contagion macroeconomic models with multiple equilibria abstract several concepts of contagion are distinguished it is argued that models that allow only a single equilibrium conditional on the macroeconomic fundamentals are not adequate to capture all forms of contagion hence it is useful to formulate macro models that admit multiple equilibria and self fulfilling expectations a simple balance of payments model is presented to illustrate that phenomenon and some back of the envelope calculations assess its relevance to the coincidence of emerging market crises in 1994 95 and in 1997

sticky prices and monetary policy evidence from disaggregated us data this paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor augmented vector autoregression estimated on a large data set on the basis of this estimation we establish eight facts 1 macroeconomic shocks explain only about 15 of sectoral inflation fluctuations 2 the persistence of sectoral inflation is driven by macroeconomic factors 3 while disaggregated prices respond quickly to sector specific shocks their responses to aggregate shocks are small on impact and larger thereafter 4 most prices respond with a significant delay to identified monetary policy shocks and show little evidence of a price puzzle contrary to existing studies based on traditional vars 5 categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least 6 the observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power 7 prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks 8 the sector specific components of prices and quantities move in opposite directions

the differential regional effects of monetary policy this paper examines whether monetary policy has similar effects across regions in the united states impulse response functions from an estimated structural vector autoregression reveal a core of regions new england mideast plains southeast and the far west that respond to monetary policy changes in ways that closely approximate the u s average response of the three noncore regions one great lakes is noticeably more sensitive to monetary policy changes and two southwest and rocky mountains are found to be much less sensitive a state level version of the model is estimated and used to provide evidence on the channels for monetary policy

market triggered changes in capital structure equilibrium price dynamics we analyze the internal consistency of using the market price of a firm s equity to trigger a contractual change in the firm s capital structure given that the value of the equity itself depends on the firm s capital structure of particular interest is the case of contingent capital for banks in the form of debt that converts to equity when conversion is triggered by a decline in the bank s stock price we analyze the problem of existence and uniqueness of equilibrium values for a firm s liabilities in this context meaning values consistent with a market price trigger discrete time dynamics allow multiple equilibria in contrast we show that the possibility of multiple equilibria can largely be ruled out in continuous time where the price of the triggering security adjusts in anticipation of breaching the trigger our main condition for existence of an equilibrium requires that the consequences of triggering a conversion be consistent with the direction in which the trigger is crossed for the design of contingent capital with a stock price trigger this condition may be interpreted to mean that conversion should be disadvantageous to shareholders and it is satisfied by setting the trigger sufficiently high uniqueness follows provided the trigger is sufficiently accessible by all candidate equilibria we illustrate precise formulations of these conditions with a variety of applications

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

boom and bust cycles external imbalances and the real exchange rate when the current account balance and net capital outflows do not exactly offset each other international payment flows arise payment flows into a country push the real exchange rate up payment outflows push it down this article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom and bust cycles it shows that during such episodes capital inflows first exceed the deficit on current account strengthening the currency later on when the return on domestic capital reverts to its normal level the current account recovers yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article s theoretical predictions

crises and exchange rate regimes time to break down the bipolar view we revisit the link between crises and exchange rate regimes err using a panel of 90 developed and developing countries over the period 1980 2009 we find that corner err are not more prone to crises compared to intermediate err this finding holds for different types of crises banking currency and debt and is robust to a wide set of alternative specifications consequently we clearly break down the traditional bipolar view countries that aim at preventing crisis episodes should focus less on the choice of the err and instead implement sound structural macroeconomic policies

collusion and overlending i introduction for a long time have korean companies been engaged in unbridled expansionism financed through loans inefficient octopus style management and over and duplicate investment thus expediting the structural failure of the economy this failure to concentrate on profits consolidation and efficiency provided the fuse to the bankruptcy bombs that triggered the foreign exchange and economic crises the collusion between the conglomerates financial sector and politicians made this financial monopoly possible chosun ilbo december 26 1997 collusion and overlending in the korean financial sector may be best illustrated by the above editorial highlight of chosun ilbo the most read newspaper in korea its 1997 financial crisis is primarily triggered by continual bankruptcies of chaebols conglomerates which with assistance from politicians had borrowed heavily from financial institutions in financing their investment projects 1 unlike some other asian countries experiencing problems in their financial sector due to shifts in investment projects toward real estates such as japan hong kong and thailand chaebols in korea concentrated mostly on manufacturing activities 2 in this study we establish a tractable model of overlending with three key players namely chaebols financial institutions and politicians as highlighted in chosun ilbo the model is designed to achieve two primary goals that are crucial for matching some key observations during the korean turmoil first we illustrate how overlending can be an equilibrium outcome with collusion between chaebols and politicians when the economic environment is favorable this occurs despite that such a collusion distorts normal borrowing lending operation by causing a discernible shift in loan composition from more to less productive investment projects second we show that as the economic environment gradually deteriorates there can be a shift from a collusion to a no collusion equilibrium the combination of deterioration in fundamentals and expectations of an equilibrium shift can trigger economy wide financial crisis more specifically we construct a simple principal supervisor agent model of corruption and overlending the principal is the formal authority of loan decision making of a financial institution or in short the financial institution the supervisor is a politician who serves as the informational intermediary in the borrowing lending arrangement via his her connections and networking 3 the agent is a chaebol of an unknown type which seeks for external financing of a set of risky projects a politician s favorable signal about the borrowing chaebol s overall performance would grant the approval of the loan to finance an array of risky projects whose returns depend on idiosyncratic shocks that cannot be washed out in aggregation within the chaebol as an outside alternative to making the loan the financial institution can invest in the world capital market where a fixed rate of return is guaranteed this portfolio decision depends on a comparison of the expected average returns on the given set of risky projects with the safe returns on investments in the world capital market while both the chaebol s type and the state of nature are unobservable to the financial institution we for simplicity assume that politician s connections and networking can fully uncover the true type of the chaebol this valuable information possessed by the politician is one that the financial institution has an incentive to purchase but a low type chaebol has an incentive to conceal whether the politician ends up revealing truthfully this information depends on how much to obtain from the lender in terms of general support versus how much to gain from the borrower in terms of bribes or side payments when a low type chaebol has the politician on its side information is distorted and a collusion equilibrium arises

