Asset price fluctuations without aggregate shocks

We analyze the pricing of a productive asset in a class of dynamic exchange economies with heterogeneous, infinitely-lived agents, and self-enforcing intertemporal trades. Individual incomes fluctuate and are correlated; preferences, dividends and aggregate income are fixed. Almost all economies in this class have a unique stationary Markovian equilibrium with fluctuations in asset prices. As the set of unrationed households changes over time and states, excess demand functions shift, asset returns fluctuate, and some households are shut out of asset markets. Examples suggest that the amplitude of these movements is negatively correlated with the productivity of the asset and with the penalty for default.     

Common markets and trade liberalization

Abstract.  The GATT Rounds show that trade liberalization is essentially a cooperative non‐stationary dynamic process. Therefore, the impact of Regionalism on trade liberalization possibly changes over time. I adapt the trade liberalization model of Devereux (1997) to examine how this impact varies. Common markets lead to a one‐time shock in immediate tariffs, as well as to a change in their rate of decline. I find that common markets that happen late in the trade liberalization process are more likely to lead to a decline in immediate tariffs. Common markets also increase the rate of decline of tariffs after their formation. JEL Classification: F03, F15     

Unemployment dynamics with international capital mobility

We study the response of domestic unemployment rates to shocks in total factor productivity for economies with high capital mobility and low labour mobility. We show that high capital mobility amplifies the impact on the domestic unemployment rate of domestic fluctuations in total factor productivity, shortens the lag of the response to shocks and raises the variability of unemployment. But average unemployment is unaffected. Capital flows increase the riskiness of labour income and reduce the riskiness of capital income but do not reduce mean welfare.     

Predicting the Crises of the Greek Drachma

The paper investigates the role of fundamentals in the speculative episodes experienced by the Greek drachma during the 1990s, and examines whether the openness of the Greek economy has altered the role of fundamentals in the likelihood of a currency crisis. An interesting aspect of the empirical analysis is that the crises are related significantly to macroeconomic fundamentals of the Greek economy. The analysis shows that the openness of the Greek economy has introduced new elements and concerns in the predictability of speculative attacks on the drachma.     

Endogenous Debt Constraints in Lifecycle Economies

We characterize competitive equilibria with perfect foresight in a deterministic, three-period pure-exchange overlapping generations economy with perfect information and no commitment to loan contracts. Commitment is replaced by an enforcement mechanism that excludes defaulters from asset markets for one period. For hump-shaped endowment profiles, young individuals face endogenous debt constraints that ration current consumption. Changes in current and future yields affect these constraints, inducing an additional income effect on rationed household demand that makes current and future consumption complements. This mechanism can lead to multiple steady states, persistent indeterminacy and regime switching. We show that sensitivity to shocks and complex dynamic behaviour are consistent with endogenous debt limits but not with exogenous liquidity constraints.     

The Working Behavior of Young People in Rural Cote d'Ivoire

One of the major features of structural adjustment is an attemptto reallocate labor—and hence output—through changesin relative prices. This article assesses how price changesaffect the working patterns of young people in rural Côted'Ivoire. The analysis is based on a model of the labor supplyof rural households and on the construction of composite priceindexes. The data come from the Côte d'Ivoire Living StandardsSurvey for 1985 and 1986. The panel aspect of the data allowsthe work choice made in one year to depend on the individual'schoice in the previous year. Results indicate that the priceof agricultural output generally is a positive incentive onthe decision to participate in the labor force. However, thisresult depends heavily on the employment and education of theindividual in the previous period. Those not already workingare less likely to respond to favorable movements in the pricesof cash crops by entering the work force.     

Foreign Debt and Economic Development

This paper characterizes the optimal path of foreign public debt that can support politically unanimous (Pareto welfare improving) economic growth under uncertainty. The feasibility of the plan depends on whether the maintenance of political consensus in the debtor country requires additional loans that are high relative to the country's outstanding debt. If a program is feasible, then the creditors will have an incentive to preserve political support for the plan, in case of adverse developments, by offering debt relief. Unlike the certainty case, where only total debt matters, uncertainty makes also the timing of debt repayments critical for economic development.     

THE COMPLEX RESPONSE OF MONETARY POLICY TO THE EXCHANGE RATE

We estimate a flexible non‐linear monetary policy rule for the United Kingdom to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under‐valuations of more than 4% and over‐valuations of more than 5%. Third, the response of policymakers to inflation is smaller when the exchange rate is over‐valued and larger when it is under‐valued. None of these responses is allowed for in the widely used linear Taylor‐type rules, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper.