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Working Paper
Monetary policy and the currency denomination of debt: a tale of two equilibria
Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies. This opens the door to multiple equilibria in policy regimes. We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency. The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen. We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary ...
Working Paper
Private investment and sovereign debt negotiations
Journal Article
Dollarization: a scorecard
In January of this year, Jamil Mahuad, then president of Ecuador, startled his compatriots by proposing to eliminate the national currency, the sucre. Instead, Mahuad advanced, the U.S. dollar would replace the sucre for all purposes. Although a popular uprising forced him out of office a week later, the succeeding government has actually implemented his proposal and recently announced that U.S. dollars will have completely replaced the sucre by September 2000. ; The question remains as to whether the Ecuadorian plan will be successful and, more generally, whether other countries will follow ...
Working Paper
Bargaining a monetary union
Journal Article
Understanding recent crises in emerging markets
The world economy is going through a difficult and dangerous period. The recent Brazilian currency meltdown is one more in a series of events that includes the Asian crises of 1997-98 and the Mexican crash in 1994, and there is uncertainty about whether other emerging economies will be infected with the Brazilian virus. ; Dealing with crises in emerging economies is, therefore, an urgent matter. However, what to do about these crises is a source of heated debate. According to the author of this article, much of the confusion arises from the fact that accumulated knowledge about crises in ...
Working Paper
Commitment, coordination failures, and delayed reforms
Working Paper
Financial crises in emerging markets: a canonical model
We present a simple model that can account for the main features of recent financial crises in emerging markets. The international illiquidity of the domestic financial system is at the center of the problem. Illiquid banks are a necessary and a sufficient condition for financial crises to occur. Domestic financial liberalization and capital flows from abroad (especially if short-term) can aggravate the illiquidity of banks and increase their vulnerability to exogenous shocks and shifts in expectations. A bank collapse multiplies the harmful effects of an initial shock, as a credit squeeze ...
Journal Article
Is low unemployment inflationary?
Many discussions about current macroeconomic events are based on the premise that inflation must accelerate after unemployment falls below a certain value. That value, called the nonaccelerating inflation rate of unemployment, or NAIRU, is believed to be around 6 percent, suggesting that recent unemployment rates are too low for stable inflation. But in fact inflation has been low and stable for several years. ; This article argues that the concept of the NAIRU is of very limited use for predicting inflation, understanding its causes, or forming policy. Such is the implication of empirical ...
Working Paper
Financial fragility and the exchange rate regime
We study financial fragility, exchange rate crises, and monetary policy in an open economy version of a Diamond-Dybvig model. The banking system, the exchange rate regime, and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare; if the mechanism fails, banking crises and speculative attacks become possible. We compare currency boards, fixed rates, and flexible rates with and without a lender of last resort. A currency board cannot implement a socially optimal allocation; in addition, bank runs are possible under a currency board. A fixed exchange ...