predicting exchange rate crises mexico revisited abstract this paper predicts ex ante probabilities of currency crises and sizes of expected devaluations month by month for mexico between 1980 and 1986 the forces contributing to speculative attacks on the mexican peso include domestic fiscal and monetary shocks external credit shocks and relative price shocks reducing domestic credit growth increasing the uncertainty surrounding this growth and reducing the size and perhaps increasing the frequency of currency realignments might have greatly reduced the amount of currency speculation against the peso between 1980 and 1986 anticipated external credit supply shocks played a relatively minor role during mexico s balance of payments crises

monetary policy and investment dynamics evidence from disaggregate data we use disaggregated data on the components of private fixed investment pfi to estimate industry level responses of real investment and capital prices to unanticipated monetary policy the response functions derive from a restricted large scale var estimated over 1959 2007 our results point to significant cross sector heterogeneity in the behavior of pfi prices and quantities for assets belonging to the equipment category of fixed investment we find that quantities rather than prices absorb most of the fallout from a policy shock by contrast the price effects tend to be higher and the output effects lower for nonresidential structures

assets and liabilities and scottish independence scottish independence implies an economic future that is different from remaining in the united kingdom the economic debate largely comes down to whether this would leave scots better or worse off by most measures scotland s current economic standing is very similar to that of an average uk region output per head income and unemployment are almost all exactly the same as the average uk region this is not surprising given the economic and social integration and shared institutions and is consistent with the idea of conditional convergence this suggests that after controlling for differences in institutions and other characteristics so called initial conditions countries tend to converge to similar levels of income 1 however if scotland becomes an independent nation some of the shared uk assets liabilities and institutions would need to be divided up this would change the initial conditions for scotland and the rest of the uk and therefore we would be likely to see a different economic future for both regions see barro and sala i martin 1991

disaggregate evidence on the persistence of consumer price inflation this paper uses disaggregate inflation data spanning all of consumption to examine i the persistence of disaggregate inflation relative to aggregate inflation ii the distribution of persistence across consumption sectors and iii whether persistence has changed assuming mean inflation to be unchanged disaggregate persistence inflation is consistently below aggregate persistence taking into account an early 1990s shift in mean inflation identified by break tests yields much lower estimates of both aggregate and disaggregate persistence for 1984 2002 but with the mean break average disaggregate persistence is actually as great as aggregate inflation persistence a factor model provides a natural framework for interpreting the relationship between aggregate and disaggregate persistence copyright 2006 john wiley sons ltd

a new approach to modeling early warning systems for currency crises can a machine learning fuzzy expert system predict the currency crises effectively abstract this paper presents a hybrid causal model for predicting the occurrence of currency crises by using the neuro fuzzy modeling approach the model integrates the learning ability of the neural network with the inference mechanism of fuzzy logic the empirical results show that the proposed neuro fuzzy model leads to a better prediction of crisis significantly the model can also construct a reliable causal relationship among the variables through the obtained knowledge base compared to neural network and the traditionally used techniques such as logit the proposed model can thus lead to a somewhat more prescriptive modeling approach based on determinate causal mechanisms towards finding ways to prevent currency crises

the politics of speculative attacks in industrial democracies recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack we argue that political processes and partisan objectives inform expectations about the government s commitment to the exchange rate first market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse second party labels provide information to currency traders about the policy objectives of a potential government consequently we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy a discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995 the predicted values are then used as a proxy for market expectations in a model of speculative currency crises

