Creator: Cole, Harold Linh, 1957- and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 209 Abstract:
A traditional explanation for why sovereign governments repay debts is that they want to keep good reputations so they can easily borrow more. Bulow and Rogoff show that this argument is invalid under two conditions: (i) there is a single debt relationship, and (ii) regardless of their past actions, governments can earn the (possibly state-contingent) market rate of return by saving abroad. Bulow and Rogoff conjecture that, even under condition (ii), in more general reputation models with multiple relationships and spillover across them, reputation may support debt. This paper shows what is needed for this conjecture to be true.
Keyword: Default , Borrowing and lending, Reputation, Lending crises, and Sovereign Debt Subject (JEL): F34 - International Lending and Debt Problems, F00 - International Economics: General, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Holmes, Thomas J. and Stevens, John J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 304 Abstract:
Does national market size matter for industrial structure? Round One (Krugman) answered in the affirmative: Home market effects matter. Round Two (Davis) refuted this, arguing that an assumption of convenience—transport costs only for the differentiated goods—conveniently obtained the result. In Round Three we relax another persistent assumption of convenience—two industry types differentiated only by the degree of scale economies—and find that market size reemerges as a relevant force in determining industrial structure.
Keyword: Home market effects, Market size, and Scale economies Subject (JEL): F00 - International Economics: General, O10 - Economic Development: General, and R10 - General Regional Economics (includes Regional Data)
Creator: Arce, Fernando, Bengui, Julien, and Bianchi, Javier Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 761 Abstract:
This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to over-borrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves.
Keyword: Macroprudential policy, Financial crises, and International reserves Subject (JEL): E00 - Macroeconomics and Monetary Economics: General, F00 - International Economics: General, and G00 - Financial Economics: General
Creator: Kehoe, Patrick J. and Midrigan, Virgiliu Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 656 Abstract:
The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods have differing degrees of price stickiness then relatively more sticky goods tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatility fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. We show that allowing for pricing complementarities leads to a modest improvement in the theory’s predictions for persistence but little improvement in the theory’s predictions for conditional variances.
Subject (JEL): F00 - International Economics: General and F40 - Macroeconomic Aspects of International Trade and Finance: General
Creator: Auerbach, Kay J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 047 Keyword: International banking and Bank regulation Subject (JEL): G28 - Financial Institutions and Services: Government Policy and Regulation and F00 - International Economics: General