Cover

Half-title

Title

Copyright

Contents

List of Contributors

Preface

Introduction

PART ONE FINANCIAL ISSUES IN OPEN ECONOMIES: THEORY

ONE Crises: The Next Generation?

1. A Brief History of Currency Crisis Modeling

2. The Balance-Sheet View of Crises

3. Asset Prices and Crises

4. Financial Crisis in a Closed Economy

References

TWO Solutions (?) to the “Devaluation Bias”: Some Preventive Measures to Defend Fixed Exchange Rates against Self-Fulfilling…

1.Introduction

2.The Self-Fulfilling Crisis Model of Obstfeld (1996)

3. Some Measures to Prevent Self-Fulfilling Attacks

3.1. Imposing an Exit Penalty or Reputational Constraint (à la Barro–Gordon (1983))

3.2. Appointing a Conservative Central Banker (à la Rogoff (1985))

3.3. Designing an Incentive Contract for the Central Banker (à la Walsh (1995))

3.4. An Assessment of the Practicality of the Three Solutions (and Their Equivalents)

4. Are Currency Boards Different from Regular Pegs?

5. Conclusion

6.Appendix: Salient Features of Currency Boards

References

THREE Growth-Enhancing Effects of Bailout Guarantees

1. Introduction

2. Conceptual Framework

2.1. Distortions

2.2. Investment and Debt Denomination

2.3. Real Exchange Rate Risk

2.4. Equilibrium Dynamics

3. Policy Evaluation

3.1. Policies During a Boom

4.Conclusions

References

FOUR Risk and Exchange Rates

1. A Stochastic Two-Country Model

1.1. Preferences and Technology

1.2. Prices, Demand, and Budget Constraints

2. Goods Market Clearing and the Redundancy of Securities Markets

3. Producer Behavior under Preset Prices

3.1. The Price Setting Problem

3.2. Implications for Ex Ante Terms of Trade

3.3. Implications for Ex Ante Consumption

4. Equilibrium

4.1. First-Order Conditions for Consumption and Money

4.2. Log-Linearization and the Exchange-Rate Risk Premium

4.3. Equilibrium Exchange Rates and the “Level” Risk Premium

4.4. The Short-Run Effects of Monetary Shocks

5. Solving for Exchange Risk Premia

6. The Magnitude of the “Level” Exchange Rate Risk Premium

7. Volatility and Welfare

7.1. Calculating Ex Ante Utility

7.2. Equality of Expected Home and Foreign Utilities

7.3. Country Size and the Cost of Currency Volatility

7.4. Quantifying the Cost of Currency Volatility

8. Summary

Appendix A. Flexible-Price Output Levels and Government Spending Shocks

A.1. Equilibrium Output with Flexible Prices

A.2. Government Spending Shocks

Appendix B. Optimal Price Setting by Producers Facing Monetary and Productivity Shocks

Appendix C. An Important Special Case with an Exact Solution

Appendix D. Ex Post Welfare Effects of Monetary Shocks

D.1. Calculating Ex Post Welfare Effects

D.2. The Terms of Trade and Asymmetric Transmission

References

PART TWO FINANCIAL ISSUES IN OPEN ECONOMIES: EMPIRICS

FIVE Economic Integration, Industrial Specialization, and the Asymmetry of Macroeconomic Fluctuations

1. Introduction

2. Conceptual Issues

3. A Stylized Model of Fluctuations

4. Measuring the Asymmetry of Fluctuations

4.1. A Utility-Based Measure of Fluctuations Asymmetry

5. Measuring Specialization in Production

6. Empirical Analysis

6.1. Data Used

6.2. Asymmetry Measures and Specialization Indices

6.3. Regression Analysis

6.4. Regressions Using a Pairwise Correlation Measure of Fluctuations Asymmetry

7. Income Asymmetry versus GDP Asymmetry

8. Summary

Appendix: A Utility-Based Measure of Fluctuations Asymmetry

References

SIX Uncovered Interest Parity in Crisis: The Interest Rate Defense in the 1990s

1. Introduction

2. Methodology

3. The Data Set

4. UIP Regression Analysis

5. The Interest Rate Defense

5.1. The Framework

5.2. The Role of Excess Returns

6.Conclusion

References

SEVEN When Does Capital Account Liberalization Help More than It Hurts?

1. Introduction

2. Previous Literature

3. Basic Results

4. Sensitivity Analysis

5. Do These Patterns Reflect Stages of Financial and Institutional Development?

6. Sequencing

7. Conclusion

Data Appendix

References

EIGHT Sources of Inflation in Developing Countries

1. Introduction

2. Econometric Method

3. Data

4. Specifications and Results

4.1. Ordering of the Variables

4.2. Importance of the Six Factors as Influences on Inflation

4.3. Response of Inflation to Shocks

4.4. Sensitivity Analysis

5. Conclusions

References

PART THREE ECONOMIC GROWTH: THEORY AND EMPIRICS

NINE Growth Effects and the Cost of Business Cycles

1. Introduction

2. A Model of Endogenous Growth

2.1. Growth Effects through the Level of Investment

2.2. Growth Effects through Investment Volatility

3. Quantitative Analysis

4. Conclusion

References

TEN Explaining Economic Growth

1. Evidence

2. A Note on Technology

3. Explanations – An Overview

4. Empirics of the Solow and Related Models

5. The Implemented Technology

5.1. Some Implications

6. Consequences

7. Cross-Country Agricultural Production Function

8. Empirical Results

9. Concluding Remarks

Appendix: Estimates of Growth Models

References

PART FOUR PUBLIC ECONOMICS

ELEVEN Simulating Fundamental Tax Reform in the United States

1.The Model

1.1. Demographic Structure

1.2. Preferences and Household Budget Constraints

1.3. The Government

1.4. Firms and Technology

2. Calibration

2.1. Earnings Ability Profiles

2.2. Fiscal Structure

2.3. Preferences and Technology

2.4. Solving the Model

2.5. The Benchmark Equilibrium

3. Initial Tax Reform Simulations

3.1. A Proportional Income Tax

3.2. A Proportional Consumption Tax

3.3. The Flat Tax

3.4. The Flat Tax with Transition Relief

3.5. The X Tax

4. Sensitivity Analysis

5. Summary and Conclusion

Appendix

Labor Supply Elasticities

Calculation of Earnings Ability Profiles

References

TWELVE The International Macroeconomics of Taxation and the Case against European Tax Harmonization

1. Introduction

2. A ‘Workhorse’ Dynamic Equilibrium Model of Taxation in Open Economies

2.1. Structure of the Model

2.2. Stationary Equilibrium, Calibration and Design of Tax Policy Experiments

2.3. The International Transmission Channels of Tax Policy

3. The Case Against European Tax Harmonization

3.1. Identifying the Tax Policy Transmission Channels: Unilateral Tax Cuts

3.2. European Tax Harmonization

4. Concluding Remarks: If Harmonization Is Undesirable, What Then?

References

THIRTEEN Home Bias in Portfolios and Taxation of Asset Income

1. Portfolio Specialization in an Open Economy

1.1. Equilibrium When Domestic Prices Are Stabilized

1.2. Equilibrium When Exchange Rates Are Stabilized

2. Price vs. Exchange Rate Stability and International Capital Mobility

3. Implications of Stochastic Prices for Taxes on Asset Income

3.1. Tax Policy in a Nonstochastic Setting

3.2. Tax Policy When Exchange Rates Are Stochastic

3.3. Tax Policy when Domestic Prices Are Stochastic

4. Conclusions

References

FOURTEEN Social Dumping in the Transformation Process?

1. The Accusation of Social Dumping

2. Redistribution vs. Wages in Kind

3. Why Are the Differences in Direct and Indirect Wage Costs So High?

4. A Simple Model of the Economic Catching-up Process

5. The Policy of the National Government

6. The Overall Welfare Optimum

7. The Properties of the Catching-Up Process

8. Lessons from German Unification

9. Why Low Wages and Social Standards Do Not Indicate Social Dumping

References

PART FIVE POLITICAL ECONOMY

FIFTEEN Do Political Institutions Shape Economic Policy?

1. Initial Remarks

2. Theoretical Ideas

2.1. An Organizing Framework

2.2. General Ideas

2.3.Specific Predictions

2.4. Discussion

3. Data and Specification

4. Empirical Regularities?

4.1. Size of Government

4.2. Composition of Government

4.3. Corruption

5. Final Remarks

References

Author Index

Subject Index