the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

the impact of uncertainty shocks in emerging economies abstract a recent strand of research proposes that sudden jumps in uncertainty generate rapid drops and recoveries in real macroeconomic variables that drive the business cycle using an empirical model we find substantial heterogeneity in reactions to these shocks across countries in comparison to the u s and other developed countries emerging economies suffer much more severe falls in investment and private consumption following an exogenous uncertainty shock take significantly longer to recover and do not experience a subsequent overshoot in activity we provide evidence that the dynamics of investment and consumption are correlated with the depth of financial markets we control for the potential role of a credit channel and estimate that it can account for up to one half of the increased fall in investment generated by uncertainty shocks among emerging economies with less developed financial markets in this context monetary and fiscal policy actions that alleviate the impact of credit constraints facing firms may reduce the impact of uncertainty shocks in these economies

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

exchange rate based stabilization imperfect competition and supply side effects abstract this paper studies exchange rate based stabilization programs in the context of a dynamic general equilibrium model for a small open economy that incorporates imperfect competition a backward looking wage setting and an endogenous labor supply in contrast to previous results the analysis shows that a permanent disinflation leads to a sustained expansion in the domestic sector and a slow inflation convergence this study also shows that a temporary stabilization replicates a boom recession cycle these results suggest that a backward looking wage setting and an endogenous labor supply are the key ingredients for reproducing the stylized facts of exchange rate based stabilization

managing currency pegs the combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity in turn this real rigidity makes the economy prone to involuntary unemployment during external crises this paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency first and second best monetary and fiscal solutions are analyzed second best solutions are prudential whereas first best solutions are not

bank runs in open economies and the international transmission of panics abstract in this paper we extend the bank run literature to an open economy model we show that a foreign banking system by raising deposit rates in the presence of a domestic banking panic may generate sufficient liquid resources to acquire assets sold by the domestic banking system at bargain prices in this case foreign depositors will benefit from the domestic panic we also show that our simple model is able to generate the spreading of panics perhaps not surprisingly the crucial element in determining the propagation of financial crises is the effect of interest rates on savings decisions

temporary stabilization a stochastic analysis abstract this paper develops a stochastic model of exchange rate based inflation stabilization in which agents have expectations of devaluation driven by a mixed diffusion jump process in a richer stochastic environment where a brownian motion drives the rate of devaluation and a poisson process determines the probability of devaluation we examine consumption and wealth equilibrium dynamics when a stabilization plan is implemented and contingent claims markets are unavailable we also assess the effects of exogenous shocks on consumption and welfare finally we use the proposed model to carry out a simulation experiment of the equilibrium dynamics

should we be worried about the green paradox announcement effects of the acid rain program this paper presents the first empirical test of the green paradox hypothesis according to which well intended but imperfectly implemented environmental policies may lead to detrimental outcomes due to supply side responses we use the introduction of the acid rain program in the u s as a case study the theory predicts that owners of coal deposits expecting future sales to decline would supply more of their resource between the announcement of the acid rain program and its implementation moreover the incentive to increase supply would be stronger for owners of high sulfur coal this would all else equal induce an increase in sulfur dioxide emissions using data on prices heat input and sulfur content of coal delivered to u s power plants we find strong evidence of a price decrease and of an increase in the sulfur premium some indication that the amount of coal used might have increased and no evidence of fuel switching towards higher sulfur coal overall our evidence suggests that while the mechanism indicated by the theory might be at work market conditions and concurrent regulation largely prevented a green paradox from arising these results have implications for the design of climate policies

the green paradox and budgetary institutions abstract we examine oil production strategies in response to the rise of alternative energy in context of saudi arabia and the united states in a unified simultaneous equation model sem over the period 1976 2015 we investigate the extent to which budget balance behaviour explains the nature of oil production strategies we find that green regulations have a positive impact on u s oil production while an inverse relationship holds for saudi arabia we argue that the nature of budgetary institutions prevents saudi arabia from following a profit maximising behaviour saudi arabia is incentivised to ensure political cohesion through adopting a procyclical fiscal policy rather regulators seem incentivised to channel surplus towards individuals to gain popularity in the united states a thriving shale oil industry is a plausible rationale for u s production strategies also known as a weak green paradox this is problematic for climate change initiatives to reduce global emissions climate experts may wish to pay more attention to the supply side of oil markets when designing decarbonisation plans the results challenge conventional wisdom of the green paradox neglecting the role of incentive structure between different types of oil producers

exchange rate based stabilizations a literature review the exchange rate based stabilizations erbss that have been undertaken in chronic inflation countries have generated a controversial body of literature regarding the effects of disinflation programs especially those on real consumption and output this survey provides an extensive overview of the literature on erbs the paper covers various empirical studies that have attempted to document the macroeconomic regularities associated with erbs discussing both their strengths and their weaknesses it analyzes diverse theoretical models that have been put forward to replicate the business cycles associated with erbs and sheds light on which models perform better using real data the results suggest that durables incorporated weak credibility and sticky price model proves to be most compatible with the empirical regularities observed in the course of erbs

a contribution to event study methodology with an application to the dutch stock market abstract this paper proposes an extended market model for event studies based on daily stock returns for actual data the assumptions of the simple market model are violated the return distribution is not normal and neither the variance of the error term nor the risk parameter beta are constant our model incorporates the generalized autoregressive conditional heteroskedasticity garch model with t distributed errors and a time dependent beta we test for anomalies by adding dummy variables in the regression equation our model is fairly general and could be used in a wide variety of event study situations we illustrate the model by an analysis of the weekend and the option expiration effect we use return data from the dutch stock market the weekend effect on stock returns is significant but no expiration effect could be detected

exchange rate management intertemporal tradeoffs exchange rate management is possible only if the government pursues consistent monetary and fiscal policies the authors constructa model in which the real consequences of exchange rate management depend on the precise time pattern of these policies the authors study the constraints on feasible policies and the comparative dynamics of disinflation by means of exchange rate targeting theoretical results are consistent with exchange rate managed disinflation attempts in argentina chile and israel copyright 1987 by american economic association

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

risk aversion intertemporal substitution and the term structure of interest rates an equilibrium model of the term structure of interest rates is derived from a representative agent framework with recursive utility preferences a key ingredient is a time varying subjective discount factor which is linked to the short term rate of interest the proposed model incorporates a vector autoregression description of macroeconomic dynamics and links them to those of the term structure so that nominal bond yields are affine functions of observable state variables the model is estimated and compared to both a restricted expected utility version of the model and a reduced form no arbitrage model we find that all three models can fit the term structure equally well but that only the unrestricted non expected utility model can empirically account for the tent shaped pattern and magnitude of coefficients from predictive regressions of excess bond returns on forward rates documented by cochrane and piazzesi 2005 bond risk premia american economic review 95 138 160 the unrestricted equilibrium model fits the term structure and captures the important features of bond risk premiums with economically plausible values for the structural preference parameters

the argentine stabilization plan of december 20th abstract in this paper an analytical model is developed to incorporate the essential characteristics of the stabilization plan implemented in argentina in january 1979 the model is based upon a set of simplifying assumptions that only approximate the complexity of the real world it is assumed that the expectations of inflation and the degree of excess demand or supply in the non traded goods market are the main intermediate determinants of the rate of inflation in that market the rate of change of prices of traded goods being determined by the external inflation together with the rate of devaluation treating thus the external rate of inflation as exogenous the only instrument available for influencing the rate of inflation in the long run is the rate of devaluation since the model assumes a fixed exchange rate regime the money supply is endogenous and hence unsuitable as an instrument of economic policy

announcing climate policy can a green paradox arise without scarcity unintended consequences of a pre announced climate policy are studied within a framework that allows for competition between polluting and clean energy sources we show that early announcement of a carbon tax gives rise to a green paradox in that it increases emissions in the interim period between announcement and actual implementation irrespective of the scarcity of fossil fuels the paradoxical outcome is driven by consumption saving tradeoffs facing households who seek to smooth consumption over time and holds both when the announced implementation date is taken as a credible threat and when households are skeptical about the political will or capability of the government to implement the policy as announced

exchange rate based inflation stabilization the initial real effects of credible plans abstract this paper studies the initial effects of exchange rate based stabilization programs within a dynamic general equilibrium model of a small open economy in which inflation acts as a tax on intermediate transactions and capital accumulation is subject to convex adjustment costs and gestation lags the model replicates the typical pattern of slow inflation convergence sustained real exchange rate appreciation trade balance deterioration and expansion in domestic spending followed by a deflationary slowdown without resorting to sticky prices imperfect credibility or adaptive expectations calibrated versions of the model are compared with the initial effects of the argentine convertibility plan of april 1991

balance of payments crises in a cash in advance economy the author shows that a flexible prices sidrauski type model with a cash in advance constraint is capable of depicting some of the phenomena associated with a balance of payments crisis like the onesrecently observed in argentina and mexico current accounts deficits and appreciation of the real exchange rat e it is also shown that these phenomena become exacerbated as the rate of devaluation before the crisis occurs becomes smaller copyright 1987 by ohio state university press

absolute abundance and relative scarcity environmental policy with implementation lags we study the effectiveness of environmental policy in a model with nonrenewable resources and an unavoidable implementation lag we find that a time lag between the announcement and the implementation of an emissions quota induces an increase in emissions in the period between the policy s announcement and implementation since a binding constraint on emissions restricts energy use during the implementation phase more of the resources must be extracted outside of it we call this the abundance effect in the case of multiple resources that differ in their pollution intensity a second channel emerges since cleaner sources are relatively more valuable when the policy is implemented it is optimal to conserve them before the cap is enforced this ordering effect tends to induce a switch to dirtier resources before the policy is implemented compounding the increase in emissions via the abundance channel using the announcement lag in title iv of the 1990 caaa as a case study we are able to empirically show that the abundance effect and ordering effect are both statistically and economically significant we discuss a number of alternative policy options to deal with these undesirable side effects of policy announcements

external shocks u s monetary policy and macroeconomic fluctuations in emerging markets estimated structural vars show that external shocks are an important source of macroeconomic fluctuations in emerging markets furthermore u s monetary policy shocks affect interest rates and the exchange rate in a typical emerging market quickly and strongly the price level and real output in a typical emerging market respond to u s monetary policy shocks by more than the price level and real output in the u s itself these findings are consistent with the idea that when the u s sneezes emerging markets catch a cold at the same time u s monetary policy shocks are not important for emerging markets relative to other kinds of external shocks

financial stress economic activity and monetary policy in the asean 5 economies this article uses a structural vector autoregression approach to analyse the impact of financial stress on the economy and the relationship between monetary policy and financial stress in the asean 5 economies indonesia malaysia philippines singapore and thailand we find that an increase in financial stress leads to tighter credit conditions and lower economic activity in all five countries the estimated impact on the real economy displays an initial rapid decline followed by a gradual dissipation in malaysia the philippines and thailand the central banks tend to reduce policy interest rates irs when financial stress increases although there is substantial cross country variation in the magnitude and time dynamics the lower policy irs are found to have little significant effects in lowering financial stress but are still effective in stimulating economic activity through other channels these findings imply that easing monetary policy is likely necessary but insufficient to address growth s

balance of payments crises and devaluation the collapse of a fixed exchange rate is typically marked by a sudden balance of payments crisis in which speculators fleeing from the domestic currency acquire a large portion of the central bank s foreign exchange holdings faced with such an attack the central bank often withdraws temporarily from the foreign exchange market allowing the exchange rate to float freely before devaluing and returning to a fixed rate regime this paper links the timing of the initial speculative attack to the magnitude of the expected devaluation and to the length of the transitional period off loating an implication of the analysis is that there exist devaluations so sharp and transition periods so short that acrisis must occur the moment the market first learns that the current exchange parity will eventually be altered for sufficiently long transition periods the floating exchange rate overshoots its new peg before appreciating back toward it for shorter periods the rate depreciates monotonically to its new fixed level accordingly the central bank s return tothe foreign exchange market can occasion a capital outflow or a capital inflow this abstract was borrowed from another version of this item

financial fragility in small open economies firm balance sheets and the sectoral structure episodes of large capital inflows in small open economies are often associated with a shift of resources from the tradable to the non tradable sector and sometimes lead to balance of payments crises this article builds a two sector dynamic model to study the evolution of the sectoral structure and its impact on financial fragility the model embeds a static mechanism of balance of payments crisis which produces multiple equilibria within a single time period when the non tradable sector is large enough compared to the tradable sector the article studies the dynamics induced by an increase in financial openness it shows that the relative size of the non tradable sector overshoots which makes the economy more likely to be financially fragile during the transitory dynamics using an extended version of the model the article conducts a quantitative analysis and shows that this mechanism accounts well for several episodes of large capital inflows that led to financial crises

time to build and the real options channel of residential investment abstract a standard real options model predicts that time to build investment could be delayed by uncertainty over future revenue we quantify the first order importance of this mechanism in the 2002 2011 housing boom bust cycle by developing and estimating a model of sequential irreversible investment with stochastic bottlenecks we find that the main driver of construction delays during the boom is construction bottlenecks however further delay in construction during the bust is caused by an increase in uncertainty which grew by 21 6 between 2002 and 2009 the model can account for more than one third of the decline in residential investment between 2002 and 2009

sticky inflation and the real effects of exchange rate based stabilization abstract this paper tests the empirical validity of the forward looking pricing hypothesis using data from four exchange rate based stabilization erbs episodes it finds that backward looking components of inflation play an important role in inflation dynamics in some cases exceeding the importance of forward looking components the paper then shows that the presence of empirically relevant degrees of inflation stickiness increases the size of the real exchange rate appreciation predicted by an imperfect credibility model of erbs the 12 real appreciation predicted by the sticky inflation model is a 70 improvement over the predictions of the fully forward looking pricing setup but as in other erbs models still falls short of matching the real appreciations observed in practice

ordering the extraction of polluting nonrenewable resources energy markets are often characterized by the use of multiple nonrenewable resources such as coal and natural gas with different pollution characteristics the same resource may have different qualities as when high and low sulfur coal is used to generate electricity multiple resources are used in providing transportation services such as cars running on gasoline or plug in hybrids that may be fueled by electricity produced from coal when these nonrenewable resources contribute differentially to pollution what is the opti mal sequence of extraction over time harold hotelling 1931 developed the classical theory of extraction of a nonrenewable resource orris c herfindahl 1967 extended the hotelling model by considering many resources with different unit costs of extraction and proposed the least cost first principle extraction must be ordered by cost with the cheapest resource used first others have examined whether herfindahl s model remains valid in a variety of situations in a general equilibrium setting see murray kemp and ngo v long 1980 tracy r lewis 1982 in the presence of setup costs g rard gaudet moreaux and stephen w salant 2001 under het erogeneous demands chakravorty and darrell l krulce 1994 and when the extraction rate is constrained jean pierre amigues et al 1998 stephen p holland 2003 in these studies following hotelling and herfindahl resources were differentiated by cost alone in this paper we abstract from cost considerations and focus on how the sequence of extraction may be affected when resources are differentiated only by their pollution character istics we consider two resources one more polluting than the other without loss of generality consider coal to be the dirty resource and natural gas the clean one both may be used to generate electricity environmental regulation is imposed through a cap on the stock of pollution this may be a stylized approximation of an international agreement such as the kyoto protocol which aims to stabilize the concentration of greenhouse gases in the atmosphere 1 with heterogeneity in pollution the results are nonintuitive and do not depend on the emis sion rates of the resources when the economy is already at its allowable stock of pollution the clean natural gas is used first and use of the dirty coal is postponed to the future this is what one would expect armed with insights from the herfindahl model however when the economy starts from below the ceiling and accumulates pollution coal may be used first and use of the clean natural gas is postponed the optimal strategy is to benefit from natural dilution by build ing the stock of pollution as quickly as possible this is done by burning coal rather than natural

green expectations current effects of anticipated carbon pricing i report evidence that an anticipated strengthening of environmental policy increased emissions i find that the breakdown of the u s senate s 2010 climate effort generated positive excess returns

temporary stabilization predetermined exchange rates the paper analyzes the impact of a stabilization policy based on a temporary reduction in the rate of devaluation against a background in which a constant rate of devaluation has no real effects it is shown that the temporary policy does and furthermore that the real effects tend to become bigger in absolute value as the horizon of the temporary policy is shortened the central discussion is carried out in terms of a one good cash in advance model with perfect capital mobility and ramsey type consumers results are extended to account for home goods and variable velocity the roles of capital mobility and banking liberalization are briefly discussed

stabilization dynamics and backward looking contracts abstract exchange rate based stabilizations often result in an initial output expansion one explanation for this phenomenon has been that in the presence of inflation inertia a reduction in the nominal interest rate causes the domestic real interest rate to fall thus increasing aggregate demand this paper reexamines this issue in the context of an intertemporal optimizing model in contrast to previous results the analysis shows that if the intertemporal elasticity of substitution is smaller than the elasticity of substitution between traded and home goods a permanent reduction in the rate of devaluation leads to a fall in aggregate demand

effects of inflation on the pattern of international trade this paper integrates a transactions based model of money with a real trade model and examines how steady state inflation affects the direction and size of international trade the effects of inflation work through changes in supplies of labour and capital which are chosen jointly with production and consumption by utility maximizing households if production exhibits constant returns to scale in domestically mobile factors then it is unlikely that the economy will produce both of the two traded goods for certain rates of inflation small changes can have dramatic effects on the direction of trade for other rates of inflation the volume of trade is affected when money is held for transactions purposes and factor supplies are endogenous changes in inflation can cause changes in the pattern of trade that do not reflect real underlying changes in comparative advantage

the price consumption puzzle of currency pegs abstract a defining stylized fact associated with exchange rate based stabilization programs is that their initial phase is characterized by several years of continuous expansion in private consumption and a gradual appreciation of the real exchange rate this paper shows that a large class of standard optimizing models is unable to account for this empirical regularity in particular models in this class predict that a gradual appreciation of the real exchange rate must necessarily be accompanied by a declining path of consumption the paper suggests several possible solutions to this problem and develops one in detail namely the relaxation of the assumption of time separability in preferences specifically it shows that under habit formation currency pegs induce a positive comovement between consumption and the real exchange rate the paper also establishes that habit formation provides an explanation for why in failed currency pegs a contraction in aggregate demand sets in before the collapse of the program

quantifying tax effects under policy foresight abstract studies of tax effects make the conventional information assumption that changes in period t taxes become known at t legislative lags however imply that news arrives before tax changes take place under policy foreknowledge the conventional information structure is therefore misspecified simulations of a standard neoclassical growth model suggest that foresight of only one quarter can distort substantially the estimates of tax effects obtained under the no foresight assumption also it is crucial to model capital and labor taxes separately anticipated changes in these two tax policies have opposite effects on consumption investment labor and output before policy realization

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

climate policy and the optimal extraction of high and low carbon fossil fuels we study how restricting co2 emissions affcts resource prices and depletion over time we use a hotelling style model with two nonrenewable fossil fuels that differ in their carbon content e g coal and natural gas and that are imperfect substitutes in final good production we study both an unexpected constraint and an anticipated constraint both shocks induce intertemporal substitution of resource use when emissions are unexpectedly restricted it is cost effective to use high carbon resources relatively more less intensively on impact if this resource is relatively scarce abundant if the emission constraint is anticipated it is cost effective to use relatively more less of the low carbon input before the constraint becomes binding in order to conserve relatively more less of the high carbon input for the period when climate policy is active in case the high carbon resource is relatively scarce abundant

a further exploration in the theory of exchange rate regimes in an interesting paper in this journal elhanan helpman 1981 develops a simple two country model to compare the welfare levels that are achieved under different exchange rate regimes in a world characterized by perfect foresight his basic finding is that equilibrium consumption allocations and hence welfare levels are identical under a floating exchange rate system and a one sided peg fixed exchange rate regime this result is due to helpman s assumption that output is determined exogenously which allows a separation of the real and monetary sides of the economy the purpose of this paper is to extend helpman s model by making two alterations in his setup 1 to allow production to be endogenously determined as a function of labor force participation and 2 to allow welfare levels to be dependent on labor service as well as on consumption the main conclusion then obtained is that a country may achieve a higher welfare level under a flexible exchange rate regime than under a fixed exchange rate regime since it is able to choose an optimal rate of inflation or currency depreciation

resurrecting the weak credibility hypothesis in models of exchange rate based stabilization abstract we analyze how weak credibility affects the volatility of consumption spending in a model of exchange rate based stabilization that allows for both durable and nondurable goods the inclusion of durables greatly improves the explanatory power of the weak credibility hypothesis the hypothesis can account for the main qualitative properties of the boom bust cycle provided the elasticity of durables expenditure with respect to tobin s q is greater than the intertemporal elasticity of substitution moreover the quantitative effects are very large in numerical simulations based on conservative assumptions about the expenditure share of durables 20 and wealth effects none aggregate consumption increases 17 22 and the real exchange rate appreciates 24 26 when the crawl decreases from 100 to zero for 3 years in variants of the model that incorporate supply effects the consumption boom is equally strong but appreciation of the real exchange rate rises to 30 40

identifying monetary policy in a small open economy under flexible exchange rates abstract previous empirical study on the effects of monetary policy shocks in small open economies has generated puzzling dynamic responses in various macroeconomic variables this paper argues that these puzzles derive from an identification of monetary policy that is inappropriate for such economies to remedy this it is proposed that a structural model be estimated to explicitly account for the features of the small open economy such a model is applied to canada with tightly estimated results overall the dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the exchange rate as a transmission mechanism

on gradual disinflation the real exchange rate and the current account abstract we study the effects of a credible gradual exchange rate based disinflation program in a two sector economy after an initial exchange rate depreciation the reductions in the rate of devaluation reduce the monetary wedge generated by the cash in advance constraint leading to a gradual increase in absorption that yields progressive real exchange rate appreciations and current account deficits an initial boom in economic activity is not followed by a later contraction as labour supply expands during the whole length of the program many of the model s predictions are in accordance with the stylized facts on disinflation in chronic inflation countries in particular those of the mexican program of 1988 1992

stabilization policies in developing countries what have we learned abstract the paper reviews the recent experience with stabilization programmes in latin america in the light of traditional and monetarist models of inflation and the exchange rate the traditional model links both inflation and payments problems to budget deficits the monetarist model too believes that inflation is caused by fiscal deficits but it takes a more optimistic view of stabilization full purchasing power parity and perfect capital mobility make stabilization just a question of the appropriate exchange rate policy and the proper rate of domestic credit creation the traditional view is substantially right as a long run model but it fails in the dynamics the monetarist model is as we know now fundamentally wrong as a short run description of the possibilities of inflation control there is need and room for a paradigm that places emphasis on the debt money mix in financing the budget on the stickiness of inflation rates and on the place of short run real exchange rate and real interest rate variations that these are key features of the transition phase is amply borne out by the devasting and unsuccessful experiences with monetarist stabilization in argentina chile and brazil

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

stabilization and its discontents argentina s economic restructuring in the 1990s abstract this paper assesses the argentine stabilization and market reform strategies since 1989 we argue that argentina may be penned in by its own success exchange rate targeting quelled inflation but the resulting real appreciation has limited export and employment growth microeconomic reforms raised efficiency but have threatened income distribution and hence political stability exclusive styles of policy making helped enact reform but have led to corruption and policy insensitivity and contributed to rising social discontent we close by suggesting how a second generation of reforms could tackle these issues and spread the proceeds of reform to a wider segment of the argentine public

