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Journal Article
Are global imbalances due to financial underdevelopment in emerging economies?
This Economic Letter presents recent research on a new explanation for both the export of savings and the import of equity by emerging countries: their level of underdevelopment of the financial sector compared to that of more advanced countries. Specifically, financial underdevelopment in emerging markets can lead to both over saving by domestic agents and undervaluation of domestic firms, which encourages international investors to purchase equity there.
Journal Article
Fiscal sustainability and contingent liabilities from recent credit expansions in South Korea and Thailand
While South Korea and Thailand had relatively sustainable fiscal policies prior to the Asian crisis, the long-term cost of the bailout of their financial sectors amounted to an estimated 30 to 40 percent of output, which was largely financed by public borrowing. The recent credit expansions in South Korea and Thailand have created new contingent liabilities for the governments of the two countries. This paper evaluates the impact of these rapid credit expansions on the sustainability of fiscal policy in South Korea and Thailand. In Thailand, a rapid credit expansion preceded the currency ...
Journal Article
What if foreign governments diversified their reserves?
World financial markets paid close attention when officials from both South Korea and Japan said that their governments were considering diversifying their holdings of foreign reserves. Since then, officials in both countries have insisted that they were not considering any major changes to the policy of reserve holdings. Nonetheless, the potential for a sell-off of dollar-denominated assets by foreign governments has raised some questions about the consequences of such a move. This Economic Letter attempts to put these issues into perspective. It begins with a review of recent trends in the ...
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
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 ...
Working Paper
Currency boards, dollarized liabilities, and monetary policy credibility
The recent collapse of the Argentine currency board raises new questions about the desirability of formal fixed exchange rate regimes in modern developing economies. This paper examines the impact of dollarized liabilities with potential default for a currency board with costly abandonment. We compare the performance of a currency board to a central bank with full discretion in two environments: One with only idiosyncratic firm shocks, and one with both idiosyncratic shocks and shocks to the dollar-euro rate. We show that the possibility of default with peso-valued exports generates a risk ...
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
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 ...
Working Paper
Statistical nonlinearities in the business cycle: a challenge for the canonical RBC model
Significant nonlinearities are found in several cyclical components macroeconomic time series across countries. Standard equilibrium models of business cycles successfully explain most first and second moments of these time series. Nevertheless, this paper shows that a model of this class cannot replicate nonlinear features of the data. Applying the Efficient Method of Moments (Gallant and Tauchen, 1996, 2000) methodology to build an algorithm that searches over the models parameter space establishes the parameterization that best allows replication of all statistical properties of the data. ...