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Endogenous deposit dollarization
This paper explores sources of deposit dollarization unrelated to standard moral hazard arguments. We develop a model in which banks choose the optimal currency composition of their liabilities. We argue that the equal treatment of peso and dollar claims in the event of bank default can induce banks to attract dollar deposits above the socially desirable level. The distortion arises because dollar deposits are the only source of default risk in the model, but dollar depositors share the burden of the default with peso depositors. The incentive to dollarize is reinforced by common banking ...
Report
Terms of trade and exchange rate regimes in developing countries
Since Friedman (1953), an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks. I use a post-Bretton Woods sample (1973-96) of seventy-five developing countries to assess whether the responses of real GDP, real exchange rates, and prices to terms-of-trade shocks differ systematically across exchange rate regimes. I find that responses are significantly different across regimes in a way that supports Friedman's hypothesis. In response to a negative terms-of-trade shock, countries with fixed ...
Journal Article
Coping with terms-of-trade shocks in developing countries
Sharp swings in a developing country's terms of trade, the price of its exports relative to the price of its imports, can seriously disrupt output growth. An analysis of the effects of a decline in export prices in seventy-five developing economies suggests that countries with a flexible exchange rate will experience a much milder contraction in output than their counterparts with fixed exchange rate regimes.
Working Paper
Exporting deflation? Chinese exports and Japanese prices
Between 1992 and 2002, the Japanese Import Price Index (IPI) registered a decline of almost 9 percent and Japan entered a period of deflation. We show that much of the correlation between import prices and domestic prices was due to formula biases. Had the IPI been computed using a pure Laspeyres index like the CPI, the IPI would have hardly moved at all. A Laspeyres version of the IPI would have risen 1 percentage point per year faster than the official index. Second we show that Chinese prices did not behave differently from the prices of other importers. Although Chinese prices are ...
Report
Uncertainty, exchange rate regimes, and national price levels
Large differences in national price levels exist across countries. In this paper, I develop a general equilibrium model predicting that these differences should be related to countries? exchange rate regimes. My empirical findings confirm that countries with fixed exchange rate regimes have higher national price levels than countries with flexible regimes. At the disaggregate level, the relationship between exchange rate regimes and national price levels is stronger for nontraded goods than for traded goods. I also find that measuring the misalignment in national price levels around times of ...
Report
Globalization and the gains from variety
Since the seminal work of Krugman, product variety has played a central role in models of trade and growth. In spite of the general use of love-of-variety models, there has been no systematic study of how the import of new varieties has contributed to national welfare gains in the United States. In this paper, we show that the unmeasured growth in product variety from U.S. imports has been an important source of gains from trade over the last three decades (1972-2001). Using extremely disaggregated data, we show that the number of imported product varieties has increased by a factor of four. ...
Journal Article
Are we underestimating the gains from globalization for the United States?
Over the last three decades, trade has more than tripled the variety of international goods available to U.S. consumers. Although an increased choice of goods clearly enhances consumer well-being, standard national measures of welfare and prices do not assign a value to variety growth. This analysis-the first effort to measure such gains-finds that the value to consumers of global variety growth in the 1972-2001 period was roughly $260 billion.