comparing the welfare costs and initial dynamics of alternative inflation stabilization policies abstract this paper uses calibrated versions of a sticky price currency substitution model to compare the initial dynamics and welfare costs of three types of stabilization program exchange rate based erb money based mb and money based with initial reliquefication mbr erb and mbr programs are found to induce an initial expansion in real activity whereas mb programs are initially contractionary the welfare gains of eliminating high inflation are significant under permanent erb and mbr programs but small under permanent mb programs in addition temporary mb programs are shown to be much more disruptive than temporary erb or mbr programs these results provide an explanation for why mb programs are so rarely implemented and suggest that empirical studies that fail to distinguish mb from mbr programs are likely to be biased toward finding that stabilizations are always expansionary regardless of the nominal anchor

exchange rate based stabilizations under real frictions the role of endogenous labor supply abstract this paper studies exchange rate based stabilization programs in the context of a model of a small open economy where labor supply is endogenous agents derive utility from both consumption and leisure in environments where consumption is subject to a cash in advance constraint a cut in the rate of devaluation lowers the nominal interest rate and hence alters the optimal mix of consumption and leisure the paper shows that in the presence of adjustment costs of investment a perfectly credible cut in the devaluation rate causes simultaneously a consumption and output boom a cumulative current deficit a sustained real appreciation of the domestic currency and an increase in labor supply over time it is also shown that an imperfectly credible stabilization program in this environment would have effects similar to the perfectly credible program but generate richer dynamics such as an initial boom in output followed by a recession which begins prior to the end of the program the model has clear welfare implications in that permanent reductions in inflation are unambiguously welfare enhancing

tax reform and adjustment costs the impact on investment and market value this paper provides an effective tax rate measure that is valid in the presence of adjustment costs and anticipated tax changes and a measure of the impact of tax changes on market value that may be decomposed into the effects on discounted pure profits and normal returns to capital changes in the value of capital may in turn be decomposed further into changes in the marginal value of new capital and changes in the relative value of new and existing capital these new measures are used to evaluate tax changes similar to those introduced by the recent u s tax reform copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

modern hyper and high inflations since 1947 hyperinflations by cagan s definition in market economies have been rare much more common have been longer inflationary processes with inflation rates above 100 percent per annum based on a sample of 133 countries and using the 100 percent threshold as the basis for a definition of very high inflation episodes this paper examines the main characteristics of such inflations among other things we find that i close to 20 percent of countries have experienced inflation above 100 percent per annum ii higher inflation tends to be more unstable iii in high inflation countries the relationship between the fiscal balance and seigniorage is strong both in the short and long run iv inflation inertia decreases as average inflation rises v high inflation is associated with poor macroeconomic performance and vi stabilizations from high inflation that rely on the exchange rate as the nominal anchor are expansionary

structural var models for malaysian monetary policy analysis during the pre and post 1997 asian crisis periods this article conducts an in depth investigation into building a structural vector autoregression svar model and analysing the malaysian monetary policy considerable attention is paid to i the selection of foreign policy and target variables ii establish identifying restrictions and improve the estimates of impulse response functions iii assess the importance of intermediate channels in transmitting monetary policy mechanism and iv the way in which the 1997 asian financial crisis affected the working of monetary policy malaysia is an interesting small open economy to study because following this crisis the government imposed capital and exchange rate control measures the overall results suggest that the crisis and the subsequent major shift in the exchange rate regime have significantly affected the malaysian black box in the pre crisis period domestic variables appear to be more vulnerable to foreign monetary shocks further the exchange rate played a significant role in transmitt

disinflation programs under policy uncertainty abstract this paper uses a model with endogenous labor supply to study exchange rate based inflation stabilization programs under uncertainty regarding the duration of the program the paper finds that the output and consumption dynamics induced by these programs are extremely sensitive to whether the programs are perceived to have a chance of continuing permanently or whether they are expected to end in finite time it is shown that the business cycle dynamics for output that are typically associated with these programs arise only when the policy is expected to collapse in finite time furthermore for the purposes of rationalizing the stylized facts the uncertain duration channel appears to induce a fundamental tension between the consumption dynamics and the current account dynamics these results raise doubts regarding the explanatory power of the uncertain duration channel in particular and the credibility channel in general

nominal interest rates consumption booms and lack of credibility a quantitative examination abstract exchange rate based stabilization programs in chronic inflation countries have often been accompanied by an initial expansion of private consumption followed by a contraction this consumption cycle has been attributed to lack of credibility in the sense that the public views the reduction in the devaluation rate as temporary this paper assesses the quantitative relevance of the temporariness hypothesis by comparing the predictions of a simple model to the actual figures for seven major programs the paper concludes that nominal interest rates must fall substantially for the temporariness hypothesis to account for an important fraction of the observed consumption booms

interest rate rules and transitional dynamics in an endogenously growing open economy abstract this paper sets up an endogenous growth model of an open economy in which the monetary authority implements a gradualist interest rate rule with targets for both inflation and economic growth we show that under a passive rule a monetary equilibrium exists and is unique moreover the equilibrium is locally determinate by contrast an active rule implies either two equilibria one high growth and one low growth or none in the case of two equilibria the high growth equilibrium is locally determinate while the low growth equilibrium is a source besides the stabilization and growth effects of alternative target policies are also explored in this study moreover in departing from the existing literature we turn to focus on the analysis of transition with a particular emphasis on the case of imperfect credibility

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

inflation stabilisation and the consumption of durable goods exchange rate based stabilisations in chronic inflation countries have often been characterised by an initial consumption boom which is most evident in the behaviour of durable goods followed by a later contraction this paper provides an explanation for such a boom recession cycle based on the timing of purchases of durable goods the initial fall in inflation results in a wealth effect which induces many consumers to bring forward their purchases of durable goods thus generating an aggregate consumption boom since most consumers replenish their stock of durable goods at the beginning of the programme a later slowdown follows

stabilization with exchange rate management stabilization programs in open economies typically consist of two stages in the first stage the rate of currency devaluation is reduced but the fiscal adjustment does not eliminate the fiscal deficit that causes growth of debt and loss of reserves making a future policy change necessary only later at a second stage is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit we study how different second stage policy changes affect economic dynamics during the first stage these changes include tax increases budget cuts on traded and nontraded goods and increases in the growth rate of money

policy shocks and market based regulations evidence from the renewable fuel standard the renewable fuel standard mandates large increases in u s biofuel consumption and is implemented using tradable compliance credits known as rins in early 2013 rin prices soared causing the regulator to propose reducing future mandates we estimate empirically the effect of three policy shocks that reduced the expected mandates in 2013 we find that the largest of these shocks decreased the value of the fuel industry s 2013 compliance obligation by 7 billion we then study the effects of the shocks on commodity markets and the market value of publicly traded biofuel firms results show that the burden of the mandate reductions fell primarily on advanced biofuel firms and commodity markets of the marginal compliance biofuel we argue that the policy shocks reduced the incentive to invest in the technologies required to meet the future objectives of the rfs and discuss alternative policy designs to address the problems that arose in 2013

event studies in economics and finance the event study is an important research tool in economics and finance the goal of an event study is to measure the effects of an economic event on the value of firms event study methods exploit the fact that given rationality in the marketplace the effects of an event will be reflected immediately in security prices thus the impact can be measured by examining security prices surrounding the event in this paper event study methods are described including some of the potential complications an example is included to illustrate the approach

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

monetary policy in a financial crisis what are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis under what conditions will a cut stimulate output and employment and raise welfare under what conditions will a cut have the opposite effects we answer these questions in a general class of open economy models where a financial crisis is modeled as a time when collateral constraints are suddenly binding we find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy then a cut in the interest rate is most likely to result in a welfare reducing fall in output and employment when these frictions are absent a cut in the interest rate improves asset positions and promotes a welfare increasing economic expansion

efficiency wages disinflation and labor mobility abstract the paper analyzes the role of labor market segmentation and relative wage rigidity in the transmission process of disinflation policies in an open economy facing imperfect capital markets wages are flexible in the nontradables sector and based on efficiency factors in the tradables sector with perfect labor mobility a permanent reduction in the devaluation rate leads in the long run to a real appreciation a lower ratio of output of tradables to nontradables an increase in real wages measured in terms of tradables and a fall in the product wage in the nontradables sector under imperfect labor mobility unemployment temporarily rises