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Working Paper
Private investment and sovereign debt negotiations
Journal Article
Is low unemployment inflationary?
Many discussions about current macroeconomic events are based on the premise that inflation must accelerate after unemployment falls below a certain value. That value, called the nonaccelerating inflation rate of unemployment, or NAIRU, is believed to be around 6 percent, suggesting that recent unemployment rates are too low for stable inflation. But in fact inflation has been low and stable for several years. ; This article argues that the concept of the NAIRU is of very limited use for predicting inflation, understanding its causes, or forming policy. Such is the implication of empirical ...
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 ...
Working Paper
Financial crises in emerging markets: a canonical model
We present a simple model that can account for the main features of recent financial crises in emerging markets. The international illiquidity of the domestic financial system is at the center of the problem. Illiquid banks are a necessary and a sufficient condition for financial crises to occur. Domestic financial liberalization and capital flows from abroad (especially if short-term) can aggravate the illiquidity of banks and increase their vulnerability to exogenous shocks and shifts in expectations. A bank collapse multiplies the harmful effects of an initial shock, as a credit squeeze ...
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
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
Commitment, coordination failures, and delayed reforms
Working Paper
Credible monetary policy with long-lived agents: recursive approaches
This paper develops recursive methods that completely characterize all the time-consistent equilibria of a class of models with long-lived agents. This class is large enough to encompass many problems of interest, such as capital-labor taxation and optimal monetary policy. The recursive methods obtained are intuitive and yield useful algorithms to compute the set of all time-consistent equilibria. ; These results are obtained by exploiting two key ideas derived from dynamic programming. The first--developed by Abreu, Pearce, and Stachetti in the context of repeated games and by Spear and ...
Working Paper
Financial fragility and the exchange rate regime
We study financial fragility, exchange rate crises, and monetary policy in an open economy version of a Diamond-Dybvig model. The banking system, the exchange rate regime, and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare; if the mechanism fails, banking crises and speculative attacks become possible. We compare currency boards, fixed rates, and flexible rates with and without a lender of last resort. A currency board cannot implement a socially optimal allocation; in addition, bank runs are possible under a currency board. A fixed exchange ...