these shares are in line with many other countries in the region naturally there has been a convergence of tariffs towards service provision costs which becomes central in order to incentive sectoral investment and stimulate a good provision of services

hungary in transition to a market economy hungary began its transition to a market economy as long ago as 1968 with the adoption of the new economic mechanism when detailed central planning was abandoned and the economy was regulated by means of financial and economic levers hare radice and swain 1981 however after a period of re centralization in the 1970s and further marketoriented reforms during the 1980s it became evident that the country was still far from achieving a successful transition nevertheless hungary s attempts at economic reform over the last 20 years are remarkably instructive both for the present government s program of transition and for other eastern european nations for some general discussion of reform attempts and approaches see hare 1987 moreover many of the measures now being implemented in hungary were prepared and in many cases began to be implemented prior to the country s political transformation hence there is much stronger continuity in the hungarian reforms than one can find elsewhere in the region

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

continuous workout mortgages efficient pricing and systemic implications abstract this paper studies the continuous workout mortgage cwm a two in one product a fixed rate home loan coupled with negative equity insurance to advocate its viability in mitigating financial fragility in order to tackle the many issues that cwms embrace we perform a range of tasks we optimally price cwms and take a systemic market based approach stipulating that mortgage values and payments should be linked to housing prices and adjusted downward to prevent negative equity we illustrate that amortizing cwms can be the efficient home financing choice for many households we price cwms as american option style defaulting debt in conjunction with prepayment within a continuous time analytic framework we introduce random prepayments via the intensity approach of jarrow and turnbull 1995 we also model the optimal embedded option to default whose exercise is motivated by decreasing random house prices we adapt the barone adesi and whaley 1987 baw approach to work within amortizing mortgage context we derive new closed form and new analytical approximation methodologies which apply both for pricing cwms as well as for pricing the standard us 30 year fixed rate mortgage frm

the economic impact of subsidy phase out in oil exporting developing countries a case study of algeria iran and nigeria abstract one of the crucial issues of energy markets in oil exporting developing countries is the high level of subsidies on petroleum products and the low efficiency in energy use the purpose of this paper is to investigate the impacts of a subsidy phase out policy on the energy sector and oil revenues in three countries algeria iran and nigeria by using a standard econometric approach we find that the effects of different deregulation policies are substantial we also analyse the impact of a policy based on autonomous energy efficiency improvement finally a combination of both policies is elaborated and quantified our results show that a policy geared at more rational use of energy would permit these countries to save enough oil to meet future increases in demand while maintaining stable production capacity furthermore such an energy policy could result in additional oil revenues which would enhance their economic development

a re examination of the demand for money in small developing economies this paper re examines the money demand function in three small open economies of asia korea pakistan and singapore in addition to using the relatively new procedure of error correction modelling the roles of variables such as a the expected change in the exchange rate b foregin interest rates and c foreign exchange risks on money demand are examined in testing the importance of these variables in the money demand function special attention is paid to testing the assumptions of the classical linear regression model the sample period for each country spans from 1973 1 through 1990 1 the empirical results suggest that the error correction specification performs very well in addition to the traditional variables the results suggest that at least some measure of foreign monetary developments appear to have some significant effect on money demand behaviour in these small developing economies

the assessment microeconomics of transition in eastern europe the dramatic political events of 1989 and 1990 when almost all the communist governments of eastern europe collapsed and new democratic governments were elected into office gave rise to a brief spell of euphoria the dead or dying hand of communism was lifted from the region and a future of capitalist abundance was supposedly as sured this naive but perfectly understandable euphoria was quickly dispelled by the grim economic reality facing the new governments al though nearly everywhere there was a commit ment more or less strong to bring about a transition to a market type economy a transition typically requiring stabilization extensive liberalization and privatization there was far less agreement on the speed sequencing and precise modalities of the process at the same time in certain countries much needed reform programmes could neither be agreed nor implemented effectively because of political disputes over the very nature and existence of the states concerned table 1 summarizes the economic and political situation in the whole re gion as of summer 1991

optimal long term financial contracting we develop an agency model of financial contracting we derive long term debt a line of credit and equity as optimal securities capturing the debt coupon and maturity the interest rate and limits on the credit line inside versus outside equity dividend policy and capital structure dynamics the optimal debt equity ratio is history dependent but debt and credit line terms are independent of the amount financed and in some cases the severity of the agency problem in our model the agent can divert cash flows we also consider settings in which the agent undertakes hidden effort or can control cash flow risk

