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Working Paper
Asset bubbles, domino effects and 'lifeboats': elements of the East Asian crisis
Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the USA. Could similar mechanisms have played a role in ending the East Asian miracle? After a brief account of the nature of the recent crises, we use a model of highly levered credit-constrained firms due to Kiyotaki and Moore (1997) to explore this question. As applied to land-holding property companies, it predicts greatly amplified responses to financial shocks--like the ending of the land price bubble or the fall of the exchange rate. The initial fall in asset values is followed by the ...
Working Paper
Hyperinflation and stabilization: Cagan revisited
In this paper Cagan's analysis of hyperinflations is adapted to look at situations where the deficits to be financed by money creation are large and variable, but fiscal stabilisation is expected--features found in some of the republics of the Former Soviet Union soon after independence. The impact of various stabilisation policies on real balances and inflation expectations is studied, assuming expectations are rational and deficits follow a geometric Brownian motion until the stabilisation takes place. For a modified form of Cagan's demand function we are able to obtain explicit solutions ...
Working Paper
Monetary stabilization policy in an open economy
This paper investigates optimal stabilization policy in a small open economy using a continuous time model in which inflation depends on future monetary policy as well as past inflation. The impact of monetary policy is assumed to operate via real interest rates and the real exchange rate and the setting of real interest rates is chosen so as to minimize quadratic costs of fluctuations in output and inflation, subject to varying expectations in the foreign exchange market. Analytical expressions and simulation results are presented for "time inconsistent" optimal policy, the "dynamic ...