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

how responsive is business capital formation to its user cost an exploration with micro data abstract the response of business capital formation to its user cost is critical to evaluating tax reform deficit reduction and monetary policy evidence for a substantial user cost elasticity however is sparse most evidence has been based on aggregate data although several recent studies with firm level data report substantial effects with a particularly rich micro dataset containing over 26 000 observations this paper explores what can be learned about the user cost elasticity while the results depend to some extent on the specification and econometric technique various diagnostics lead us to prefer a precisely estimated but small elasticity of approximately 0 25 this paper is dedicated to the memory of robert eisner who labored early and ably on uncovering the determinants of investment spending and highlighting the importance of the question found in the title of this paper

sterilization costs and exchange rate targeting abstract we examine the movements of exchange rates and capital inflows in an environment where an optimizing central bank pursuing the joint goals of inflation and output targeting engages in costly sterilization activities our results predict that when faced with increased sterilization costs the central bank will choose to limit its sterilization activities allowing target variables such as the nominal exchange rate to adjust we then test the predictions of a linearized version of the saddle path solution to the model for a cross country panel of developing countries we use ols iv and gmm specifications to allow for the endogeneity of capital inflows our results confirm that monetary policy does respond to sterilization costs

small sample bias and adjustment costs the response of most stock variables e g capital housing consumer durables and prices to exogenous impulses involves a dynamic or short run reaction and a target or long run reaction the difference between these two is typically attributed to some form of adjustment cost in this paper i argue that the small sample problems of cointegrating procedures used to estimate the long run component are particularly severe when adjustment costs are important more precisely elasticity estimates will tend to be biased downward i illustrate the empirical relevance of this by showing that the target elasticity of capital with respect to its cost is severely downward biased when estimated with conventional ols cointegration procedures once this is corrected the elasticity of the u s capital output ratio to the cost of capital is found to be large and close to minus one copyright 1994 by mit press

seigniorage revenue deficits and self fulfilling currency crises abstract this paper examines potential resolutions to the conflict between a fixed exchange rate and seigniorage revenue requirement of a stylized developing economy that gives rise to a currency crisis the government has an informational advantage and can decide when it is optimal to invoke an escape clause i e to drop the peg and float speculators must guess when the crisis will happen based on their assessment of the probability of collapse and this makes pegged exchange rate equilibria unstable

optimal monetary policy with durable consumption goods abstract we document that the durable goods sector is much more interest sensitive than the nondurables sector and then investigate the implications of these sectoral differences for monetary policy we formulate a two sector general equilibrium model that is calibrated both to match the sectoral responses to a monetary shock derived from our empirical var and to imply an empirically realistic degree of sectoral output volatility and comovement while the social welfare function involves sector specific output gaps and inflation rates the performance of the optimal policy rule can be closely approximated by a simple rule that targets a weighted average of aggregate wage and price inflation in contrast a rule that stabilizes a more narrow measure of final goods price inflation performs poorly in terms of social welfare

macroeconomic regime switches and speculative attacks this paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated the paper develops a model of an open economy in which monetary policy starts active fiscal policy starts passive and in a particular state of nature monetary policy switches to passive and fiscal policy switches to active the probability of the regime switch is endogenous and changes over time together with the state of the economy the regime switch is preceded by a sharp increase in interest rates and causes a jump in the exchange rate the model predicts that currency composition of public debt affects dynamics of macroeconomic variables furthermore the model is consistent with evidence from recent currency crises in particular small seigniorage revenues

sources of the great moderation a time series analysis of gdp subsectors recent work finds evidence that the volatility of the u s economy fell dramatically around the first quarter of 1984 we trace the timing of this so called great moderation across many subsectors of the economy in order to better understand its root cause we find that the interest rate sensitive sectors generally experience a much earlier volatility decline than other large sectors of the economy the changes in federal reserve stabilization policies that occurred during the early 1980s support the view that an improved monetary policy played an important role in stabilizing real economic activity we find only mild evidence that good luck was important and little evidence to support the claim that improved inventory management was important

international policy coordination for financial market stability in the asian economies based on the understanding of financial crisis as the self fulfilling crisis of speculators belief system this paper examines the feasibility of introducing the tobin tax system to reduce financial volatility in the asian foreign exchange markets the model analysis in this paper provides the following policy implications to reduce the motivation to deviate from the policy coordination it is required to allow all tax revenues to collecting countries especially to singapore and hong kong even without the participation of the major western countries the start of the tax policy coordination in the asian region can have significant signalling effects to reduce speculative motivation

self fulfilling expectations speculative attack and capital controls this paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime it is shown that if there exists a nonzero probability that the policymaker s response to a significant decrease in official foreign reserves will be the introduction of controls a speculative attack may occur even when current and expected monetary policy is consistent with a permanently viable control free fixed exchange rate regime consequently capital controls may be the outcome of self fulfilling expectations rather than the result of imprudent economic policies copyright 1993 by ohio state university press

uncertainty and the timing of taxes abstract this paper uses blanchard s 1985 overlapping generations model to study a current tax reduction followed by a future budget balancing tax increase at an unknown date assuming that the rate of time preference equals the interest rate the tax cut creates a trade deficit which grows before it eventually shrinks with certainty regarding the timing of future taxes the initial deficit immediately improves the former path for the trade deficit is consistent with events in the united states following the 1981 tax cut