optimal lending contracts and firm dynamics we develop a general model of lending in the presence of endogenous borrowing constraints borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced in the model the dynamics of debt are closely linked with the dynamics of borrowing constraints in fact borrowing constraints must satisfy a dynamic consistency requirement the value of outstanding debt restricts current access to short term capital but is itself determined by future access to credit this dynamic consistency is not guaranteed in models of exogenous borrowing constraints where the ability to raise short term capital is limited by some prespecified function of debt we characterize the optimal default free contract which minimizes borrowing constraints at all histories and derive implications for firm growth survival leverage and debt maturity the model is qualitatively consistent with stylized facts on the growth and survival of firms comparative statics with respect to technology and default constraints are derived borrowing constraints are an important determinant of firm growth and survival 1 such constraints may arise in connection to the financing of investment opportunities faced by firms or temporary liquidity needs such as those required to survive a recession this paper develops a theory of endogenous borrowing constraints and studies its implications for firm dynamics in our model debt is constrained by the firm s limited liability and option to default a lending contract specifies an initial loan size future financing and a repayment schedule the choice of these variables in turn determines future growth the firm s future borrowing capacity and its ability and willingness to repay hence borrowing constraints and firm dynamics are jointly determined we study this dynamic design problem our model builds on thomas and worral s 1994 model of foreign direct investment at time zero a risk neutral borrower firm or entrepreneur has a project which requires a fixed initial set up cost every period the project yields revenues that increase with the amount of 1 there is considerable evidence suggesting that financing constraints are important determinants of firm dynamics gertler and gilchrist 1994 argue that liquidity constraints may explain why small manufacturing firms respond more to a tightening of monetary policy than do larger manufacturing firms perez quiros and timmermann 2000 show that in recessions smaller firms are more sensitive to the worsening of credit market conditions as measured by higher interest rates and default premia evans and jovanovic 1989 show that the liquidity constraints are essential in the decision to become an entrepreneur fazzari hubbard and petersen 1988 among others view financial constraints as an explanation for the dynamic behaviour of aggregate investment and cabral and mata 1996 are able to fit reasonably well the size distribution of portuguese manufacturing firms by estimating a simple model of financing constraints for surveys see hubbard 1998 and stein 2003

a theory of political and economic cycles abstract we develop a theoretical framework in which political and economic cycles are jointly determined these cycles are driven by three political economy frictions policymakers are non benevolent they cannot commit to policies and they have private information about the tightness of the government budget and rents our first main result is that in the most favorable equilibrium to the households distortions to production emerge and never disappear even in the long run this result is driven by the interaction of limited commitment and private information on the side of the policymaker since in the absence of either friction there are no long run distortions to production our second result is that if the variance of private information is sufficiently large there is equilibrium turnover in the long run so that political cycles never disappear finally our model produces a long run distribution of taxes distortions and turnover where these all respond persistently to temporary economic shocks

a review of optimal energy policy instruments on industrial energy efficiency programs rebound effects and government policies abstract industrial energy efficiency programs ieeps are defined as one of the most popular government policies that aim to reduce energy consumption in industrial energy intensive sectors in this paper we review and classify the most important academic studies that have addressed the environmental and economic aspects of ieeps using a systematic review the classification of energy policy instruments has been developed based on an analytical approach we discuss also the outputs benefits and barriers of ieeps besides a comprehensive argument about the restrictive policies on the rebound effects made after the implementation of these programs the results disclose that china usa and sweden are the most addressed countries on ieeps and their applications in this regard incentive energy policies e g voluntary agreements and subsidies have been applied more than others in the last decade furthermore most of the reviewed studies emphasize energy price reform as an effective practical policy while a few analytical methods can be seen to help policy makers determine the optimal levels of decision variables finally according to the state of the art analysis the authors provide some novel recommendations to improve the performance of ieeps using some restrictive policies on the negative impacts of rebound effects

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

welfare implication of reforming energy consumption subsidies abstract reforming energy consumption subsidies in particular for fossil fuels has been frequently referred to as a quick win policy to enhance environmental mitigation in addition the removal of such subsidies may release a sizeable portion of a country s national budget for use on more productive targets one of the most recognized challenges of such reform is selling the new energy prices to citizens particularly those with a more fragile purchasing power several empirical and technical studies have prescribed that the reform might be supported by a direct compensation mechanism in order to ensure feasibility this is what was done during the recent energy subsidy reform in iran however the compensation mechanism implemented in iran s reform was successful at the beginning but did not proceed as expected this has raised questions about the feasibility and sustainability of the direct compensation mechanism and even of the reform policy itself in this paper we consider a stylized model where direct compensation is the instrument proposed to restore consumers utility against increased energy prices we find that when prices of other goods are affected by the announced reform policy the feasibility of a subsidy reform critically depends on the value of certain parameters the initial subsidization rate the share of energy in the consumers bundle and the energy portion of price of other goods

