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

bilateral portfolio dynamics during the global financial crisis abstract there has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis for a given destination investors from different countries adjusted their holdings to different degrees we show that the size of the initial bilateral holding geographical distance common language the level of trade and common institutional linkages help to explain the pattern of adjustment these bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries

how robust are popular models of nominal frictions this paper analyzes three popular models of nominal price and wage frictions to determine which best ts post war u s data we construct a dynamic stochastic general equilibrium dsge model and use maximum likelihood to estimate each model s parameters because previous research nds that the conduct of monetary policy and the behavior of in ation changed in the early 1980s we examine two distinct sample periods using a bayesian pseudo odds measure as a means for comparison a sticky price and wage model with dynamic indexation best ts the data in the early sample period whereas either a sticky price and wage model with static indexation or a sticky information model best ts the data in the late sample period our results suggest that price and wage setting behavior may be sensitive to changes in the monetary policy regime if true the evaluation of alternative monetary policy rules may be even more complicated than previously believed

inflation regimes and the sources of inflation uncertainty this paper develops new time series measures of inflation uncertainty in the united states in the postwar period that account for the prospect of changing inflation regimes the measures are constructed from estimates of a markov switching model for inflation importantly we show that rational forecasts derived from the markov model are consistent with survey measures of inflation expectations our markov model allows us to decompose uncertainty about future inflation into two components a certainty equivalent component that ignores uncertainty about future inflation regimes and a regime uncertainty component that reflects this uncertainty survey measures of inflation uncertainty based on the dispersion of forecasts appear more closely associated to the regime uncertainty component than the certainty equivalent component of inflation uncertainty the regime uncertainty component also appears to have significant explanatory power in forecasting unemployment while the certainty equivalent component does not copyright 1993 by ohio state university press

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

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

conversation information and herd behavior experimental evidence shows that an important reason why people tend to imitate others to exhibit herd behavior is that they assume that the others have information that justifies their actions the information cascade models of banerjee 1992 and bikhchandani et al 1992 are significant developments in showing some general equilibrium and welfare effects of such rational imitative behavior but these models as specified may be of limited applicability since they assert that differences across groups in herd behavior can be attributed to the random decisions of first movers differences across groups in herd behavior might be explained more often in terms of different modes of interpersonal information transmission patterns of human conversation imply great selectivity to the kinds of information transmitted within groups this abstract was borrowed from another version of this item

international financial contagion in currency crises abstract this paper examines the role of financial linkages especially through a common creditor in the propagation of emerging market crises during the 1990s using panel probit regressions on 41 emerging market countries it finds that financial linkages played a significant role in the spread of the mexican asian and russian crises the significance of financial linkages emerges after controlling for the role of domestic and external fundamentals trade spillovers and financial weaknesses in the affected countries a strong financial linkage to the crisis country of origin not only substantially raises the probability of contagion but also helps to explain the observed regional concentration of currency crises

financial contagion and attention allocation this paper explains financial contagion between two stock markets with uncorrelated fundamentals by fluctuations in international investors attention allocation we model the process of attention allocation that underlies portfolio investment in international markets using investors who face information processing constraints investors optimally allocate more attention to a region hit by a financial crisis to the detriment of other markets the resulting endogenous increase in uncertainty causes a reduction in the capacity to bear risks by international investors that induces them to liquidate their positions in all risky assets hence there is a collapse in stock prices around the world we show that the degree of non anticipation of a crisis is crucial for the existence of contagion using data from the east asian crisis and the number of news stories about thailand in the financial times relative to news stories about argentina brazil and chile as a proxy for the relative attention allocated to the asian stock market we find evidence consistent with two key predictions of our model first the higher the volatility of the originator market the more relative attention allocated to this market and second the more relative attention allocated to the originator market the higher the volatility of the other markets our findings support the attention reallocation channel as a transmission mechanism of financial crises between regions during the period from january 1997 to july 1998

the behavior of money and other economic variables two natural experiments abstract the object of this paper is to test the performance of the quantity theory model and the related proposition of monetary neutrality in a context in which to use bernanke s phraseology money move d for reasons that were plausibly unrelated to the current state of the economy we investigate this question using data from two recent episodes of monetary policy regime change the move to floating exchange rates throughout the industrialized world following the breakdown of bretton woods in the early 1970s and the shift toward less expansive monetary policy that to varying degrees took place in these countries a decade or so later the results of this exercise are highly positive the money price relationship that we observe is fully consistent with theory growth shifts in the nominal stock of money and in the price level are highly correlated and bear a one to one relation to one another growth shifts in exchange rates are significantly related both to growth shifts in relative price levels and to growth shifts in relative excess supplies of money the classical neutrality proposition in this context superneutrality in general receives strong though not totally unambiguous support

financial globalisation and crisis institutional transformation and equity this paper comprises the long introduction to the symposium of five papers on financial globalisation published in the cambridge journal of economics volume 34 no 2 the paper discusses the impact of financial globalisation in a variety of spheres and shows how the five papers link together to provide a coherent view of the current economic and financial crisis in this paper we also examine the globalisation of finance more broadly both in historical terms as well as in relation to the current widespread failure in the financial markets we take up the policy question of how the interests of the poor in particular and developing countries in general could be safeguarded from the vagaries of financial globalisation questioning how much choice communities and countries have and what can the international community do to extend these choices

trade integration and business cycle convergence is the relation robust across time and space in this paper we investigate the relationship between trade intensity and the business cycle correlation using a panel data set taken from 24 countries over the period 1959 2003 most previous studies did not account for the possibility that the business cycle correlation may be influenced by unobservable country pair specific effects our estimates using both fixed and random effects methodologies suggest that trade intensity and the business cycle correlation are positively related to one another however detailed investigation shows that this relationship exists mainly for the european countries

the link between output growth and volatility evidence from a garch model with panel data abstract estimation results from a dynamic panel garch model for g7 countries over the 1965 2007 period support that higher output growth is associated with higher volatility of the innovations to growth but higher growth does not lead to more economic uncertainty

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

terms of trade uncertainty and economic growth abstract this paper examines a stochastic endogenous growth model in which terms of trade uncertainty affects savings and growth the model explains the well known positive link between growth and the mean rate of change of terms of trade and predicts also that terms of trade variability affects growth increased terms of trade variability results in faster or slower growth depending on the degree of risk aversion but in either case it reduces social welfare these growth effects imply that welfare costs of macroeconomic uncertainty are much larger than first thought cross country panel regressions provide strong support for the model s key predictions

inflation output and uncertainty in the era of inflation targeting a multi economy view on causal linkages abstract this study provides cross country robust evidence on interdependencies among inflation output growth and respective uncertainties for the current era of low inflation policies we attribute the extant empirical disagreement on these relations to the fact that long sampling periods and single economies are typically considered for analysis in this study varx mgarch m models are estimated for 34 developed and emerging economies and the time period of 1990 2010 we study average granger causal effects by aggregating parameter estimates over economies the cross sectional variation of estimates serves as a means to assess the robustness of empirical findings over the entire cross section we find that both inflation and inflation uncertainty significantly reduce output growth economies with low inflation rates are particularly at risk to incur output losses from increasing inflation we also find spillover effects among uncertainty variables where the causal impact if present seems to point from the uncertainty in output to inflation uncertainty

does culture influence asset managers views and behavior abstract this research enters new ground by presenting comparative survey evidence on asset managers views and behavior in the united states germany japan and thailand relying on hofstede s four cultural dimensions we find that cultural differences are most helpful in understanding country differences which cannot be explained by pure economic reasoning in short controlling for various determinants the dimension of more individualism predicts less herding behavior more power distance leads to older and comparatively less experienced managers in the upper hierarchy masculinity brings men into top positions and to higher volumes of assets under personal responsibility and uncertainty avoidance is related to higher safety margins against the tracking error allowed and relatively more research effort these consequences i e the culturally different importance of herding age experience gender tracking error and research effort clearly affect investment behavior although in a complex way

a year of living dangerously the management of the financial crisis in 2008 there are many reasons to regret the decision of u s financial authorities to insert the government into the resolution of the investment bank bear stearns in march 2008 the federal reserve s use of its discount window built up false hope of future rescues paying off the uninsured creditors of bear stearns overcompensated them at the time and invited speculative attacks on the equity of similarly situated firms i will argue that the market seizure after lehman brothers decision to seek the protection of bankruptcy was an echo of the prior official decision to protect bear stearns

sudden stops financial frictions and the banking sector abstract financial crises typically feature a large fall in total factor productivity tfp in emerging economies about 40 of domestic credit is provided by banks theories have largely focused on how exogenous changes in domestic interest rates impact the economy in this paper i explore the role of banks intermediation in exacerbating allocative inefficiency i build a small open economy model in which banks are the only domestic agents with access to international capital markets during sudden stops a shock to the world interest rate decreases banks credit supply and raises the domestic interest rate on loans firms with working capital financing needs experience an increase in the cost of production this worsens the misallocation and generates an endogenous fall in tfp and output the model is calibrated to mexico before the 1995 crisis the model predicts a 6 9 fall in tfp and a 5 fall in investment to gdp ratio which closely matches the effects observed in the data

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

do investors herd in emerging stock markets evidence from the taiwanese market abstract this paper has three main contributions to the literature on investor herds first it extends investor herding studies to an emerging yet relatively sophisticated taiwanese stock market at the sector level by using firm level data second it employs different methodologies designed to test the existence of investor herds to better understand the sources of herd behavior third it discusses the implications of different herding measures for investors exposed to systematic and unsystematic risks we find that the linear model based on the cross sectional standard deviation cssd testing methodology yields no significant evidence of herding however the non linear model proposed by chang et al 2000 and the state space based models of hwang and salmon 2004 lead to consistent results indicating strong evidence of herd formation in all sectors we also find that the herding effect is more prominent during periods of market losses our results suggest limited diversification opportunities for investors in this market especially during periods of market losses when diversification is most needed further research is necessary to see whether similar findings hold for other emerging markets

speculative attacks in a two peg model abstract we present a two country model of speculative attacks where the two countries peg their currency to the u s dollar and a continuum of investors can either attack or defend one or the two pegs the main objective of the paper is to show how extending a single peg model of speculative attacks with the presence of a second country pegging its currency changes the range of parameters for which a currency is attacked the model suggests that the presence of another country fixing its exchange rate changes dramatically the range of parameters for which a currency is attacked or defended for example the model indicates that a peg with a relatively high probability of collapse could survive if the other peg is not very likely to be abandoned so investors prefer instead to defend the second peg finally under complete information when the level of fundamentals in both economies is neither weak nor strong the stronger peg may collapse while the weaker peg may survive so in principle any peg could be successfully attacked

the constitutional reform of the european union abstract the european union violates three fundamental constitutional principles the principle of the separation of powers the democratic principle and the principle of subsidiarity centralisation and the democracy deficit explain the union s interest group bias the only way of closing the union s democracy deficit that is compatible with the principle of subsidiarity is to strengthen the role of the parliaments of the member states since democratic legitimacy is a european public good the treaty has to incorporate the national parliaments in the european legislative process subsidiarity also requires incentive compatible solutions for the european court and the european fiscal constitution

banks and liquidity crises in emerging market economies abstract this paper presents and analyzes a simple banking model in which banks have access to international capital markets and domestic asset markets the model generates two types of equilibria a no default equilibrium and a mixed equilibrium in the no default equilibrium all banks are symmetric and always solvent while in the mixed equilibrium some banks can be internationally illiquid and default simultaneously the latter equilibrium captures the basic features of banking crises after financial liberalization in emerging market economies in this case a large capital inflow leads to high asset price volatility and magnifies a banking crisis

a theory of capital controls as dynamic terms of trade manipulation we develop a theory of capital controls as dynamic terms of trade manipulation we study an infinite horizon endowment economy with two countries one country chooses taxes on international capital flows in order to maximize the welfare of its representative agent while the other country is passive we show that a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows although our theory of capital controls emphasizes interest rate manipulation the pattern of borrowing and lending per se is irrelevant

