monetary policy in a dual currency environment we develop a small open economy general equilibrium model with sticky prices and partial dollarization a situation where both domestic and foreign currencies coexist we derive a tractable representation of the model in terms of domestic inflation and the output gap in which a trade off which depends on the degree of dollarization arises endogenously due to the presence of foreign interest rate shocks we use this framework to show analytically how higher degrees of dollarization induce larger volatilities of the output gap and inflation thus hampering a central bank s effectiveness to stabilize the economy our impulse response functions show that the transmission of such shocks has a positive negative effect on inflation and negative positive effect on the output gap when money aggregates and consumption are complements substitutes

globalization and emerging markets with or without crash we analyze the effects of financial and trade globalization on the likelihood of financial crashes in emerging markets while trade globalization always makes crashes less likely financial globalization may make them more likely especially when trade costs are high pessimistic expectations can be self fulfilling and lead to a collapse in demand for goods and assets such a crash comes with a current account reversal and drops in income and investment lower income countries are more prone to such demand based financial crises a quantitative evaluation shows our model is consistent with the main stylized facts of financial crashes in emerging markets

short run effects of devaluation a disaggregated analysis of latin american exports conventional models examining the relationship between devaluation and exports are based on exchange rate pass through these suggest that after devaluation exports become cheaper relative to other exports and the growing export market is posited to stimulate the economy if devaluation has a differential effect across commodities countries can expect different results depending on their portfolios therefore any accurate analysis of the effects of devaluation must take into account the components of a country s export portfolio the pooled time series estimation for latin american countries reveals a negative short run relationship between real devaluation and export growth for most exports at a disaggregated level the results of this study are far reaching as they suggest that more targeted policies are better suited to stimulate exports

optimal punishment schemes with state dependent preferences i introduction it is well known in the economics of crime literature that both the certainty and severity of punishment can be manipulated to deter criminal behavior as polinsky and shavell 1979 show when punishment takes the form of a fine the optimal combination of the probability of punishment and the magnitude of the fine depends on the risk attitudes of offenders and on the costs of catching and convicting offenders this paper examines how the optimal combination of certainty and severity are affected if offenders preferences are state dependent state dependent utility is commonly used in situations in which the state of the world affects how well individuals are able to enjoy the consumption of their wealth death of the individual is an obvious example and hirschleifer and riley 1992 also suggest the death of a child the loss of use of a limb or the loss of a precious heirloom there are many reasons to add conviction for a crime to this list 1 first if the individual is sent to prison his consumption opportunities are obviously diminished even without a prison sentence though utility might best be modeled as being state dependent for utility to be state independent there must exist some decrease in wealth that has the same effect on the utility function as being convicted of the crime if the offender is risk averse and has state independent utility a loss of wealth reduces the level of utility but increases marginal utility it is easy to imagine why being convicted of a crime would reduce the level of utility but it is difficult to imagine why it would increase the individual s marginal utility of wealth for example drivers who are caught speeding are angered beyond the level consistent with the expected loss of income but this additional anger does not lead to an additional increase in the marginal utility of wealth in addition to these considerations lott 1992a b provides evidence that conviction leads to increased divorce rates and constrained job opportunities the former reduces the level of utility but is unlikely to increase marginal utility and should therefore be modeled as a shift in the utility function constrained job opportunities reduce both income and job satisfaction and the reduction in job satisfaction is again best modeled as a shift in the utility function as a final argument supporting the use of state dependent preferences neilson and winter 1997 show that if offenders preferences are state dependent it is possible for them to be both risk averse and more sensitive to changes in the certainty of punishment than to proportional changes in the severity of punishment becker 1968 notes this empirical finding 2 and concludes that if offenders are expected utility maximizers they cannot be risk averse 3 polinsky and shavell 1979 demonstrate that when offenders are risk averse and have state independent utility increasing the fine increases social loss by increasing the amount of risk borne by offenders consequently in the extreme case in which it is costless to catch and convict offenders the optimal policy has a relatively low fine but punishes criminals with probability one this paper shows that if preferences are state dependent there is an additional social cost associated with setting a high probability of punishment because it makes it more likely that criminals are on their lower utility functions to avoid the additional social cost the certainty of punishment should be reduced ii the model the model presented below is identical to that in polinsky and shavell 1979 except for the addition of state dependent preferences identical individuals choose whether to commit a crime or not 4 gains from crime are random with probability q the individual gains a and with probability 1 q he gains b greater than a even though the gains are random it is assumed that the individual knows the true value of the gain before any decision must be made

the effectiveness of fiscal and monetary policy responses to twin crises we study how effective fiscal and monetary policy responses are during a twin crisis using the dataset provided by laeven and valencia 2008 we identify 57 episodes of twin crises following the methods proposed in baldacci et al 2009 and hutchison et al 2010 we construct the variables measuring the duration and output cost of a twin crisis we find that fiscal policy does not seem to be associated with the shortening of a twin crisis regarding monetary policy we find that monetary tightening is associated with the lengthening of a twin crisis duration consistent with the result in hutchison et al 2010 dealing with a sudden stop crisis in addition our results show that while a mild monetary expansion is effective in reducing a twin crisis duration over expansionary monetary policy loses its effectiveness

the benefits of dollarization when stabilization policy lacks credibility and financial markets are imperfect dollarization entails two potentially large benefits for emerging economies first it may eliminate price and wealth distortions induced by the lack of credibility of stabilization policies second it may improve the efficiency of financial markets by weakening informational or institutional frictions driving credit constraints quantitative analysis of a dynamic stochastic equilibrium model calibrated to mexican data shows that the mean welfare gains of eliminating policy uncertainty are staggering ranging between 6 4 and 9 percent of trend consumption the mean welfare gain of weakening credit constraints is 4 6 percent liability dollarization and sharp fluctuations in relative prices play a key role in these results

liquidity effects and the monetary transmission mechanism several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment existing quantitative general equilibrium models which allow for capital accumulation are inconsistent with this view there does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates output and employment to a money supply shock however a key shortcoming of these models is that they cannot rationalize persistent liquidity effects this paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence we argue that once a simplified version of the model in christiano and eichenbaum 1991 is modified to allow for extremely small costs of adjusting sectoral flow of funds positive money shocks generate long lasting quantitatively significant liquidity effects as well as persistent increases in aggregate economic activity

progressive taxation and the social marginal cost of public funds abstract this paper describes the calculation of the social marginal cost of public funds smcf for a progressive tax system which distorts individuals labour supply decisions a formula for the smcf indicates that the income and substitution effects of the labour supply response are weighted by the changes in individuals average and marginal tax rates respectively other well known formulas for the smcf are shown to be special cases of this formula the difference between this formula and the mayshar 1991 formula is shown to be due to different but equally valid ways of computing the change in the average tax rate the condition under which a marginal tax rate increase may lead to a reduction in revenues is derived

modeling exchange rate passthrough after large devaluations large devaluations are generally associated with large declines in real exchange rates burstein eichenbaum and rebelo 2005 argue that the primary force causing these declines is often the slow adjustment in the price of nontradable goods and services we develop a model which embodies two complementary forces that account for the large declines in the real exchange rate that occur in the aftermath of large devaluations the first force is sticky nontradable goods prices instead of simply assuming that nontradable goods prices are sticky we develop conditions under which this phenomenon can emerge as an equilibrium outcome the second force is the impact of real shocks that often accompany large devaluations these real shocks lead to a decline in the price of nontradable goods relative to traded goods we argue that sticky nontradable goods prices generally play an important role in explaining post devaluation movements in real exchange rates however there are cases in which sticky nontradable goods prices are not sustainable as an equilibrium phenomenon in these cases real shocks are the primary driver of real exchange rate movements j e l classification f31

investment prices and exchange rates some basic facts this paper documents four basic facts about investment goods and investment prices first investment has a very significant nontradable component in the form of construction services second distributions services wholesaling retailing and transportation are much less important for investment than for consumption third the import content of investment is much larger than that of consumption finally in the aftermath of three large devaluations the rate of exchange rate pass through is perhaps not surprisingly highest for imported equipment and lowest for construction services jel f41

capital flows and real exchange rate fluctuations following spain s entry into the european community abstract spain s 1986 entry into the european community was followed by a dismantling of restrictions on international capital flows initial trade deficits and real exchange rate appreciation were followed by trade surpluses and real exchange rate depreciation this paper analyzes spain s financial liberalization using a dynamic general equilibrium model with a traded and nontraded good where a capital poor country opens itself to its capital rich neighbors a carefully calibrated model has trouble accounting for the large changes in relative prices observed given the small changes in quantities variants of the model with frictions in factor mobility between sectors fare better

the marginal welfare cost of public funds theory and estimates abstract we derive a general analytic formula for the marginal welfare cost mwc of public funds without imposing restrictive assumptions on preferences or technologies the framework encompasses the various special cases previously considered and reconciles the disparities among the reported estimates of mwc unresolved differences in existing estimates are fully explained by appropriate interpretations of intended thought experiments and alternative assumptions about the elasticity of labor supply with respect to public spending further progress in measuring mwc requires empirical estimation of labor supply functions that include government spending as an explanatory variable

does devaluation make sense in the least developed countries the exchange rate is a controversial instrument of economic policy especially in developing countries even in cases where currency overvaluation is clearly a major cause of an acute balance of payments crisis the governments of developing countries are frequently reluctant to devalue apparently for three main reasons a they doubt that export production import demand and domestic expenditures are very responsive to a change in the exchange rate elasticity pessimism b they fear the potentially disruptive side effects of devaluation on inflation employment and output growth as well as on real wages and income distribution and c they want to avoid political risk the focus of the present study is on the effects of devaluation in the deficit prone least developed countries where a large part of the population barely survives on a subsistence wage to be wholly successful devaluation generally requires a reduction of real wages to encourage the expansion of exports and of import substitution without a contraction of national income hence our lead question is devaluation an appropriate method of economic stabilization in the least developed countries where a decrease of real wages or earnings could result in severe economic hardship or even starvation more specifically the aim of our study is twofold 1 to investigate the short to medium term effects of devaluation on macroeconomic performance in the least developed countries subject to the condition that real wages or earnings

bankruptcy costs liability dollarization and vulnerability to sudden stops abstract countries with intermediate levels of institutional quality suffer larger output contractions following sudden stops of capital inflows than less developed nations however countries with strong institutions seldom experience significant falls in output after capital flow reversals we reconcile these two observations using a calibrated dsge model that extends the financial accelerator framework developed in bernanke gertler and gilchrist 1999 the model captures financial market institutional quality with creditors ability to recover assets from bankrupt firms bankruptcy costs affect vulnerability to sudden stops directly but also indirectly by affecting the degree of liability dollarization simulations reveal an inverted u shaped relationship between bankruptcy costs and the output loss following sudden stops

