Search Results
Working Paper
Private investment and sovereign debt negotiations
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 ...
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
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 ...
Journal Article
Is a weak dollar inflationary?
Since the early seventies, the U.S. dollar has been allowed to float freely, and its exchange rates have become extremely volatile and difficult to explain, let alone to predict. The dollar's erratic behavior has stimulated a lively debate in academic and policy circles over what the government's response should be. One of the major questions that must be answered before a response can be contemplated is whether dollar exchange rate changes influence U.S. inflation. ; This article examines the empirical relationship between dollar movements and inflation in the United States. Historical ...
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 ...
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
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 ...