Abstract: We lay out a "small open economy" version of
the Calvo sticky price model, and show how the
equilibrium dynamics can be reduced to a simple representation in domestic
inflation and the output gap. We use the resulting framework to analyze the
macroeconomic implications of three alternative rule-based policy regimes
for the small open economy: domestic inflation and CPI-based Taylor rules,
and an exchange rate peg. We show that a key difference among these regimes
lies in the relative amount of exchange rate volatility that they entail.
We also discuss a special case for which domestic inflation targeting
constitutes the optimal policy, and where a simple second order approximation
to the utility of the representative consumer can be derived and used to
evaluate the welfare losses associated with the suboptimal rules.
Abstract: This paper is a theoretical study of the
determination of prices, interest
rates and currency exchange rates, set in an infinitely lived two country
world which is subject both to stochastic endowment shocks and to
monetary instability. Formulas are obtained for pricing all equity claims,
nominally denominated bonds, and currencies, and these formulas are
related to earlier, closely related results in the
theories of money, finance and international trade.
Abstract: This paper explores the nature of default arrival and
recovery implicit in the term structures of
sovereign CDS spreads. We argue that term structures of spreads reveal
not only the arrival rates of credit events, but also the loss rates given
credit events. Applying our framework to Mexico, Turkey, and Korea, we show
that a single-factor model with following
a lognormal process captures most of the variation in the term structures
of spreads. The risk premiums associated with unpredictable variation
in are
found to be economically significant and co-vary importantly with several
economic measures of global event risk, financial market volatility, and
macroeconomic policy.
Abstract:
This paper presents empirical evidence that the growth of export
manufacturing in Mexico during a period of major trade reforms, the years
1986-2000, altered the distribution of education. I use variation in the
timing of factory openings across municipalities to show that school
dropout increased with local expansions in export manufacturing. The
magnitudes I find suggest that for every twenty jobs created, one student
dropped out of school at grade 9 rather than continuing through to grade
12. These effects are driven by the least-skilled export-manufacturing jobs
which raised the opportunity cost of schooling for students at the margin.
Abstract: This paper develops a simple theory of
capital controls as dynamic terms-of-trade manipulation. We study an
infinite horizon endowment economy with two countries. One country chooses
taxes on international capital flows in order to maximize the welfare of
its representative agent, while the other country is passive. We show that
capital controls are not guided by the absolute desire to alter the
intertemporal price of the goods produced in any given period, but rather
by the relative strength of this desire between two consecutive periods.
Specifically, it is optimal for the strategic country to tax capital
inflows (or subsidize capital outflows) if it grows faster than the rest of
the world and to tax capital outflows (or subsidize capital inflows) if it
grows more slowly. In the long-run, if relative endowments converge to a
steady state, taxes on international capital flows converge to zero.
Although our theory emphasizes interest rate manipulation, the country's
net financial position per se is irrelevant.
Abstract: One strand of endogenous-growth models
assumes constant returns to a broad concept of capital. I extend these
models to include tax financed government services that affect production
or utility. Growth and saving rates fall with an increase in utility-type
expenditures; the two rates rise initially with productive government
expenditures but subsequently decline. With an income tax, the
decentralized choices of growth and saving are "too low," but if
the production function is Cobb-Douglas, the optimizing government still
satisfies a natural condition for productive efficiency. Empirical evidence
across countries supports some of the hypotheses about government and
growth.