are devaluations contractionary the case of turkey this article studies the output effects of currency devaluation in turkey using annual data from 1970 to 2004 an empirical model that incorporates monetary fiscal and other external variables in addition to exchange rates is developed before estimating the model time series properties of the data are diagnosed two forms of the model one with real exchange rate and the other with nominal exchange rate and relative price level foreign to domestic price ratio are estimated the results suggest that devaluation is contractionary in the short run expansionary in the medium run and neutral in the long run and the effects emanate from nominal devaluation and not from the changes in relative price level

the costs of financial crises resource misallocation productivity and welfare in the 2001 argentine crisis the costs of financial crises financial crises in emerging market countries appear to be very costly both output and a host of partial welfare indicators decline dramatically the magnitude of these costs is puzzling both from an accounting perspective factor usage does not decline as much as output resulting in large falls in measured productivity and from a theoretical perspective towards a resolution of this puzzle we present a framework that allows us to i account for changes in a country s measured productivity during a financial crises as the result of changes in the underlying technology of the economy the efficiency with which resources are allocated across sectors and the efficiency of the resource allocation within sectors driven both by reallocation amongst existing plants and by entry and exit and ii measure the change in the country s welfare resulting from changes in productivity government spending the terms of trade and a country s international investment position we apply this framework to the argentine crisis of 2001 using a unique establishment level data set and find that more than half of the roughly 10 decline in measured total factor productivity can be accounted for by deterioration in the allocation of resources both across and within sectors we measure the decline in welfare to be on the order of one quarter of one years gdp

devaluations and aggregate output fluctuations a random coefficient regression model for mexico the goal of this paper is to investigate whether nominal devaluations had real output growth effects in mexico and if so to assess the significance and duration of such effects a random coefficient regression model to evaluate the output growth effects of 1976 1982 and 1986 devaluations using sectoral data from 1970 to 1991 is specified and estimated the results indicate unambiguous short term contractionary effects of devaluations on non agricultural output in mexico in addition it is found that adjustments to imbalances in the external sector invariably came from temporary contractions in the aggregate output rather than significant resource reallocation from the non tradable sector towards the tradable sector several transmission mechanisms that relate nominal exchange rate movements to real output fluctuations are also considered

willingness to pay and the distribution of risk and wealth willingness to pay wtp most economists believe is an appropriate benefits metric for government expenditure and regulatory policies that reduce risks to human life it depends however on the distribution of risk and wealth currently society s expenditures overemphasize concentrated risks say after the fact treatment as opposed to prevention a dead anyway effect complements excess attention to intense interests in explaining this our normative criterion for spending on risk reduction is what a rational albeit uninsured individual confronting lotteries on future risks to life and wealth would choose for himself this requires correcting wtp to eliminate the dead anyway effect but continues to reflect that wealth enhances the utility of living

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

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

risk self protection and ex ante economic value abstract we develop three propositions about the ex ante value of reduced risk if there is a continuous outcome distribution and if self protection influences outcome probability and severity then 1 unobservable utility terms cannot be eliminated from the ex ante value expressions 2 knowledge of the convexity or the nonconvexity of dose response functions is insufficient to sign changes in these expressions and 3 self protection expenditures need not be a lower bound measure of these expressions therefore many restrictions applied in recent empirical work on the economic value of risk changes are not immediately transferable to settings where endogenous risks prevail

is devaluation expansionary or contractionary empirical evidence from fiji devaluation has been traditionally promoted as an effective tool for increasing exports and improving the external position of the devaluing country if a nominal devaluation results in expenditure switching in this article our aim is to model the relationship between currency devaluations and output for fiji following the approach in bahmani et al 2002 we extend the traditional model by incorporating other monetary and fiscal policy variables we achieve our goal by using the recently developed bounds testing approach to cointegration and the autoregressive distributed lag model and find that devaluation is expansionary in the case of fiji

the determinants of import demand in trinidad and tobago 1967 84 1988 the determinants of import demand in trinidad and tobago 1967 84 applied economics vol 20 no 3 pp 303 313

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

liquidity effects monetary policy and the business cycle this paper presents a flexible price quantitative general equilibrium model with the property that a positive money supply shock drives the nominal interest rate down and aggregate employment output and the real wage up these implications are broadly consistent with postwar u s data the two key features of the model that are responsible for its properties are 1 money shocks have a heterogeneous impact on agents and 2 ex post inflexibilities in production give rise to a very low short run interest elasticity of money demand in our model the extent of the drop in the interest rate after a positive money supply shock depends on the degree to which production is ex post inflexible given sufficient ex post inflexibility the model conforms well with the view widely held within the u s federal system that the short run interest rate elasticity for total reserves is very close to zero copyright 1995 by ohio state university press

output effects of devaluation evidence from asia we study the effect of devaluation on output in six developing countries of asia in an empirical model that includes monetary fiscal and external variables we examine the impact of devaluation as the effect of real exchange depreciation and alternatively as the effect of nominal devaluation and changes in the foreign to domestic price ratio we find that with few exceptions a devaluation fails to make any effect on output over any length of time short run intermediate run or long run whatever effect on output we are able to uncover comes from the relative price level the ratio of foreign to domestic prices but not from nominal devaluation

real exchange rate monetary policy and the u s economy evidence from a favar model this paper examines the effects of exchange rate depreciation to the u s economy in a factor augmented vector autoregression model using monthly data of 148 variables for the post bretton woods period of 1973 2017 exchange rate shock is identified to reflect exogenous disturbances to the foreign exchange market and movements in exchange rate that are not accounted for by changes in the u s monetary policy we find that depreciation is expansionary and inflationary to the broad u s economy the current account improves over time conforming to the j curve theory and monetary policy is leaning against the wind jel e3 e5 f31 f32 f41

