Discussion ofA Neoclassical Analysis of theAsian Crisis: Business Cycle
Accounting for a Small Open
EconomyR. Anton Braun
University of Tokyo

Motivation of the paper
1. Present a new set of facts about the AsianCrisis.
2. Use these new facts to assess alternative
explanations about the causes of the Asiancrisis.

The Asian crisis was an event. How
does one summarize the key facts
associated with that event.

What are the old facts?
• Old style facts:
Document percent decline in output and othervariablesimpact
Persistence (how quickly these variables recovered)Example of old style facts• Fact: Output and consumption decline by about thesame amount.
• Researchers then try to produce a model that canreproduce this fact.

New Facts• Recently a number of different researchers haveproposed that we can learn more by imposing priors
on the data.
• Old facts impose a form of prior:Which facts are important?
• Response of output as compared to the response of inventories.
• How to filter the data

• New Facts impose much stronger priors:
Structural VARs (How monetary policy effect output,prices and interest rates)
Business Cycle Accounting. (Representative agent model)

Why might we need a new set of facts
to account for the Asian Crisis?
• Bob Lucas’ view: there are too many facts
already!
• Other views:
Old facts aren’t sharp enough to distinguishbetween competing theories (Observationalequivalence?).
New facts may shed light on which theory offers
the best explanation.

All of the New facts are highly
contentious• Structural VAR’s
Do the priors make sense? Does a surpriseincrease in money supply actually lower thenominal interest rate? (Liquidity Effect)
Do structural VARs uncover structure?

• Real Business Cycle AccountingDo the priors make sense?
Does this method uncover structure?

What are the maintained priors inBCA?
1. The good allocations are those associatedwith a social planners problem for arepresentative agent economy.
2. The functional form and the specific valuesof the structural parameters are known.
3. It is OK to ignore correlation among thewedges.

Representative agent model• There are different views in the profession.
One view is that the representative agent model isdead. Its unlikely that we’ll resolve asset pricing
anomalies in a representative agent model.
Alternative view: representative agent model isperfectly fine for considering aggregate risk events.
These events can’t be insured.
My view is its fine to limit attention to that model.

Functional Form and specific values ofthe parameters are known• Do producers in Thailand operate the sameequipment, structures as in the U.S.?
• Is it reasonable to ignore farming in Thailand?
• Are preferences the same in all countries?

Correlation among wedges• Impossible to identify the individual
contribution of a single wedge until it ispurged of its correlation with other wedges.

If “it works” these details may notmatter!
• “It Works” (defined)
Does this new set of facts rule out any existingtheories?
Does this new set of facts lead to the developmentof a new theory?

Does this new set of facts rule out any
existing theories?
••

No.
This could be explored: derive the efficiency andother wedges in other models. Show that they can’t
reproduce movements in this wedge.
1. Solve and simulate data from the candidate model.
2. Use the simulated data to conduct a wedge analysis.
3. Compare the resulting simulated wedges with wedges
based on actual data.

Sometimes thinking about wedges
helps come up with new ideas
Example:Difficult to come up with ways to decentralize
efficient allocations in dynamic models withprivate information. Tyvinski and Goloslev(2005)
came up with a way to decentralize a model withdisability by thinking about what taxes distort
which wedges and were able to derive acompetitive decentralization scheme.

Does this paper deliver a new andbetter model?
No.

How to build a better new model?
• My view of BCA accountingSomething that you try late at nite in your office when you
are trying to come up with a new model.

• The punch line though is not to describe what you dolate at nite in your office!
• But to deliver a new model and document how well it
performs:
Old facts (reproduces output and consumption declines
New facts ( and thereby produces wedges that are small).

Three strategies for strengthening thepaper1) Show that these new facts help to build anew and better model.
2) Show that these new facts rule out particular
existing theories of the Asian Crisis.
3) Look for robust conclusions across a varietyof models.

Smaller points: about the new facts
1.
2.
3.
4.

Decline in efficiency wedge in all countries
Decline in labor wedge in all countries
Decline in investment wedge in all countries
Foreign debt wedges rise in Korea,
Singapore and Hong Kong.

Efficiency wedge falls

Yt = F ( At , K t H t )A) Output fell a lot
B) Capital didn’t changeC) If labor didn’t fall, how did output fall by so much?
1)
2)

Do Hong-Kong, Singapore and Thailand have great insurance?
Do the official statistics on the labor market represent what actually
happened in the labor market in these economies?

Labor wedge falls
Conclusions about labor wedge depend on preferences.
Previous work on emerging countries finds that it isdifficult to reproduce the facts with a standard
utility function. Resolution is to use GHH.
From the perspective of wedge analysis changing theutility function from that used by CKM doesn’t
make sense. Do agents in Thailand have different
preferences for leisure than Americans?

Role of preferences in labor wedge• If it is assumed that the preferences are CobbDouglas instead the results line up better withmy priors about what happened in Asia during
this period.
• 1) Labor wedge shoots up at the time of theAsian crisis.
• 2) Foreign debt wedges decrease.

Which model preferences makes moresense?
• Do we really think that labor wedges fellduring this period?
• My priors lead me to place more weight on autility function where labor supply responds tochanges in income and interest rates. With thisspecification the labor wedge rises.

Investment wedge falls in all countries• Wrong sign!
• Christiano and Davis (2006) reportspecifications in which the sign of theinvestment wedge are flipped and its role ismuch more important.
• Could this happen here?

Foreign debt wedge3) Nature of the Foreign Debt wedge.
CKM: shocks to the trade balance are demand
shocks. Sudden improvements in the tradebalance during crises represent sudden stops ofcapital inflows.
Otsu: shocks are to the domestic real interest ratepremium.

Foreign debt wedge (What isexogenous?)• Did shocks to exogenous interest rates improve
the trade balance• Or did exogenous shocks to the trade balance
move interest rates?
• Hard to say. Probably makes sense to try bothhypotheses.