Search Results
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
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 be caused by global capital market frictions, such as collateral constraints and trading costs, suggests that sudden stops could be prevented by offering price guarantees on the emerging market asset class. Providing these guarantees is a risky endeavor, however, because they introduce a moral hazard-like incentive similar to those that are also viewed as a cause of emerging markets crises. This paper studies this financial frictions-moral hazard tradeoff using an equilibrium asset-pricing model in which margin ...
Working Paper
Understanding Bank and Nonbank Credit Cycles: A Structural Exploration
We explore the structural drivers of bank and nonbank credit cycles using an estimated medium-scale macro model that allows for bank and nonbank financial intermediation. We posit economy-wide aggregate and sectoral disturbances to potentially drive bank and nonbank credit growth. We find that sectoral shocks affecting the balance sheets of entrepreneurs who borrow from the financial sector are important for the business cycle frequency fluctuations in bank and nonbank credit growth. Economy-wide entrepreneurial risk shocks gain predominance for explaining the longer-horizon comovement ...
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
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 ...
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. ...
Discussion Paper
Evaluating Empirical Regularities in Variable Comovement in Stress Test Scenarios
Each year, the Federal Reserve Board conducts a stress test of large banks to assess their ability to withstand economic downturns while continuing to lend and meet their obligations. These stress tests include severely adverse scenarios which feature 13-quarter paths of key macroeconomic and financial variables that factor into the calculation of projected capital losses of the stress-tested institutions.
Discussion Paper
Measuring the Severity of Stress-Test Scenarios
This note presents a simple methodology for measuring the severity of stress-test scenarios, which relies on a comparison of scenario developments with historically stressful episodes--specifically, recessions and house-price retrenchments.
Working Paper
Labor market search in emerging economies
This paper shows that labor markets of emerging economies are characterized by large fluctuations in wages while employment fluctuations are subdued. We find that a real business cycle model of a small open economy that embeds a Mortensen-Pissarides type of search-matching frictions can account for these aforementioned regularities. Moreover, the joint interaction of countercyclical interest rates and search-matching frictions can go a long way in accounting for higher consumption variability relative to output and countercyclical current account observed in emerging markets. Extending this ...
Working Paper
On the solvency of nations: are global imbalances consistent with intertemporal budget constraints?
Theory predicts that a nation's stochastic intertemporal budget constraint is satisfied if net foreign assets (NFA) are integrated of any finite order, or if net exports (NX) and NFA satisfy an error-correction specification with a residual integrated of any finite order. We test these conditions using data for 21 industrial and 29 emerging economies for the 1970-2004 period. The results show that, despite the large global imbalances of recent years, NFA and NX positions are consistent with external solvency. Country-specific unit root tests on NFA-GDP ratios suggest that nearly all of them ...