financial globalization financial crises and the external portfolio structure of emerging markets financial globalization and crises and external portfolio structure we study the transitional dynamics of financial integration in emerging economies using a two sector model with a collateral constraint on external debt and trading costs incurred by foreign investors the probability of a financial crisis displays overshooting it rises sharply initially and then falls sharply but remains non zero in the long run while equity holdings fall permanently bond holdings initially fall but rise after the probability of a crisis peaks conversely asset returns and asset prices first rise and then fall these results are in line with the post globalization dynamics observed in emerging markets and the higher frequency of crises that they display

inflation dynamics during the financial crisis using confidential product level price data underlying the u s producer price index ppi this paper analyzes the effect of changes in firms financial conditions on their price setting behavior during the great recession that surrounds the financial crisis the evidence indicates that during the height of the crisis in late 2008 firms with weak balance sheets increased prices significantly relative to industry averages whereas firms with strong balance sheets lowered prices a response consistent with an adverse demand shock these stark differences in price setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeconomic shocks we explore the implications of these empirical findings within a general equilibrium framework that allows for customer markets and departures from the frictionless financial markets in the model firms have an incentive to set a low price to invest in market share though when financial distortions are severe firms forgo these investment opportunities and maintain high prices in an effort to preserve their balance sheet capacity consistent with our empirical findings the model with financial distortions relative to the baseline model without such distortions implies a substantial attenuation of price dynamics in response to contractionary demand shocks

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

exchange rate and inflation dynamics in dollarized economies abstract we use a panel of a hundred plus countries with differing degrees of dollarization to perform an empirical analysis of the effects on inflation of exchange rate depreciations the results qualify the common view that countries with higher dollarization exhibit higher inflation pass through we show that large depreciations tend to generate a negative impact on the pass through coefficient this impact being more intense the higher the level of dollarization of the economy we interpret this as evidence that in highly dollarized economies the classic inflationary effects of a real depreciation higher internal demand and imported inflation can be offset or diminished by both the larger financial costs and the balance sheet effect especially if the depreciation is large additionally the exchange rate regime is shown to matter countries with fixed exchange rates suffer more noticeably the balance sheet effects of large depreciations

are currency devaluations effective a panel unit root test abstract using a panel unit root test with real exchange rate volatility measures this paper shows that currency devaluation leads to a short run contractionary effect for the crisis affected asian economies in addition devaluation is ineffective in the long run in influencing aggregate output

macroeconomic stabilization in developing economies are optimal policies procyclical abstract many empirical studies provide evidence that macroeconomic policies as well as capital flows exhibit procyclical characteristics in developing economies in particular kaminsky et al 2004 when it rains it pours procyclical capital flows and macroeconomic policies nber macroeconomics annual mit press demonstrate that a large group of middle income countries run contractionary policies and experience capital flight during times of recession this paper investigates the role of international financial markets in explaining these macroeconomic policy and capital flow characteristics an optimal fiscal and monetary policy problem is formulated and solved for a small open economy that faces a country specific interest rate spread in international financial markets it is found that in the presence of the country spread optimal fiscal and monetary policies as well as capital flows are procyclical under a reasonable parametrization optimal policies and capital flows turn countercyclical in the absence of the country spread this pattern is robust to a range of alternative model specifications

the marginal cost of raising tax revenue and redistributing income we present analytic formulas for calculating marginal welfare costs when taxes are levied against the wages of a heterogeneous population of households and marginal tax revenue finances either the supply of a public good or lump sum transfers the formulas are applied to explain the wide discrepancy between estimates of marginal welfare costs for redistribution previously obtained through computer simulation procedures our calculations reveal that these procedures introduced lump sum transfers that were not specified as part of the reforms to be simulated but explain most of the differences between their estimates we also show that welfare cost estimates are quite sensitive to the elasticity of labor supply with respect to exhaustive public spending

terms of trade tariffs and labor market adjustment in developing countries a three goods model importables exportables and nontradables is used to analyze labor market adjustment to changes in the terms of trade and import tariffs for a small open economy first a three goods four factor model labor and capital specific to each sector is developed and used to investigate how an exogenously generated change in a country s terms of trade affects labor allocation and wages in the short run next a more traditional three goods two factor model is used to examine the effects in the long run the analysis is carried out under alternative assumptions regarding wage flexibility full flexibility economy wide real wage rigidity and sector specific real wage rigidity

behavior of output during currency crises abstract this paper documents the behavior of output and its association with other macroeconomic variables in 195 episodes of currency crises in developing countries during 1970 2000 we find that about 60 of the crises are contractionary while the rest are expansionary crises are one and a half times more likely to be contractionary in emerging markets than in other developing economies the number of contractionary crises or their severity does not increase in the 1990s economies which experience capital inflows in the years prior to the crisis or an increase in external debt burden during the crisis are more likely to slow down during crises while those with restrictions on capital flows prior to the crisis or are more open to international trade are less likely to do so the results are robust to different ways of measuring changes in output during crises

comorbidities and the willingness to pay for health improvements we show that the willingness to pay for health improvements increases with the severity and probability of occurrence of comorbidities this result which is obtained under mild restrictions on the shape of the utility function has important implications for cost benefit studies applied to health care in particular it implies that the discrimination of the elderly believed to be implicit in cost benefit analysis is less of a problem than commonly thought

risky sports and the value of safety information abstract we develop a theoretical account of how athletes engaged in risky sports value safety information based on our model we postulate that the demand value of such information rises with wealth and exposure and declines with the athlete s appetite for risk we use survey data from a sample of backcountry skiers to empirically test these predictions the high degree of self control over exposure makes these athletes a well suited population to study the demand value of safety information caution is warranted in the empirical analysis as unobserved factors may jointly affect the athlete s perceived risk and his willingness to pay for obtaining safety information we use a recursive two stage estimation approach to account for endogeneity concerns the empirical results are supportive of our theoretical predictions and suggest that variations in athletes demand for safety information can be explained by personal beliefs about risk exposure and deliberate risk taking

regulating capital flows to emerging markets an externality view abstract we show that capital flows to emerging market economies create externalities that differ by an order of magnitude depending on the state contingent payoff profile of the flows those with pro cyclical payoffs such as foreign currency debt generate substantial negative pecuniary externalities because they lead to large repayments and contractionary exchange rate depreciations during financial crises conversely capital flows with an insurance component such as fdi or equity are largely benign we construct an externality pricing kernel and use sufficient statistics and dsge model simulations to quantify the externalities that materialized during past financial crises we find stark differences depending on the payoff profile justifying taxes of up to 3 for dollar debt but close to zero for fdi these findings contrast with the existing literature which has suggested that policymakers should focus on reducing over borrowing rather than changing the composition of external liabilities

redistribution and the marginal cost of public funds abstract discussions of the marginal cost of public funds with distortionary taxation are often cast in the framework of a one consumer economy while the main justification of distortionary taxes is that they are needed for redistribution this paper analyzes the issue in a model with heterogeneous consumers and a linear income tax focusing on the tradeoff between labour market distortions and the redistribution from high wage to low wage workers in an optimal tax system the mcf will be the same for all sources of funds and under certain assumptions less than one without optimality the mcf will in general differ between different sources of finance

a marginal cost of funds approach to multi period public project evaluation implications for the social discount rate abstract although the use of marginal cost of funds mcf has been widely appreciated in public finance literature discussions of mcf have been confined to a static setting this paper develops a multi period project evaluation rule that is based on mcf unlike previous approaches the parameters required for implementing the mcf rule are independent of projects under consideration a lesson from this paper is that the government discount rate policies that are largely based on the concepts of social discount rate and shadow price of capital should be rewritten with the use of parameters representing mcf

highway safety economic behavior and driving environment author s keeler theodore e abstract economic analysis has enhanced our understanding of the efficacy of highway safety regulations specifically a consumer theoretic literature has developed on drivers responses to regulations based on ideas first set forth by lester lave and w e weber 1970 and more fully thought out by sam peltzman 1975 meanwhile an empirical literature has also developed testing hypotheses relating to the effects on safety of speed limits safety device regulations and alcohol policies among other things yet despite extensive research controversies remain as to the effects of regulations on highway safety this paper contributes to the literature on economic aspects of highway safety in an four important ways first it is based on a county level data set for the u s for 1970 and 980 affording over 2 600 observations each year in a consistent panel many more observations than previous studies have used second this study uses different and more appropriate estimation procedures than most previous studies allowing for the count nature of highway fatalities and correcting for omitted variable bias otherwise possible in cross section analysis third the model used here controls for more variables in a single model than previous studies finally this study allows for important differences in the estimated coefficients between urban and rural driving environments

currency crises and monetary policy in an economy with credit constraints this paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities the possibility of multiple equilibria including a currency crisis equilibrium with low output and a depreciated domestic currency results from the following mechanism if nominal prices are sticky a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms and thus to a fall in their profits this reduces firms borrowing capacity and therefore investment and output in a credit constrained economy which in turn reduces the demand for the domestic currency and leads to a depreciation we examine the impact of various shocks including productivity fiscal or expectational shocks we then analyze the optimal monetary policy to prevent or solve currency crises we also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms

alternative measures of the marginal cost of funds liqun liu this article reconciles the use of two different marginal cost of funds mcf measures by resorting to alternative marginal benefit measures it demonstrates how the alternative mcf measures can be properly applied to two classic problems in expenditure analysis local cost benefit project evaluation and the second best public good level question relative strengths of the two mcf approaches in addressing the two problems are identified jel h21 h43 1 introduction it is widely appreciated that the welfare cost of taxation should play a role in the normative analysis of government expenditures efficiency in government spending involves balancing the marginal benefits and marginal costs of expenditures the marginal cost of spending in part depends on the welfare costs also known as excess burdens or deadweight losses we will use the term welfare costs that result from raising the revenue that finances the expenditures to determine the marginal cost of government spending we multiply the direct resource cost of the expenditure by a term generally referred to as the marginal cost of funds mcf the mcf is the cost of raising an additional dollar of revenue which includes the direct cost the dollar of revenue actually raised plus any additional welfare costs resulting from the change in the tax structure martin feldstein emphasized the importance of mcf in a recent paper appropriately titled how big should government be feldstein 1997 he correctly stresses that the answer to this question involves comparing the benefits of incremental government spending with the mcf and concludes that the economics profession should devote more attention to informing policy makers of the importance of mcf and providing estimates of its magnitude feldstein s own estimate of mcf is 2 65 feldstein 1999 implying that the distortionary cost of raising revenue is amazingly high raising an additional dollar of revenue carries with it an efficiency loss that is more than one and a half times 1 65 as large in sharp contrast there are a number of estimates in the literature on mcf that are strikingly lower so low as to suggest that mcf should play a minor role in the evaluation of government spending programs for example stuart 1984 reports an estimate of 1 07 and ballard and fullerton 1992 suggest that i n a variety of cases mcf is less than 1 10 these disparate estimates of the magnitude of mcf are worrisome because they have contradictory implications regarding the importance of the distortionary cost of taxation but a major reason for the differences in these estimates is simply definitional fullerton 1991 and ballard and fullerton 1992 feldstein is using a definition of mcf that depends primarily on the compensated effects of taxation whereas the other estimates use a definition of mcf that depends primarily on uncompensated effects the definition based on compensated effects always yields a larger estimate of mcf 1 this raises the obvious question which definition is the appropriate one to use in the evaluation of government expenditures that is the subject of the present paper in this paper we investigate the appropriate measure of mcf for a special case that has been widely discussed in the literature when the government expenditure is to finance the provision of a public good that enters consumers utility functions in a separable fashion from private goods and leisure that the appropriate definition of mcf depends on exactly how the expenditure affects consumer utility was emphasized by wildasin 1984 and ballard and fullerton 1992 recent papers that help clarify the role of the separability assumption include mayshar 1991 snow and warren 1996 and ahmed and croushore 1996 furthermore we restrict our attention to the case in which the public good is financed by a tax on wage income in this case much of the literature on mcf emphasizes that the definition of mcf should be based on the uncompensated wage elasticity of labor supply in contrast to feldstein s measure

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

macroeconomic volatility in latin america a conceptual framework and three case studies after decades of trial error and occasional regress the pieces of a successful latin american economic model can be seen scattered among the leading economies of the region the most traditional macroeconomic maladies of the emerging world such as chronic fiscal imbalances and monetary gimmicks are gradually being left behind many of these economies have made significant progress in their regulatory and supervisory frameworks and at times have been leaders beyond latin american boundaries in allowing private sector co participation in a wide array of expublic sector activities despite these significant efforts several structural sources of volatility remain and new ones have emerged as a result of the new and otherwise better economic environment in this paper i review these sources through the recent experiences of argentina chile and mexico

endogenous private safety investment and the willingness to pay for mortality risk reductions when individuals cannot undertake safety improving expenditures the effect of an increase in the initial risk on the willingness to pay wtp for mortality risk reduction is positive because of the dead anyway effect when they can undertake safety improving expenditures the effect of an increase in the initial risk is governed by two effects the dead anyway effect which is positive and the high payment effect which is negative we treat the two types of risk reducing expenditures endogenous and exogenous as inputs in a safety improving technology function and find conditions that guarantee that the high payment effect dominates

international financial shocks in emerging markets abstract the present paper investigates how an emerging market economy is affected when it suddenly faces a higher risk premium on international capital markets we study this question empirically for five latin american economies over the period 1994 2007 within a structural panel vector autoregression and analyze theoretically the transmission mechanism using a dynamic stochastic general equilibrium model dsge of a small open economy the financial shock is modeled by an unexpected increase in the risk premium of firms foreign currency debt in response the adverse shock is amplified by a feedback mechanism between currency depreciation adverse balance sheet and risk premium effects the theoretical model is used to study different monetary policy responses we find that an exchange rate targeting rule that strikes a balance between exchange rate and inflation targeting allows the monetary authority to stabilize inflation and output more effectively than under a pure inflation targeting rule

modelling real exchange rate effects on output performance in latin america this article empirically analyses real per capita gdp growth for six latin american countries argentina brazil chile columbia mexico venezuela in terms of real exchange rate depreciations inflation and us interest rates focussing on the role of the real exchange rate we find evidence of nonlinearity in this relationship which we capture through a smooth transition regression model with the exception of mexico nonlinearity in economic growth is associated with changes in the real exchange rate with depreciations leading to different relationships compared with appreciations regimes for mexico are associated with the past growth rates with effectively symmetric effects of real exchange rate changes although our results are in accord with other recent literature in that depreciations may have negative effects for growth the asymmetries we uncover indicate that these effects depend on the conditioning state

does openness to trade make countries more vulnerable to sudden stops or less using gravity to establish causality openness to trade is one factor that has been identified as determining whether a country is prone to sudden stops in capital inflows several authors have offered empirical evidence that having a large tradable sector reduces the contraction necessary to adjust to a given cut off in funding such studies may however be subject to the problem that trade is endogenous we use the gravity instrument for trade openness which is constructed from geographical determinants of bilateral trade we find that openness indeed makes countries less vulnerable to crises and that the relationship is even stronger when correcting for the endogeneity of trade

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

non nested tests of new classical versus keynesian models further evidence this paper re runs the experiment conducted by dadkhah and valbuena 1985 using data generated by the australian canadian japanese swiss and swedish economies the aim of this exercise is to discriminate between new classical and keynesian accounts of the business cycle the results obtained in the present study are broadly supportive of dadkhah and valbuena s earlier findings in that the keynesian model generally outperforms the new classical alternative

risk aversion and the propensities for self insurance and self protection for a risk averse individual the methods for reducing the expected financial impact of a loss include reducing the severity of any loss that occurs self insurance and reducing the probability of the occurrence of a loss self protection the literature on this topic has pointed to several anomalies whereby the use of self protection and self insurance yield quite unsimilar results for example ehrlich and becker 5 show that self insurance is always a substitute for market insurance an insurance company s indemnifying a loss whereas self protection and market insurance might be complements dionne and eeckhoudt 4 show that a more risk averse consumer would always invest more in self insurance activities but not necessarily more in self protection activities they argue 4 42 that this result is counterintuitive and provides an exception to the widely accepted result that increased risk aversion reduces risky activities ehrlich and becker 5 639 argue that the incentive to self protect is not so dependent on attitude towards risk both of the above papers seem to take for granted that self protection activities reduce the riskiness of the final wealth distribution however as we argue below this is not the case if riskiness is defined as in rothschild and stiglitz 14 even if we use the variance as our risk measure we do not always reduce risk via self protection dionne and eeckhoudt suggest that these results might not be robust enough to extend to models that incorporate random initial wealth risk and state dependent preferences we show that the model seems to be very robust we also explain why self protection is not at all an exception to the long standing result of arrow 1 whereby more risk averse individuals undertake a lower