can neoclassical economics underpin the reform of centrally planned economies te here s a curious symmetry between the arguments propounded over the last century in advocacy of socialism and the present popular discussion of the reform of centrally planned economies in those old discussions the vision of socialism was utopian which was contrasted with the dickensian realities of capitalism now the disasters of central planning are contrasted with the benefits flowing from perfectly functioning markets in the conventional wisdom of reform the vision of markets is utopian and that of central planning concentrates on the awful reality what is largely missing in the conventional wisdom is a satisfactory attempt to come to grips with the central question that should be answered in formulating reform plans how does one explain the differences in performance of market capitalist and centrally planned economies of course capitalism has outperformed central planning the developed west is therefore an obvious source of ideas for reforms but the institutions of capitalism come in many varieties and cannot be put in place instantaneously there are many alternative reform paths depending upon the importance attributed to each of these institutions thus there remains the problem of tracing the source of the superiority of capitalist economies to specific characteristics this point was made clear to me on hearing a vietnamese official justify single party rule by noting the economic success of taiwan and singapore reformers need a filter that interprets the experience of capitalist and socialist systems this is exactly where economic theory plays a vital role

long duration bonds and sovereign defaults abstract this paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long duration bonds this contrasts with previous studies which assume the government can borrow using bonds that mature after one quarter we show that when we assume that the government issues bonds with a duration similar to the average duration of sovereign bonds in emerging economies the model generates an interest rate that is substantially higher and more volatile than the one obtained assuming one quarter bonds this narrows the gap between the predictions of the model and the data which indicates that the introduction of long duration bonds may be a useful tool for future research about emerging economies our analysis is also relevant for the study of other credit markets

financial market fragmentation and reforms in ghana malawi nigeria and tanzania this article reports the findings from surveys of formal and informal institutions and their clients in ghana malawi nigeria and tanzania it investigates the hypothesis that reforming financially repressive policies would not be sufficient to overcome fragmentation of financial markets because of structural and institutional barriers to interactions across different market segments the four countries have substantially fragmented financial markets with weak linkages between formal and informal segments and interest rate differentials that cannot be adequately explained by differences in costs and risks nevertheless the relatively low transaction costs and loan losses of informal institutions indicate that they provide a reasonably efficient solution to information transaction cost and enforcement problems that exclude their clients from access to formal banking services the findings imply that financial liberalization and bank restructuring in the african context should be accompanied by complementary measures to address institutional and structural problems such as contract enforcement and information availability and to improve the integration of informal and formal financial markets

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

kuwait s energy subsidy reduction examining economic and co2 emission effects with or without compensation abstract this paper examined economy wide impacts of reducing energy subsidy in kuwait a social accounting matrix sam was constructed and a computable general equilibrium cge model was developed the cge model was used to simulate separate and combined effects of a 25 reduction of subsidy to three energy products natural gas oil and electricity this policy shock was applied to the model in two scenarios in each round the subsidy reductions were applied to each energy product separately in turn and then finally simultaneously to all energy products in the first scenario subsidy reductions were applied and results were compared with the baseline scenario given in the sam this yielded adverse effects across a range of endogenous variables it leads to large energy price increases as high as 255 for electricity gross domestic product gdp marginally declined by 0 28 in scenario 2 the subsidy reduction was accompanied with cash transfers to energy users a compensation for welfare loss the amount of transfer was equivalent to the sum of the amount of subsidy reductions the results indicated that such transfers would reduce the adverse effects of the policy reform the effects on gdp was reversed it rose by 1 01 the price effect was slightly lower electricity price rose by 245 finally sensitivity of the model results was examined by varying the elasticity of the substitution of composite energy and capital in production greater possibility of substitution seems to cause subsidy reform to have much larger positive or smaller adverse economy wide effects the simulation experiments suggest that subsidy reform would need to be accompanied by demand side stimulus or supply side initiatives to encourage energy conservation

informal credit markets and economic development in taiwan abstract taiwan is a case which shows how informal credit markets help to compensate for the limitations of the formal financial system especially in satisfying the needs of medium and small enterprises government regulations and policies affect the way participants in informal credit markets solve selection enforcement and incentive problems recent changes demonstrate the continued resilience and relevance of informal credit markets during a process of financial liberalization

enterprise ownership constraints and the role of equity markets in financial development the long standing controversy of the contribution of equity markets to economic development has been reactivated by the emerging markets phenomenon positive reassessments have emphasised diversification and liquidity gains for investors funding risky long lived projects the present analysis adopts instead the viewpoint of the issuer the owner controlled enterprise typical of ldcs owners wealth is a fundamental constraint on expansion when gearing is limited by bankruptcy risk and minority equity issue eases this constraint it is suggested that equity and debt are thus complementary and that stock markets may improve overall allocative efficiency if equities correctly value firm prospects

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

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

pareto inefficiency of market economies search and efficiency wage models this paper shows that market economies with search and in which wages are affected by efficiency wage considerations are not constrained pareto efficient wages are not set at pareto efficient levels nor is the level of employment unemployment pareto efficient we identify the nature of the biases and the welfare improving government interventions this abstract was borrowed from another version of this item

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