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Creator: Kehoe, Patrick J. and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 543 Abstract:
Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies
Palabra clave: Optimal currency area, International financial markets, Cross-country insurance, International transfers, Cross-country externalities, Cross-country transfers, and Fiscal externalities Tema: F35 - Foreign Aid, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, G15 - International Financial Markets, G33 - Bankruptcy; Liquidation, F42 - International Policy Coordination and Transmission, G28 - Financial Institutions and Services: Government Policy and Regulation, F33 - International Monetary Arrangements and Institutions, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and F38 - International Financial Policy: Financial Transactions Tax; Capital Controls
Creator: Brinca, Pedro, Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 531 Abstract:
We elaborate on the business cycle accounting method proposed by Chari, Kehoe, and McGrattan (2007), clear up some misconceptions about the method, and then apply it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries. We have four main findings. First, with the notable exception of the United States, Spain, Ireland, and Iceland, the Great Recession was driven primarily by the efficiency wedge. Second, in the Great Recession, the labor wedge plays a dominant role only in the United States, and the investment wedge plays a dominant role in Spain, Ireland, and Iceland. Third, in the recessions of the 1980s, the labor wedge played a dominant role only in France, the United Kingdom, Belgium, and New Zealand. Finally, overall in the Great Recession the efficiency wedge played a more important role and the investment wedge played a less important role than they did in the recessions of the 1980s.
Palabra clave: Business cycle accounting, 1982 recession, and Great Recession Tema: E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, G33 - Bankruptcy; Liquidation, G28 - Financial Institutions and Services: Government Policy and Regulation, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 481 Abstract:
We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of limits on the debt-to-value ratio of firms mitigates the time-inconsistency problem by eliminating the incentives of governments to undertake bailouts. In terms of the cyclical properties of regulation, we show that regulation should be tightest in aggregate states in which resources lost to bankruptcy in the equilibrium without a government are largest.
Palabra clave: Prudential regulation and Financial regulation Tema: E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, G33 - Bankruptcy; Liquidation, G28 - Financial Institutions and Services: Government Policy and Regulation, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination