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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 ...
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. ...
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 ...
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 ...
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 ...
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.
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 ...