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Conference Paper
Defaultable debt, interest rates and the current account
World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina?s default in 2002. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates as compared to ...
Report
The competitiveness of U.S. manufacturing
We study the competitiveness of U.S. manufacturing. For the period 1999?2012 we find little support for a significant offshoring reversal. We show that the share of domestic demand that is met by imports and the terms of trade show no signs of reversal, even in sectors dominated by imports from China. We do, however, find some evidence consistent with the U.S. shale-gas energy revolution raising the competiveness of U.S. energy-intensive sectors.
Working Paper
Trade adjustment and productivity in large crises
The authors empirically characterize the mechanics of trade adjustment during the Argentine crisis using detailed firm-level customs data covering the universe of import transactions made during 1996-2008. Their main findings are as follows: First, the extensive margin defined as the entry and exit of firms or of products (at the country level) plays a small role during the crisis. Second, the sub-extensive margin defined as the churning of inputs within firms plays a sizeable role in aggregate adjustment. This implies that the true increase in input costs exceeds that imputed from ...
Working Paper
Capital Allocation and Productivity in South Europe
Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity. We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time. We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs. The model generates cross-sectional and time-series patterns in size, productivity, capital ...
Report
Coordination and Crisis in Monetary Unions
We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over-borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of ...
Working Paper
Fiscal devaluations
The authors show that even when the exchange rate cannot be devalued, a small set of conventional fiscal policy instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a standard New Keynesian open economy environment. They perform the analysis under alternative pricing assumptions?producer or local currency pricing along with nominal wage stickiness, under alternative asset market structures, and for anticipated and unanticipated devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation: one, a ...
Working Paper
Efficient expropriation: sustainable fiscal policy in a small open economy
We study a small open economy characterized by two empirically important frictions? incomplete financial markets and an inability of the government to commit to policy. We characterize the best sustainable fiscal policy and show that it can amplify and prolong shocks to output. In particular, even when the government is completely benevolent, the government?s credibility not to expropriate capital varies endogenously with the state of the economy and may be ?scarcest? during recessions. This increased threat of expropriation depresses investment, prolonging downturns. It is the incompleteness ...
Working Paper
Defaultable debt, interest rates and the current account
World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina?s default in 2002. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates as compared to ...
Working Paper
Emerging market business cycles: the cycle is the trend
Business cycles in emerging markets are characterized by strongly counter-cyclical current accounts, consumption volatility that exceeds income volatility, and dramatic ?sudden stops? in capital inflows. These features contrast with those of developed, small open economies and highlight the uniqueness of emerging markets. Nevertheless, we show that both qualitatively and quantitatively a standard dynamic stochastic, small open economy model can account for the behavior of both types of markets. Motivated by the observed frequent policy-regime switches in emerging markets, our underlying ...