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Working Paper
Monetary policy and the currency denomination of debt: a tale of two equilibria
Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies. This opens the door to multiple equilibria in policy regimes. We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency. The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen. We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary ...
Working Paper
Private investment and sovereign debt negotiations
Journal Article
Dollarization: a scorecard
In January of this year, Jamil Mahuad, then president of Ecuador, startled his compatriots by proposing to eliminate the national currency, the sucre. Instead, Mahuad advanced, the U.S. dollar would replace the sucre for all purposes. Although a popular uprising forced him out of office a week later, the succeeding government has actually implemented his proposal and recently announced that U.S. dollars will have completely replaced the sucre by September 2000. ; The question remains as to whether the Ecuadorian plan will be successful and, more generally, whether other countries will follow ...
Working Paper
Bargaining a monetary union
Journal Article
Understanding recent crises in emerging markets
The world economy is going through a difficult and dangerous period. The recent Brazilian currency meltdown is one more in a series of events that includes the Asian crises of 1997-98 and the Mexican crash in 1994, and there is uncertainty about whether other emerging economies will be infected with the Brazilian virus. ; Dealing with crises in emerging economies is, therefore, an urgent matter. However, what to do about these crises is a source of heated debate. According to the author of this article, much of the confusion arises from the fact that accumulated knowledge about crises in ...
Working Paper
Commitment, coordination failures, and delayed reforms
Working Paper
The Asian liquidity crisis
A country's financial system is internationally illiquid if its potential short-term obligations in foreign currency exceed the amount of foreign currency it can have access to in short notice. This condition may be necessary and sufficient for financial crises and/or exchange rate collapses (Chang and Velasco 1998a, b). In this paper we argue that the 1997-98 crises in Asia were in fact a consequence of international illiquidity. This follows from an analysis of empirical indicators of illiquidity as well as other macroeconomic statistics. We trace the emergence of illiquidity to financial ...
Journal Article
Policy credibility and the design of central banks
In recent years several countries have granted greater independence to their central banks; others have made price stability the only objective of monetary policy. These two trends can be seen as social responses to a fundamental problem of central bank credibility called the time inconsistency of monetary policy. The theory and some empirical aspects of time inconsistency are the subject of this article. ; The theory emphasizes that expected and actual inflation will be larger if a central bank cannot credibly commit to honor commitments to keep inflation low than if it can. To ameliorate ...
Working Paper
Political party negotiations, income distribution, and endogenous growth
This paper examines the determination of the rate of growth in an economy in which two political parties, each representing a different social class, negotiate the magnitude and allocation of taxes. Taxes may increase growth if they finance public services but reduce growth when used to redistribute income between classes. The different social classes have different preferences about growth and redistribution. The resulting conflict is resolved through the tax negotiations between the political parties. I use the model to obtain empirical predictions and policy lessons about the relationship ...
Working Paper
Liquidity crises in emerging markets: Theory and policy
We build a model of financial sector illiquidity in an open economy. Illiquidity is defined as a situation in which a country's consolidated financial system has potential short-term obligations that exceed the amount of foreign currency available on short notice. We show that illiquidity is key in the generation of self-fulfilling bank and/or currency crises. We discuss the policy implications of the model and study issues associated with capital inflows and the maturity of external debt, the role of real exchange depreciation, options for financial regulation, fiscal policy, and exchange ...