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Working Paper
Prospective deficits and the Asian currency crisis
This paper argues that the recent Southeast Asian currency crisis was caused by large prospective deficits associated with implicit bailout guarantees to failing banking systems. We articulate this view using a simple dynamic general equilibrium model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises. This is true regardless of the government's foreign reserve position or the initial level of its debt. While the government cannot prevent a speculative attack, it can affect its timing. The longer the delay, the higher ...
Journal Article
Understanding the Korean and Thai currency crises
This article reviews and interprets the recent currency crises in Korea and Thailand. The authors argue that a prime causes of the crises were large, unfunded government guarantees to railing financial sectors.
Working Paper
Capital utilization and returns to scale
Working Paper
Sectoral Solow residuals
Working Paper
Understanding booms and busts in housing markets
Some booms in housing prices are followed by busts. Others are not. In either case it is difficult to find observable fundamentals that are correlated with price movements. We develop a model consistent with these observations. Real estate agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics." Agents meet randomly with one another. Those with tighter priors are more likely to convert others to their beliefs. The model generates a "fad": The fraction of the population with a particular view rises and then falls. Depending on ...
Working Paper
On the fiscal implications of twin crises
This paper explores the implications of different strategies for financing the fiscal cost of twin crises for inflation and depreciation rates. We use a first-generation type model of speculative attacks which has four key features: (i) the crisis is triggered by prospective deficits, (ii) there exists outstanding non-indexed government debt issued prior to the crises; (iii) a portion of the government's liabilities are not indexed to inflation; and (iv) there are nontradable goods and costs of distributing tradable goods, so that purchasing power parity does not hold. We show that the model ...
Working Paper
Hedging and financial fragility in fixed exchange rate regimes
Currency crises that coincide with banking crises tend to share four elements. First, governments provide guarantees to domestic and foreign bank creditors. Second, banks do not hedge their exchange rate risk. Third, there is a lending boom before the crises. Finally, when the currency/banking collapse occurs interest rates rise and there is a persistent decline in output. This paper proposes an explanation for these regularities. We show that government guarantees lower interest rates, and generate an economic boom. But they also lead to a more fragile banking system: banks choose not to ...
Working Paper
Assessing the effects of fiscal shocks
This paper investigates the response of real wages and hours worked to an exogenous shock in fiscal policy. We identify this shock with the dynamic response of government purchases and tax rates to an exogenous increase in military purchases. The fiscal shocks that we isolate are characterized by highly correlated increases in government purchases, tax rates and hours worked as well as persistent declines in real wages. We assess the ability of standard Real business Cycle models to account for these facts. They can-but only under the assumption that marginal income tax rates are constant, a ...
Working Paper
Fiscal shocks in an efficiency wage model
This paper illustrates a particular limited information strategy for assessing the empirical plausibility of alternative quantitative general equilibrium business cycle models. The basic strategy is to test whether a model economy can account for the response of actual economy to an exogenous shock. Here we concentrate on the response of aggregate hours worked and real wages to a fiscal policy shock. The fiscal policy shock is identified with the dynamic response of government purchases and averages marginal income tax rates to an exogenous increase in military purchases. Burnside, Eichenbaum ...