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Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 277 Abstract:
The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantity the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption—real exchange rate anomaly, is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 308 Abstract:
We analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free-rider problem in the setting of nonmonetary policies, such as labor market policy, fiscal policy, and bank regulation. The free-rider problem leads the union’s members to pursue lax nonmonetary policies that induce the monetary authority to generate high inflation. The free-rider problem can be mitigated by imposing constraints on the nonmonetary policies, like unionwide rules on labor market policy, debt constraints on members’ fiscal policy, and unionwide regulation of banks. When there is no time inconsistency problem, there is no free-rider problem, and constraints on nonmonetary policies are unnecessary and possibly harmful.
Palavra-chave: Fixed exchange rates, European Union, Maastricht Treaty, Dollarization, and Monetary regime Sujeito: F41 - Open Economy Macroeconomics, E58 - Central Banks and Their Policies, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, F30 - International Finance: General, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, F33 - International Monetary Arrangements and Institutions, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, and F42 - International Policy Coordination and Transmission
Creator: Chari, V. V., Jagannathan, Ravi, and Jones, Larry E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 316 Abstract:
In this paper, we characterize those situations in which after the introduction of futures markets there is either an unambiguous change in the volatility of spot prices or an unambiguous change in welfare. We provide examples of the usefulness of this approach by giving two alternative sets of sufficient conditions for price volatility to decline following the introduction of futures trading. We also provide a set of sufficient conditions for the introduction of futures trading to increase the welfare of all agents.
Palavra-chave: Futures market, Prices, and Commodities Sujeito: O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 316 Abstract:
Financial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial crises. Herds disappear from these models if two of their unappealing assumptions are modified: if their zero-one investment decisions are made continuous and if their investors are allowed to trade assets with market-determined prices. However, both critiques are overturned—herds reappear in these models—once another of their unappealing assumptions is modified: if, instead of moving in a prespecified order, investors can move whenever they choose.
Palavra-chave: Financial collapse, Information cascades, and Capital flows Sujeito: F32 - Current Account Adjustment; Short-term Capital Movements, E32 - Business Fluctuations; Cycles, F20 - International Factor Movements and International Business: General, F40 - Macroeconomic Aspects of International Trade and Finance: General, and G15 - International Financial Markets
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 317 Abstract:
This paper examines the limiting behavior of cooperative and noncooperative fiscal policies as countries market power goes to zero. In the first part we provide sufficient conditions for these policies to converge. In the second part we provide examples where these policies diverge. Briefly, we show that if there are unremovable domestic distortions then there can be gains to coordination between countries even when countries have no ability to affect world prices. These results are at variance with the received wisdom in the optimal tariff literature. The key distinction is that we model explicitly the spending decisions of the government while the optimal tariff literature does not.
Palavra-chave: Fiscal policy and International economic relations Sujeito: N10 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: General, International, or Comparative and F42 - International Policy Coordination and Transmission
Creator: Albanesi, Stefania, Chari, V. V., and Christiano, Lawrence J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 319 Abstract:
Why is inflation persistently high in some periods and low in others? The reason may be absence of commitment in monetary policy. In a standard model, absence of commitment leads to multiple equilibria, or expectation traps, even without trigger strategies. In these traps, expectations of high or low inflation lead the public to take defensive actions, which then make accommodating those expectations the optimal monetary policy. Under commitment, the equilibrium is unique and the inflation rate is low on average. This analysis suggests that institutions which promote commitment can prevent high inflation episodes from recurring.
Sujeito: E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Chari, V. V. and Jagannathan, Ravi Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 320 Abstract:
This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive “story” that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long “lines” at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when no one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations.