Working Papers
2002
February 1, 2002
International Capital Crunches: The Time-Varying Role of Informational Asymmetries
Description: We examine the determinants of capital flows to four developing countries during the 1990s using an explicitly disequilibrium econometric framework in which the supply and demand for capital are not necessarily equal and the actual amount of the flow is determined by the ‘short side’ of the market. We are thus able to detect instances of ‘international capital crunch’—where capital flows are curtailed because of supply-side rationing—and to relate these instances to movements in the underlying fundamentals. The analysis highlights the role of asymmetric information—as distinct from the traditional concern with default risk—in conditioning capital flows.
February 1, 2002
Wage Inequality in the United Kingdom, 1975–99
Description: This paper provides evidence that cross-sectional wage inequality in the U.K. rose sharply in the 1980s, continued to rise moderately through the mid-1990s and has remained essentially unchanged since then. As in the U.S., increases in within-group inequality account for a substantial fraction of the rise in wage dispersion during 1975-99. Compositional shifts in the occupational and industry structures of aggregate employment are also shown to have had important effects on the evolution of wage inequality. The convergence of the wage distributions for men and women has, however, had a stabilizing effect on the overall wage distribution.
February 1, 2002
A Dynamic General Equilibrium Framework of Investment with Financing Constraint
Description: In this paper, we provide a dynamic general equilibrium framework with an explicit investment-financing constraint. The constraint is intended as a reduced form to capture the balance sheet effects, which have been widely regarded as an important determinant of financial crises. We derive a link between the value of the firm and the social welfare and we find that the value of the firm can be greater with than without the constraint. Our model also sheds light on how the effects of productivity shocks and bubbles may be amplified by the financing constraint.
February 1, 2002
Dornbusch’s Overshooting Model After Twenty-Five Years
Description: This Mundell Fleming lecture at the International Monetary Fund’s 2001 annual research conference marks the 25th anniversary of Rudiger Dornbusch’s masterpiece, “Expectations and Exchange Rate Dynamics,” a seminal contribution to both policy and research in the field of international finance. This essay provides a simple overview of the model as well as some empirics, not only on exchange rates but on measures of the paper’s influence. Last, but not least, I offer some personal reflections on how Dornbusch conveyed the ideas in his “overshooting model” to inspire a generation of students.
February 1, 2002
On-the-Job Search and the Beveridge Curve
Description: This paper presents a theoretical and empirical investigation of the role on-the-job search plays in explaining shifts of the unemployment-vacancies relationship (the Beveridge curve). We show that the direction of the shift depends on the parameters of the matching model, regardless of the assumptions made on the relative search effectiveness of employed and unemployed searchers. We estimate a Beveridge Curve equation with a panel of British regions controlling for unobserved aggregate unemployment effects. We find evidence that the rise in on-the-job search in the 1980s has shifted the Beveridge Curve outwards.
February 1, 2002
Social Sector Spending in a Panel of Countries
Description: This paper presents evidence on the political and economic determinants of social sector spending from a panel dataset. The principal finding is that democratization in countries, as measured by within-country variation in subjective indices of democracy, is a significant predictor of government spending on education and health. The relationship is robust to controlling for a variety of factors and the estimated magnitudes suggest that an increase from the lowest to the highest rating for democracy for a country is associated with approximately 1 percent more central government spending and 3 percent more general government spending in social sectors, as a percent of GDP.
February 1, 2002
Monetary Rules for Emerging Market Economies
Description: We compare the performance of a currency board, inflation targeting, and dollarization in a small, open developing economy with a liberalized capital account. We focus on the transmission of shocks to currency and country risk premia and on the role of fluctuations in premia in the propagation of other shocks. We calibrate our model on Argentina. The framework matches the second moments of key variables well. Welfare analysis suggests that dollarization is preferable to alternative regimes because it removes currency premium volatility. However, a currency board can match dollarization on welfare grounds if the central bank holds a sufficiently large stock of foreign reserves.
February 1, 2002
Trust As a Means of Improving Corporate Governance and Efficiency
Description: Agency problems within the firm are a significant hindrance to efficiency. We propose trust between coworkers as a superior alternative to the standard tools used to mitigate agency problems: increased monitoring and incentive-based pay. We show how trust induces employees to work harder, relative to those at firms that use the standard tools. In addition, we show that employees at trusting firms have higher job satisfaction, and that these firms enjoy lower labor cost and higher profits. Finally, we show how trust may also be easier to use within the firm than the standard agency-mitigation tools.
February 1, 2002
A Fiscal Theory of the Currency Risk Premium and of Sterilized Intervention
Description: This paper develops a dynamic stochastic general equilibrium monetary portfolio choice model that accomplishes two objectives. First, it provides a theory of currency risk premia based on a weak and plausible form of fiscal nonneutrality. Domestic and foreign bonds become imperfect substitutes, the uncovered interest parity condition is replaced with a portfolio balance equation, and the central bank can separately choose the growth rate of its nominal anchor and the domestic bond interest rate. Second, it can turn be shown that, and how, sterilized intervention affects equilibrium allocations and prices.
February 1, 2002
Population Aging and its Macroeconomic Implications: A Framework for Analysis
Description: This paper develops a model to examine the macroeconomic implications of population aging. Using a general equilibrium framework, the analysis examines the various channels through which changes in demographics affect the economy. Age-earnings profiles are taken to summarize differences in effective labor supply across age groups and to help determine changes in consumption and saving behavior that occur over an agent's lifetime. Aggregating these supply- and demand-side effects, the implications of aging on economic activity and fiscal policy are then examined.