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Ebook Overoptimism, Boom-Bust Cycles and Monetary Policy in Small Open Economies

Several emerging market economies during the 1990s, such as Mexico, south-east Asian countries, and Chile, displayed ... the 1990s. To that end, we develop a multi-sector dynamic stochastic general equilibrium (DSGE) model for a small economy with short-run ... mainly on the role of fiscal policy in an extended Mundell-Fleming context. The optimist-pessimist mood of the private sector in ...

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Ebook Does Bank Monitoring Benefit or Hurt Shareholders? Mergers for Coinsurance during Japan’s Banking Crisis in the 1990s

Submitted by puput on Fri, 06/18/2010 - 06:31

The objective of this paper is twofold. On the one hand, we want to model financial contagion as an endogenous phenomenon with rational forward looking agents. On the other hand, we want to give a rationale of the empirical evidence that contagion is an unlikely event in interbank deposit markets.

We model a two regions economy where, in each region, the banking sector has access to long-term investment opportunities, and consumers give their assets to the banks in order to exploit such opportunities. The two regions are characterized by a different degree of moral hazard, and have negatively correlated liquidity needs. In this way, we study how the moral hazard problem affects the possibility of liquidity coinsurance.

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Ebook Real Exchange Rate Dynamics: The Role of Elastic Labor Supply

Submitted by puput on Tue, 11/09/2010 - 06:48

The real exchange rate (RER) puzzle has spawned an extensive literature, stimulating researchers to propose different explanations [Rogoff, 1996; Betts and Devereux, 1996; Hau, 2000; Obstfeld and Rogoff, 2001; Bergin and Feenstra, 2001; Chari, Kehoe, and McGrattan, 2002; Devereux and Engel, 2002; Morshed and Turnovsky, 2004; Chen and Hsu, 2009; Carvalho and Nechio, 2010]. Two key aspects of the puzzle are: (i) the long-term persistence of the real exchange rate following a structural change, and (ii) its short-term volatility, both of which exhibit systematic patterns across economies. With respect to the persistence of the real exchange rate, the rate of convergence to its long-run equilibrium value is significantly slower for developed countries than it is for developing countries [Cheung and Lai, 2000].

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Ebook External Constraints on Monetary Policy and The Financial Accelerator

Submitted by puput on Wed, 01/20/2010 - 03:40

Over the past fifteen years there has been a dramatic rise in the frequency of financial crises that have apparently led to significant contractions in economic activity. One feature of these crises, that pertains in particular to open economies, is the strong connection with a fixed exchange rate regime. In a study covering the 1970s through the 1990s, Kaminsky and Reinhart [18] document the strong correlation between domestic financial strains and currency crises. Put differently, countries in the position of having to defend an exchange rate peg were more likely to have suffered severe financial distress. The likely reason is straight forward: defending an exchange rate peg generally requires a central bank to adjust interest rates in a direction that reinforces the crisis. Moreover, this connection between external constraints on monetary policy and financial crises is not simply a post war phenomenon: During the Great Depression, as Eichengreen [13] and others have shown, countries that stayed on the gold standard suffered far more severe financial and economic distress than countries that left early.

In this paper we develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. Our goal is to explore the connection between the exchange rate regime and financial distress. Specifically, we extend to the open economy the financial accelerator framework developed in Bernanke, Gertler and Gilchrist [4] (hereafter BGG). We then consider the behavior of the economy under fixed versus flexible exchange rates and, in the process, isolate the role of the financial accelerator.

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