are devaluations contractionary recently a number of authors have criticized the role of devaluations in traditional stabilization programs it has been argued that contrary to the traditional view devaluations are contractionary and generate a decline in aggregate output in spite of the renewed theoretical interest in the possible contractionary effects of devaluations the empirical evidence on the subject has been quite sketchy in this paper the khan and knight 1981 model is extended to empirically address the issue of contractionary devaluations the extended model considers the effect of money surprises fiscal factors terms of trade changes and devaluations on the level of real output the results obtained using a variance components procedure on data for 12 developing countries provide some support to the short run contractionary devaluation hypothesis the results obtained indicate that in the short run a devaluation will generate a decline in aggregate output it is also found that after one year a devaluation will have an expansionary effecton output the evidence suggests that in the long run devaluations will have no effect on output this abstract was borrowed from another version of this item

sudden stops and output drops in recent financial crises and in recent theoretical studies of them abrupt declines in capital inflows or sudden stops have been linked with large drops in output do sudden stops cause output drops no according to a standard equilibrium model in which sudden stops are generated by an abrupt tightening of a country s collateral constraint on foreign borrowing in this model in fact sudden stops lead to output increases not decreases an examination of the quantitative effects of a well known sudden stop in mexico in the mid 1990s confirms that a drop in output accompanying a sudden stop cannot be accounted for by the sudden stop alone to generate an output drop during a financial crisis as other studies have done the model must include other economic frictions which have negative effects on output large enough to overwhelm the positive effect of the sudden stop this abstract was borrowed from another version of this item

growth and volatility of tax revenues in latin america against the backdrop of high macroeconomic instability and the need to meet the demands of public spending we analyze the trade off between growth and volatility of tax revenues in latin america short run and long run elasticities for a sample of 11 economies are estimated accounting for state dependent asymmetric reactions controlling for composition of revenue sources and other idiosyncrasies we find revenues above below its long run equilibrium to react stronger weaker to business cycle dynamics our detailed elasticity estimates can give some orientation on how to stably reach higher tax levels on the way to develop an adequate internal tax system

an empirical test of the offset hypothesis abstract i exploit cross province and time series variation in canadian mandatory seat belt legislation to empirically test the offset hypothesis the results of this study offer modest evidence of the existence of offsetting behavior by drivers specifically increased use of seat belts by drivers after the enactment of seat belt legislation should have led to a 29 percent decrease in driver fatalities however econometric estimates indicate that the introduction of seat belt legislation is significantly correlated with only a 21 percent decline in driver fatalities furthermore the use of legislative and nonlegislative factors to control for the effects of independent determinants of traffic fatalities is critical as the omission of these effects implies that seat belt laws are associated with roughly a 32 percent decrease in driver deaths thus implying an absence of significant offsetting behavior

international debt deleveraging i provide a framework for understanding debt deleveraging in a group of nancially integrated countries during an episode of international deleveraging world consumption demand is depressed and the world interest rate is low reecting a high propensity to save if exchange rates are allowed to oat deleveraging countries can depreciate their nominal exchange rate to increase production and mitigate the fall in consumption associated with debt reduction the key insight of the paper is that in a monetary union this channel of adjustment is shut o and therefore the falls in consumption demand and in the world interest rate are amplied hence monetary unions are especially prone to hit the zero lower bound on the nominal interest rate and enter a liquidity trap during deleveraging in a liquidity trap deleveraging gives rise to a union wide recession which is particularly severe in high debt countries the model suggests several policy interventions that mitigate the negative impact of deleveraging on output in monetary unions

efficiency wages and currency devaluation abstract this paper applies the efficiency wage theory which is a powerful instrument to shed light on why involuntary unemployment is persistent in the labor market to evaluate the effect of currency devaluation in an open economy it is found that a currency devaluation will definitely depress the domestic output in the presence of the efficiency wage consideration this framework can be viewed as a theoretical structure in explaining the empirical findings of contractionary devaluation

currency devaluation aggregate output and the long run an empirical study abstract this paper estimates the effect of currency devaluation on the aggregate output level in six asian countries using a unique methodology developed by wickens et al 1988 economic journal 189 205 the estimated results suggest that devaluation in general is neutral in the long run in some cases it even can have a contractionary effect

sudden stops and financial frictions evidence from industry level data the nature of the microeconomic frictions that transform sudden stops in output collapses is not only of academic interest but also crucial for the correct design of policy responses to prevent and address these episodes and the lack of evidence on this regard is an important shortcoming this paper uses industry level data in a sample of 45 developed and emerging countries and a differences in differences methodology to provide evidence of the role of financial frictions for the consequences of sudden stops the results show that consistently with financial frictions being important industries that are more dependent on external finance decline significantly more during a sudden stop especially in less financially developed countries the results are robust to controlling for other possible mechanisms including labor market frictions the paper also provides results on the role of comparative advantage during sudden stops and on the usefulness of various policy responses to attenuate the consequences of these shocks

debt crisis adjustment policies and capital formation in developing countries where do we stand abstract this paper documents the decline in investment rates observed in developing countries after 1982 and explores analytically and empirically the factors contributing to explain it the paper focuses on the impact of macroeconomic adjustment and reform measures on private investment particularly in latin america and east asia and underscores the importance of macroeconomic uncertainty policy credibility and potential coordination failures in shaping the response of investment to the changes in economic incentives brought about by structural reforms the analysis concludes with some policy recommendations to improve the design of sustainable growth oriented adjustment programs

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

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

determinants of non life insurance expenditure in developed and developing countries an empirical investigation the determinants of non life insurance expenditure in a panel data set covering 36 developed countries and 31 developing countries for the period 2000 2011 are analysed results of our instrumental variable analysis indicate that economic freedom income bank development urbanization culture and law systems are the key drivers of the non life insurance expenditure across countries however their impacts differ significantly between the groups of developed and developing countries suggesting that the heterogeneity among countries in terms of the level of development plays an important role the global financial crisis is also found to influence the direction of those effects especially in developed countries the article yields useful policy and economic implications for governments and multinational non life insurance companies with regard to the development of the non life insurance sector an important engine for economic growth and prosperity

financial crises and exchange rate policy this paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and fisherian deation the goal is to evaluate the performance of alternative exchange rate policies in sudden stop prone economies the key element of the analysis is a pecuniary externality arising from frictions in the international credit markets which creates a trade o between price

news and business cycles in open economies we study the effects of news about future total factor productivity tfp in a small open economy we show that an open economy version of the neoclassical model produces a recession in response to good news about future tfp we propose an open economy model that generates comovement in response to tfp news the key elements of our model are a weak short run wealth effect on the labor supply and adjustment costs to labor and investment we show that our model also generates comovement in response to news about future investment specific technical change and to sudden stops

financial liberalization credit constraints and collateral investment in the mexican manufacturing sector abstract we examine the impact of financial liberalization on fixed investment in mexico using establishment level data from the manufacturing sector in addition to analyzing changes in cash flow sensitivities an innovative approach explores the role of real estate as collateral and addresses a potential censoring problem the results suggest that financial constraints were eased for the smallest firms but not for larger ones however the importance of possessing real estate increased given banks reliance on collateral in their lending the results also provide microeconomic evidence consistent with the role attributed to financial accelerator mechanisms during lending booms and during post crisis recessions

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

credit externalities macroeconomic effects and policy implications financial crises are often preceded by peri ods of credit expansion during which firms and households become increasingly vulnerable to a reversal in economic conditions when eco nomic conditions actually worsen financing constraints become tighter causing a deeper contraction of economic activity these events have led to policy proposals for preventing excessive borrowing during normal times if rational agents evaluate financing decisions from a privately optimal standpoint why would the debt level not be socially efficient the theoretical literature has offered an answer to this question based on a pecuniary externality that arises due to the presence of financial frictions private agents tend to under value net worth during a period of financial distress because they fail to internalize the fact that additional net worth would have positive spillovers on other agents balance sheets 1 as a result private agents borrow excessively the quantitative implications of these credit exter nalities however remain largely unknown in particular these key questions have not been addressed

asset bubbles leverage and lifeboats elements of the east asian crisis collapsing credit markets have been blamed for the depth and persistence of the great depression in the united states could similar mechanisms have played a role in ending the east asian economic miracle and in creating fragility in global financial markets after a brief account of the nature of the east asian crises of 1997 8 we use the framework of highly leveraged fully collaterised firms due to kiyotaki and moore 1997 to explore the impact of a credit crunch the paper emphasises the fragility of equilibrium and how rapidly boom can turn to bust

fiscal and monetary policies and the cost of sudden stops abstract this article investigates the effects of monetary and fiscal policies on output growth during sudden stop balance of payments crisis in emerging markets and developing countries sudden stops in capital flows and subsequent deep recessions are a frequent occurrence in these countries but there is no professional consensus and little systematic empirical evidence shedding light on the macroeconomic policy mix most likely to limit output losses during these episodes to address this issue we investigate 83 sudden stop crisis in 66 countries using a baseline empirical model to control for the various determinants of output losses during sudden stops we measure the marginal effects of policy on output losses and find strong evidence that monetary tightening rise in the discount rate or unsterilized rise in international reserves and discretionary fiscal contraction are significantly correlated with larger output losses following a sudden stop fiscal expansion is associated with smaller output losses following a sudden stop but monetary expansion has no discernable effect the macroeconomic policy mix associated with the least output loss during a sudden stop financial crisis is a discretionary fiscal expansion combined with a neutral monetary policy

current account effects of a devaluation in an optimizing model with capital accumulation abstract this article explores the consequences of a devaluation in the context of a real optimizing model of a small open economy what provides for real effects of the devaluation is the existence of nominal wage stickiness during a contract period we show that if this contract period is relatively short the devaluation is bound to improve the current account on impact whereas this will deteriorate in the case of a long contract period and the more so the smaller are adjustment costs in investment in addition we study the consequences for the terms of trade and for the stocks of foreign assets and of capital

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

emerging market fluctuations what makes the difference aggregate fluctuations in emerging countries are quantitatively larger and qualitatively different in key respects from those in developed countries using data from mexico and canada this paper decomposes these differences in terms of shocks to aggregate efficiency and shocks that distort the decisions of households about how much to invest consume and work in a standard model of a small open economy the decomposition exercise suggests that most of these differences are explained by fluctuations in aggregate efficiency distortions in labor decisions over the business cycle and most importantly fluctuations in country risk other distortions are quantitatively less important