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Working Paper
The impact of financial frictions on a small open economy: when current account borrowing hits a limit
The evidence of the last 20 years of recurring output busts and rapid reversals of the current account in emerging markets indicates that domestic agents may not be able to borrow in international capital markets to fully insure themselves against internal and external shocks. This paper models this phenomenon as a form of excess volatility by introducing a financial friction into a stochastic model of a small open economy. The financial friction limits the current account deficit to a fixed fraction of gross domestic product. The paper shows that conditional volatility and asymmetry are ...
Journal Article
Emerging markets and macroeconomic volatility: conference summary
This Economic Letter summarizes the papers presented at the conference on "Emerging Markets and Macroeconomic Volatility: Lessons from a Decade of Financial Debacles" held at the Federal Reserve Bank of San Francisco on June 4-5, 2004, under the joint sponsorship of the Bank's Center for Pacific Basin Studies and the University of Maryland's Center for International Economics. The papers are listed at the end and are available at http://www.frbsf.org/economics/conferences/0406/index.html
Working Paper
North-South technological diffusion and dynamic gains from trade
This paper studies the transitional dynamics in a quality ladder model of endogenous growth in which North-South trade leads to technological diffusion through reverse engineering of intermediate goods. The concept of learning-to-learn is incorporated into both imitative and innovative processes, which in turn drive domestic technological progress. International trade with imitation leads to feedback effects between Southern imitators and Northern innovators who compete for the world market. Consequently, both regions face transition paths dependent on their relative technologies. We solve ...
Journal Article
After the Asian financial crisis: can rapid credit expansion sustain growth?
In the years following the Asian financial crisis of 1997-1998, the governments of South Korea and Thailand each have sought to generate economic recovery by expanding domestic credit. The rapid credit expansion in both countries has created concerns about the extent to which their economies can channel these funds efficiently and sustain economic growth. In particular, if banks are unable to supervise the allocation of resources effectively, there is a risk of widespread bankruptcies and a financial system crisis. Previous experience shows that these Asian economies indeed may be at risk of ...
Journal Article
Does a fall in the dollar mean higher U.S. consumer prices?
This Economic Letter looks at the relationship among changes in the exchange rate value of the dollar and in import prices and overall consumer prices, with a particular focus on the current circumstances. It appears that the lower value of the dollar at this point is affecting U.S. prices less than it has historically. The reasons for the difference include changes in trading partners, changes in the composition of U.S. trade, and improved monetary policy over the last several years. Looking ahead, then, it appears likely that the recent dollar depreciation will have only very moderate ...
Journal Article
The exchange rate-consumer price puzzle
Since February of 2002, the dollar has lost 27% of its value relative to other major currencies. Over the same period, consumer prices (excluding food and energy goods) have increased by a much smaller amount--8.9%. To economists, and particularly to central bankers and others who think about forecasting inflation, this relative insensitivity of consumer prices to exchange rates is a puzzle; indeed, it is one that has a long history and that is a characteristic not only of the U.S. but of other countries as well. ; Why is it a puzzle? Because international trade theory argues that, if all ...
Journal Article
Financial development, productivity, and economic growth
Working Paper
A theory of banks, bonds, and the distribution of firm size
We draw on stylized facts from the finance literature to build a model where altering the relative costs of bank and bond financing changes the entire distribution of firm size, with implications for the aggregate capital stock, output, and welfare. Reducing transactions costs in the bond market increases the output and profits of mid-sized firms at the expense of both the largest and smallest firms. In contrast, reducing the frictions involved in bank lending promotes the expansion of the smallest firms while all other firms shrink, even as it increases the profitability of both small and ...
Working Paper
Nonlinearities in international business cycles
This paper documents the dynamic properties of national output, its components, and the current account for five OECD countries. There is strong evidence of conditional volatility for almost all time series as well as significant deviations from normality. The deviations are detected particularly in GDP, net exports, investment time series.
Working Paper
Financial choice in a non-Ricardian model of trade
We join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs both increase welfare but have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing the degree of trade openness increases firms' relative demand for bond versus bank financing. We identify a financial switching ...