can aggregation explain the persistence of inflation abstract an aggregation exercise is proposed that aims at investigating whether the fast average adjustments of the disaggregate inflation series of the euro area cpi is coherent with the slow adjustment of euro area aggregate inflation estimating a dynamic factor model for 404 inflation sub indices of the euro area cpi allows to decompose the dynamics of inflation sub indices into a part due to a common macroeconomic shock and to sector specific idiosyncratic shocks although idiosyncratic shocks dominate the variance of sectoral prices one common factor appears to be the main driver of aggregate dynamics in addition the heterogenous propagation of this common shock across sectoral inflation rates and in particular its slow propagation to inflation rates of services generates the persistence of aggregate inflation we conclude that the aggregation mechanism explains a significant amount of aggregate inflation persistence

delaying the inevitable interest rate defense and balance of payments crises the classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle in practice however central banks typically defend pegs aggressively by raising short term interest rates this paper analyzes the feasibility and optimality of raising interest rates to delay a potential bop crisis interest rate policy works through two distinct channels by raising demand for domestic interest bearing liquid assets higher interest rates tend to delay the crisis higher interest rates however increase public debt service and imply higher future inflation which tends to bring forward the crisis we show that under certain conditions it is feasible to delay the crisis but raising interest rates beyond a certain point may actually hasten the crisis a similar nonmonotonic relationship emerges between welfare and the increase in interest rates it is thus optimal to engage in some active interest rate defense but only up to a certain point i

informational contagion of bank runs in a third generation crisis model abstract this paper highlights the international spread of bank runs in a third generation model of financial crises through an informational channel banks short term liabilities include loans granted by foreign creditors who have imperfect information about the liquidation costs of banks assets a bank panic in a country induces lenders to downgrade early liquidation yields in other countries and thus to require higher interest rates to enable their banks to roll over their maturing debt those banks become therefore more prone to self fulfilling depositors runs the paper then studies the effect on contagion of increased transparency and bailouts

testing motives for charitable giving a revealed preference methodology with experimental evidence abstract a large economics literature seeks to understand the reasons why individuals make charitable contributions fundamental features of most models of charitable giving are the inclusion of externalities induced by other agents and the lancasterian characteristics approach to specifying utility functions this paper develops a general revealed preference methodology for testing a variety of preference structures that allow for both externalities and characteristics the tests are simple linear programs that are transparent computationally efficient and straightforward to implement we show how the technique applies to standard models of privately provided public goods and novel models that account for other regarding preferences based on relative consumption and donations among individuals we also conduct an original experiment that enables testing and comparing many models on a single data set our experiment design allows us to focus on intrinsic motivations which are often hard to disentangle from other extrinsic or image effects in field data the results provide the first revealed preference evidence on the importance of social comparisons when individuals make charitable contributions models that include preferences for either relative consumption or donations yield significantly greater explanatory power than the standard model of impure altruism

collapsing exchange rate regimes in the presence of a parallel market this paper develops a model of an economy where the fixed exchange rate is overvalued and coexists with a parallel market for foreign currency such a situation persists because the parallel marker is used by the central authorities as an instrument to delay policy changes using the haitian experience this paper estimates a rationing parameter of foreign currency in the official market which translates the extent of tolerance of the parallel market the paper also produces estimates of onestep ahead probability of devaluation rationing has been severe and the probability of collapse has reached high levels during the period studied

sovereign default and the euro the introduction of the euro meant that countries with sovereign debt problems could not use monetization and devaluation as a way to prevent default the institutional structures of the euro were also widely thought to prevent a country in difficulties being bailed out by other euro members or having its sovereign debt purchased by the european central bank ecb despite these restrictions there was relatively little discussion about sovereign default in pre economic and monetary union debates among economists and financial markets priced in almost no default risk in the pre crisis years the crisis has seen bailouts and bond purchases by the ecb but there has also been a sovereign default inside the euro and further defaults seem likely the introduction of the euro was intended to bring greater stability by ending devaluations triggered by self fulfilling runs on a currency while this particular scenario can no longer happen this paper discusses mechanisms whereby expectations that a country may leave the euro can lead to this outcome occurring copyright 2013 oxford university press

determinants and costs of current account reversals under heterogeneity and serial correlation using large panel data sets for analysis of determinants and costs of reversals asks for controls of latent heterogeneity among countries this article performs a bayesian analysis which allows for a parsimonious yet flexible handling of country specific heterogeneity via random coefficients and serially correlated errors consideration of persistence within the employed macroeconomic data is important to gauge the impact of explaining variables suggested by theory correctly bayesian specification tests provide evidence in favour of models incorporating heterogeneity and serial correlation the results suggest that costs of reversals are overestimated when country specific heterogeneity is neglected and stress the importance of external variables in explaining current account reversals results are checked for robustness against the underlying reversal definition

investment tax incentives prices and the supply of capital goods using data on the prices of capital goods this paper shows that much of the benefit of investment tax incentives does not go to investing firms but rather to capital suppliers through higher prices the reduction in the cost of capital from a 10 percent investment tax credit increases equipment prices 3 5 7 0 percent this lasts several years and is largest for assets with large order backlogs low import competition or with a large fraction of buyers able to use investment subsidies capital goods workers wages rise too instrumental variables estimates of the short run supply elasticity are around 1 and can explain the traditionally small estimates of investment demand elasticities in absolute value the demand elasticity implied here exceeds 1

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

learning large deviations and recurrent currency crises this article studies a version of obstfeld s journal of international economics 43 1997 61 77 escape clause model the model is calibrated to produce three rational expectations equilibria two of these equilibria are e stable and one is unstable dynamics are introduced by assuming that agents must learn about the government s decision rule it is assumed they do this using a stochastic approximation algorithm it turns out that as a certain parameter describing the sensitivity of beliefs to new information gets small the algorithm converges to a small noise diffusion process the dynamics of exchange rate changes are then characterized using large deviation techniques from freidlin and wentzell random perturbations of dynamical systems second edition berlin springer verlag 1998 these methods describe the sense in which the limiting distribution of exchange rate changes is approximated by a two state markov switching process where the two states correspond to the two e stable equilibria the model is calibrated to the exchange rate histories of argentina brazil and mexico currency crises in these countries resemble the predicted escape routes of the model a key feature of these escape routes is that expectations of a devaluation erupt suddenly without large contemporaneous shocks this is consistent with evidence showing that crises are often poorly anticipated by financial markets

multiple bubbles in the european union emission trading scheme abstract the european union emission trading scheme eu ets is the first large scale co 2 emission trading system in the world carbon allowances are financial assets potentially vulnerable to the behavior of traders and investors in fact the carbon price has been quite volatile since the inception of the market and it has recently hit very low values however to date no work exists to evaluate whether volatility and price spikes are due to episodes of speculation and price bubbles our paper fills this gap we use the recent approaches developed by phillips and yu 2010 phillips et al 2011 and phillips et al 2015a 2015b who propose a recursive right sided unit root approaches to detect and date stamp mildly explosive behaviors and carbon market exuberance we complement this methodology by using the wild bootstrap procedure by goncalves and kilian 2004 to control for the heteroschedasticity of carbon price data analyzing the eu ets front month contract price from 2005 to 2014 we find different episodes of price bubbles these episodes are not explained by similar behavior of the fundamentals but seem related to energy and environmental policy announcements our results can provide insightful policy implications in the context of the actual carbon market reform as well as the implementation of stricter financial regulations rules to co 2 trading

a restaurant field experiment in charitable contributions abstract the issue of how to best elicit charitable contributions has long been an important one for charitable organizations some recent studies have examined different schemes for eliciting contributions for public radio and maximizing revenue for commercial purposes our study is a pure field experiment that was conducted in a restaurant we varied the level of suggested contribution on the jar at the cashier to see if this had an effect on the revenue received in one condition did not make any suggestion we do find differences in revenue depending on the suggested amount showing that there is scope for strategy in choosing how to appeal to the potential donors the amount requested does affect revenue but it is not a monotonic relationship we also find that not naming a suggested amount fares poorly in terms of generating revenue

asset prices and twin crises abstract emerging market crises have been characterized by two key features i banking crises generally precede currency crises and ii asset prices decline in advance of currency crises this paper argues that asset prices provide a key link between banking and currency crises it is shown that a prospective currency crisis due to an unanticipated increase in the public debt triggers an asset price decline banks exposure to asset prices in turn deteriorates their balance sheets and precipitates a banking crisis under the assumption of government bailout of banks it is shown that the twin crises are self fulfilling and their time line follows i and ii described above the timing of currency crisis is decreasing in the ratio of government s bailout to banks loss of capital

gold monetization and gold discipline gold and its price have emerged as frequent topics of both academic and government debate 2 public attention focused on the gold market since gold s price began fluctuating violently in 1980 and 1981 has turned to gold as a possible means of removing some discretion inherent in the current fiat money system since lack of adherence to monetary rules can lead to problems of dynamic policy inconsistency academic economists have begun seriously to reconsider monetary standards based either on gold or on some other commodity as politically feasible methods of establishing rules 3

explaining the duration of exchange rate pegs abstract this paper is an empirical investigation of the duration of exchange rate pegs in 16 latin american countries and jamaica we identify factors that influence peg duration using logit analysis the real exchange rate and the level of international liquidity are significant determinants of the monthly likelihood of devaluation structural variables such as the openness of an economy and its geographical trade concentration and political variables such as changes in the executive also significantly affect the likelihood of a devaluation there is some evidence that the likelihood of a devaluation first rises and subsequently declines during the first year of a peg

uncertainty and currency crises evidence from survey data this paper studies empirically how uncertainty aects speculation in the foreign ex change markets we use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals we nd that uncertainty has a non monotone eect on exchange rate pressures namely uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad we prove that this prediction arises from a broad class of currency crisis theories ranging from rst generation to global game models we also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias

a general equilibrium model of exchange market intervention with variable sterilization abstract the model presented in this paper is characterized by rational expectations sticky prices imperfect capital substitution separate policy functions for domestic credit and credit and reserves and variable sterilization monetary intervention and sterilization policies offer complex tradeoffs between internal and external objectives sterilization dampens exchange rate and price changes due to intervention but magnifies short run changes due to foreign interest rate shocks the ratio of exchange rate to price changes due to intervention rises at an increasing rate with the degree of sterilization and changes in domestic credit induce long run purchasingn power parity but exogeneous changes in reserves income or the foreign interest rate do not

currency crises and contingent liabilities a contingent liability is a future spending commitment that is realized with some probability international organizations emphasize the dangers of contingent liabilities when providing advice why one answer is obvious if significant contingent liabilities are realized they commit governments to substantial fiscal costs there is a further reason by taking on a contingent liability the government can increase the probability of the underlying shock taking place this paper describes how the issuance of government guarantees and the methods by which they are financed affect the probability of crises taking place it also discusses the determinants of post crisis inflation and depreciation

reserve accumulation and financial crises from individual protection to systemic risk abstract this paper provides a new perspective on the relationship between countries international reserve holdings and financial crises while the local view holds that reserves may prevent domestic crises it overlooks that the accumulation of reserves relaxes the financing constraint of the reserve currency country and may cause a financial crisis in the centre which is transmitted globally according to this global view reserve accumulation might destabilize the international financial system since the crisis affects all countries alike the accumulation of reserves imposes a negative externality on non accumulating countries we integrate this idea in a theoretical model of the optimal amount of reserves and illustrate the gap between local and global optimality the consideration of systemic risk lowers the demand for reserves moreover if a supranational authority determines the optimal level of reserves it internalizes the negative externality and accumulates fewer reserves a macroprudential tax on reserve hoardings might implement the socially optimal solution our calibration analysis shows that these considerations are economically significant they lower the optimal amount of reserves in the benchmark case by 45

the mexican peso crisis sudden death or death foretold abstract we argue that allowing for the possibility of a self fulfilling panic helps to understand several features of the recent mexican crisis self fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short term dollar debt we present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt but not for others lastly we argue that the imperfect credibility of mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994 our model formalizes the reasons why this is so

sticky price models and durable goods the inclusion of a durable goods sector in sticky price models has strong and unexpected implications even if most prices are flexible a small durable goods sector with sticky prices may be sufficient to make aggregate output react to monetary policy as though most prices were sticky in contrast flexibly priced durables with sufficiently long service lives can undo the implications of standard sticky price models in a limiting case flexibly priced durables cause monetary policy to have no effect on aggregate output our analysis suggests that durable goods prices are the most relevant data for calibrating price rigidity jel e21 e23 e31 e52

monetary contracting between central banks and the design of sustainable exchange rate zones abstract an exchange rate system is a contract which commits central banks to intervene in the foreign exchange market the design features of the system include the rules of intervention the limits placed on exchange rates and the crisis scenario describing possible transitions to new regimes this paper considers the various trade offs one faces in designing an exchange rate system one of these pertains to the amount of reserves which the central banks must have on hand in order to forestall a speculative attack and make the system sustainable the amount of reserves needed depends crucially on the assumed crisis scenario

collapsing exchange rate regimes abstract the paper develops models of speculative runs and collapse of fixed exchange rate regimes which result from credit policies that are ultimately inconsistent with a fixed exchange rate while no substantially new results are offered the formulation itself is of interest in highlighting the important ideas that have emerged in this area we modify the flood garber model to make the analysis more comparable with the deterministic case specifically we assume that the money growth process is specified in terms of growth rates rather than absolute increments and as a uniform rather than exponential distribution the modified analysis lends itself to a simple geometric interpretation of the krugman and flood garber models highlighting the important difference between the deterministic and stochastic models in the former the speculative attack run is concentrated in the latter the transition to floating is diffuse reserve losses exceed increases in domestic credit because of a rising probability of transition and reserve depletion accelerates on the way to the regime change

speculative attack and the external constraint in a maximizing model of the balance of payments balance of payments models of speculative attack differ from non renewable resource models in that foreign exchange reserves may be borrowed from abroad this paper shows that in an idealized world where all private income is subject to lump sum taxation central bank reserves can become infinitely negative without violating the government s intertemporal budget constraint none the less a growth rate of domestic credit exceeding the world interest rate if maintained indefinitely leads to violation of the constraint in the paper s model given an assumed limit to official external borrowing the paper next analyses inevitable transitions between fixed and floating exchange rate regimes when individual preferences are explicitly specified in a discrete time deterministic model the collapse of a fixed rate may be characterized by two successive speculative attacks