global banks and crisis transmission abstract we study the effect of financial integration through banks on the transmission of international business cycles in a sample of 18 20 developed countries between 1978 and 2009 we find that in periods without financial crises increases in bilateral banking linkages are associated with more divergent output cycles this relation is significantly weaker during financial turmoil periods suggesting that financial crises induce co movement among more financially integrated countries we also show that countries with stronger direct and indirect financial ties to the u s experienced more synchronized cycles with the u s during the recent 2007 2009 crisis we then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity the model suggests that the relation between integration and synchronization depends on the type of shocks hitting the world economy and that shocks to global banks played an important role in triggering and spreading the 2007 2009 crisis

contagion in latin america definitions measurement and policy implications this paper analyzes bond and stock markets in latin america and uses these patterns to investigate whether contagion occurred in the 1990 s it defines shift contagion as a significant increase in cross market linkages after a shock to one country or region several coin toss examples and a simple model show that the standard tests for contagion are biased due to the presence of heteroscedasticity endogeneity and omitted variable bias recent empirical work which addresses these problems finds little evidence of shift contagion during a range of crisis periods instead this work argues that many countries are highly interdependent in all states of the world and the strong cross country linkages which exist after a crisis are not significantly different than those during more stable periods these findings have a number of implications for latin america

do expected shifts in inflation affect estimates of the long run fisher relation recent empirical studies suggest that nominal interest rates and expected inflation do not move together one for one in the long run a finding at odds with many theoretical models this article shows that these results can be deceptive when the process followed by inflation shifts infrequently we characterize the shifts in inflation by a markov switching model based upon this model s forecasts we reexamine the long run relationship between nominal interest rates and inflation interestingly we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one for one

the effects of real and nominal uncertainty on inflation and output growth some garch m evidence in this paper we use garch m methods to test four hypotheses about the effects of real and nominal uncertainty on average inflation and output growth in the united states from 1948 to 1996 we find no evidence that higher inflation uncertainty or higher output growth uncertainty raises the average inflation rate we also find no support for the idea that more risky output growth is associated with a higher average real growth rate our key result is that in a variety of models and sample periods inflation uncertainty significantly lowers real output growth copyright 2000 john wiley sons ltd

the falsification of four popular hypotheses about the asian crisis various claims have been made about the causes of the asian crisis and its spread here we use data on the behaviour of capital flows during the crisis to test the strong forms of four such hypotheses that portfolio investors and hedge funds played a dominant role in initiating and or spreading the crisis that moral hazard kept efficient markets from predicting the crisis and finally the common lender hypothesis of kaminsky and reinhart in the process we also test implications of the calvo mendoza model of rational investor ignorance all are falsified as monocausal explanations for example portfolio investments that could not have been subject to substantial moral hazard continued to flow into asia until very shortly before the crisis likewise banks were a much larger source of capital outflows during the crisis than were portfolio investors while falsified in their strongest forms several of these hypotheses in less strong forms should play a role in a more nuanced analysis it is necessary to move past simple single factor approaches in order to produce a more complete synthetic explanation of this episode

extreme interdependence and extreme contagion between emerging markets abstract this paper uses seemingly unrelated probit techniques to separate the transmission of a crisis due to broadly defined macroeconomic interdependence from contagion due to herding avoiding some of the caveats of the more traditional cross correlation approach we find that pure contagion occurred in a limited number of country pairs generally belonging to the same region a reduction in speculative pressure can also be identified between countries in different regional blocks this seems to suggest that after an initial crisis episode investors tend to discriminate on the basis of location and common macroeconomic weakness or perceived similarity

are asset price guarantees useful for preventing sudden stops a quantitative investigation of the globalization hazard moral hazard tradeoff abstract an implication of the globalization hazard hypothesis is that sudden stops caused by global financial frictions could be prevented by offering foreign investors price guarantees on emerging markets assets these guarantees create a tradeoff however because they weaken globalization hazard while creating international moral hazard we study this tradeoff using a quantitative equilibrium asset pricing model without guarantees margin calls and trading costs cause sudden stops driven by a fisherian deflation price guarantees prevent this deflation by propping up foreign demand for assets the effectiveness of price guarantees their distortions on asset markets and their welfare implications depend critically on whether the guarantees are contingent on debt levels and on the price elasticity of foreign demand for domestic assets

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration