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Conference Paper
Putting the brakes on Sudden Stops: the financial frictions - moral hazard tradeoff of asset price guarantees
The hypothesis that Sudden Stops to capital inflows in emerging economies may originate in frictions inherent to global capital markets, such as collateral constraints and trading costs, suggests that Sudden Stops could be prevented by an international organization that offers exante price guarantees on the emerging-markets asset class. Providing these guarantees is a risky endeavor, however, because they introduce a moral-hazard-like incentive similar to those that are viewed as another culprit behind emerging markets crises. This paper studies this financial frictions-moral hazard tradeoff ...
Working Paper
Nonlinear Effects of Loan-to-Value Constraints
This paper investigates the impact of loan-to-value (LtV) borrowing constraints in models with occasionally binding credit constraints. These constraints give rise to a Fisherian debt-deflation mechanism, where exogenous shocks can trigger cascading effects resulting in significant declines in consumption, asset prices, and borrowing reversals—characteristic of financial crises. However, recent literature challenges traditional view by suggesting that collateral constraints may not always exacerbate financial disturbances but could instead foster dynamics leading to multiple equilibria. ...
Working Paper
The Role of U.S. Monetary Policy in Global Banking Crises
We examine the role of U.S. monetary policy in global financial stability by using a cross-country database spanning the period from 1870-2010 across 69 countries. U.S. monetary policy tightening increases the probability of banking crises for those countries with direct linkages to the U.S., either in the form of trade links or significant share of USD-denominated liabilities. Conversely, if a country is integrated globally, rather than having a direct exposure, the effect is ambiguous. One possible channel we identify is capital flows: If the correction in capital flows is disorderly (e.g., ...
Working Paper
Quantitative implications of indexed bonds in small open economies
This paper analyzes the macroeconomic implications of real-indexed bonds, indexed to the terms of trade or GDP, using a general equilibrium model of a small open economy with financial frictions. Although indexed bonds provide a hedge to income fluctuations and can thereby mitigate the effects of financial frictions, they introduce interest rate fluctuations. Because of this tradeoff, there exists a nonmonotonic relation between the "degree of indexation" (i.e., the percentage of the shock reflected in the return) and the benefits that these bonds introduce. When the nonindexed bond market ...
Working Paper
Approximately Right?: Global v. Local Methods for Open-Economy Models with Incomplete Markets
Global and local methods are widely used in international macroeconomics to analyze incomplete-markets models. We study solutions for an endowment economy, an RBC model and a Sudden Stops model with an occasionally binding credit constraint. First-order, second-order, risky steady state and DynareOBC solutions are compared v. fixed-point-iteration global solutions in the time and frequency domains. The solutions differ in key respects, including measures of precautionary savings, cyclical moments, impulse response functions, financial premia and macro responses to credit constraints, and ...