monetary policy in a data rich environment abstract most empirical analyses of monetary policy have been confined to frameworks in which the federal reserve is implicitly assumed to exploit only a limited amount of information despite the fact that the fed actively monitors literally thousands of economic time series this article explores the feasibility of incorporating richer information sets into the analysis both positive and normative of fed policymaking we employ a factor model approach developed by stock j h watson m w diffusion indices journal of business economic statistics 2002 20 2 147 forecasting inflation 1999 journal of monetary economics 44 2 293 that permits the systematic information in large data sets to be summarized by relatively few estimated factors with this framework we reconfirm stock and watson s result that the use of large data sets can improve forecast accuracy and we show that this result does not seem to depend on the use of finally revised as opposed to real time data we estimate policy reaction functions for the fed that take into account its data rich environment and provide a test of the hypothesis that fed actions are explained solely by its forecasts of inflation and real activity finally we explore the possibility of developing an expert system that could aggregate diverse information and provide benchmark policy settings

rational and self fulfilling balance of payments crises speculative attacks on a pegged exchange rate must sometimes occur ifasset price paths are to be free of abnormal profit opportunities suchattacks are fully rational as they reflect the market s response to aregime breakdown that is inevitable the authors shows that under someexpectations about policy balance of payments crises can also be purely self fulfilling events in such cases even a permanently viableregime may collapse and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis the behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack copyright 1986 by american economic association

when should the ask be a nudge the effect of default amounts on charitable donations abstracthow does setting a donation option as the default in a charitable appeal affect people s decisions in eight studies comprising 11 508 participants making 2 423 donation decisions in both experimental settings and a large scale natural field experiment the authors investigate the effect of choice option defaults on the donation rate average donation amount and the resulting revenue they find 1 a scale back effect in which low defaults reduce average donation amounts 2 a lower bar effect in which defaulting a low amount increases donation rate and 3 a default distraction effect in which introducing any defaults reduces the effect of other cues such as positive charity information contrary to the view that setting defaults will backfire defaults increased revenue in the field study however the findings suggest that defaults can sometimes be a self canceling intervention with countervailing effects of default option magnitude on decisions and resulting in no net effect

a model of crises in emerging markets this paper presents a perfect foresight model of speculative attacks on emerging markets credit constrained governments are assumed to have two objectives to accumulate liquid assets in order to self insure against shocks to national consumption and to insure poorly regulated domestic financial markets this policy regime generates endogenous fiscal deficits defined to include the growth of contingent liabilities the model sets out a sequence of yield differentials consistent with capital inflows followed by anticipated speculative attacks the model suggests that a common shock generated capital inflows to emerging markets in asia and latin america after 1989

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

currency crises with the threat of an interest rate defence while virtually all currency crisis models recognise that the decision to abandon a peg depends on how tenaciously policy makers defend it this is seldom modelled explicitly we add the threat of an interest rate defence to the global game model of morris and shin american economic review 88 1998 with an endogenous defence actions of speculators may become strategic substitutes instead of the usual complements nevertheless our generalised model remains tractable and has a unique threshold equilibrium it provides additional insights for instance the threat of an interest rate defence makes speculation riskier and this may be sufficient to keep speculators out when fundamentals are still relatively strong

an interest rate defense of a fixed exchange rate defending a government s exchange rate commitment with active interest rate policy is not an option in first generation models of speculative attacks in those models the interest rate is the passive reflection of currency depreciation expectations in this paper we show how to adapt the first generation framework to allow for an interest rate defense it is shown that increasing domestic currency interest rate before the attack makes domestic assets more attractive according to an asset substitution effect but weakens the domestic currency by increasing the government s fiscal liabilities as a result an interest rate defense can be successful only conditional on sound fiscal policy

evidence on the role of cash flow for investment abstract recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks evidence for such a mechanism also known as the financial accelerator consists largely of firm level studies showing that cash flow is an important predictor of investment but this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities in this paper we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a fundamental versus its role in alleviating credit frictions for firms with access to commercial paper and bond markets we find that the perfect capital markets model of investment can fully account for the role of cash flow for firms with only limited access to capital markets as indicated by lack of participation in public debt markets however investment appears to be excessively sensitive to fluctuations in cash flow these results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator

the international monetary system forty years after bretton woods review essay in may 1984 a distinguished group of central bankers and economists gathered for a conference at bretton woods to consider the evolution of the world monetary system that was born at that location forty years earlier this volume contains nine essays with accompanying discussion on issues of performance and reform of current international monetary arrangements these papers deal with problems facing the industrialized and the lessdeveloped countries and assess the institutions that have been set up to accommodate these problems the major accomplishments of the original bretton woods conference were of course the establishment of the system of payments based on fixed exchange rates and the organization of the world bank and the international monetary fund as the order developed in the late 40 s and early 50 s each central bank saw it as its duty to intervene in foreign exchange markets to ensure an essentially fixed parity of their currency with respect to the dollar the role of the u s was to guarantee the dollar price of gold at 35 an ounce the system has been called a dollar standard because the dollar played the role of a reserve currency one of the paradoxes of the system as robert triffin pointed out in the early 60 s is that in order to produce a continuing and rapid enough expansion of world reserves the u s had to run balance of payments deficits yet continued deficits by the u s threatened the convertibility of the dollar into gold as it happened the system of fixed parities broke down in the early 70 s not because of a lack of reserves but because a glut of dollars made the bretton woods dollar exchange rates untenable the system eventually evolved into one in which most of the industrialized countries currencies more or less are determined by the market while the currencies of most second and third world countries are pegged to a major currency the floating period has been

inflation and the distribution of relative prices the role of productivity and money supply shocks this paper examines the role of aggregate productivity and money supply shocks in determining the relationship between inflation and the distribution of relative commodity prices i estimate a restricted var that includes aggregate variables and individual commodity prices and compute the cross sectional distribution of the dynamic responses of commodity prices to these aggregate shocks the findings indicate that both shocks lead to positive correlation between inflation and the dispersion of relative prices and that the response of prices across commodities is not uniform even in the long run

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

borrowing to defend the exchange rate and the timing and magnitude of speculative attacks abstract the paper analyses the implications for the timing and magnitude of a speculative attack on a fixed exchange rate of government borrowing to increase the stock of international reserves it is shown that such borrowing reduces the likelihood of an early collapse and increases the likelihood of an eventual collapse the magnitude of the speculative attack also increases

changes in the effects of monetary policy on disaggregate price dynamics abstract based on a time varying factor augmented vector autoregression we demonstrate that the propagation mechanism of monetary policy disturbances differs across disaggregate components of personal consumption expenditures while many disaggregate prices rise temporarily in response to a monetary tightening in the early part of the sample there is no evidence of a price puzzle at the aggregate level the share of disaggregate prices that exhibit the price puzzle diminishes from the early 1980s onwards there also is evidence of a substantial decline in the dispersion of disaggregate price responses over time this gradual decrease in cross sectional heterogeneity of disaggregate price responses is associated with a dampening effect on aggregate real economic activity and a stronger effect on the aggregate price level we illustrate by means of a multi sector sticky price model augmented by a cost channel how key structural parameters would have had to change to match this evolution of sectoral price dynamics

fiscal imbalances and the dynamics of currency crises abstract this paper analyzes links between the fiscal theory of the price level ftpl and the first generation models after krugman journal of money credit and banking 11 1979 311 325 exploring the idea that a synthesis between the two can become a new framework to analyze the fiscal dimension of currency crises working in a simple synthetic framework we show how external nominal shocks can cause a fiscal imbalance and undermine currency stability resolve two well known paradoxes of the first generation model discuss the role of seigniorage revenues and illustrate how fiscal and interest rate policies interact to determine the magnitude and the timing of speculative attacks and devaluations

capital controls and foreign exchange market crises in the ems abstract it is widely held that capital controls are necessary to prevent foreign exchange market crises in a fixed but adjustable exchange rate system like the ems it was therefore argued that capital market liberalization which came in july 1990 might lead to recurrent crises in the ems events since july 1990 have shown that capital controls were not necessary for the stability of the ems this paper shows that even with capital controls the system might enter turbulent periods and might experience a self fulfilling balance of payments crisis if the authorities are perceived to dislike high domestic interest rates a crisis can then be triggered by any small shock if the authorities are not willing to raise domestic interest rates sufficiently to defend the exchange rate

the lifetime of a unilateral target zone some extended results abstract in dumas and svensson journal of international economics 36 1994 467 the lifetime of a krugman quarterly journal of economics 106 1991 669 682 type target zone model is found to be extremely long this paper shows that the lifetime of the identical target zone regime can be much lower when real disturbances occur in particular the mean lifetime is found to be very low when real disturbances occur and the real exchange rate elasticity of the demand for domestic goods is very low it is also shown that allowing for monetary disturbances to have real effects has very little effect on the lifetime the results indicate the conditions under which real disturbances might trigger currency crises

bank firm relationships and contagious banking crises this paper argues that in an open economy a banking system with close bank firm relationships may be easily subject to contagious banking crises because it is difficult to distinguish between crony capitalism and good main bank relationships 1 show that if international investors cannot distinguish the bank type the distinction between crony capitalism and good main bank relationships becomes very fuzzy in particular the model can explain sequences of bank defaults within a country even if the insolvent banks are very few ex ante as well as sequences of banking crises among countries that are equally rated by international investors but indeed differ in the ex ante solvency of their banking system

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models

the macroeconomics outcome of oil shocks in the small eurozone economies in this work we provide an analysis over the period 1999 2015 of the effects of oil shocks on prices and gdp in a group of small euro area economies the group includes austria belgium finland greece ireland italy netherlands portugal and spain we use the structural near var methodology and are thus able to model the joint interaction of area wide macroeconomic variables and national variables we find that under the emu oil price shocks have been important drivers of business cycle fluctuations in almost all these countries moreover an increase in oil prices produces significant recessionary effects in all the countries included in the investigation thus although there are different sizes in the responses of output in the investigated countries our main conclusion is that oil prices still matter for european economies

prospective deficits and the asian currency crisis this paper argues that a principal cause of the 1997 asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems the expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in asia we articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises we present empirical evidence in support of the key assumptions underlying our interpretation of the crisis