Foreign Banks and the Dual Effect of Financial Liberalization

In emerging countries, credit market liberalization is often motivated with the financial deepening generated by the entry of foreign financial institutions. However, there is a risk that liberalization may benefit internationally active, export‐oriented businesses at the expense of domestically oriented ones. This paper models a two‐sector economy in which foreign lenders are more efficient than local lenders at extracting value from internationally tradable collateral assets. Under some conditions the entry of foreign lenders eases entrepreneurs’ access to the credit market and raises asset prices and output, but in other circumstances it reduces the depth of the credit market and depresses the price of nontradables and output. Liberalization can have a contractionary impact by inducing a reallocation of credit from the nontradables to the tradables sector.     

Phillips Curve Instability and Optimal Monetary Policy

Empirical evidence suggests the Phillips curve has flattened over the past few decades. To capture this feature of the data, I develop a framework where firms face a changing cost of price adjustment, which produces a Phillips curve with a slope coefficient that varies over time. To evaluate the implications for monetary policy, I construct the utility‐based welfare criterion where the relative weight on output gap deviations changes synchronously with the slope of the Phillips curve. The systematic component of the rule that implements optimal policy is constant under discretion and commitment.     

Monetary and Fiscal Policy Switching

A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks. In one regime monetary policy follows the Taylor principle and taxes rise strongly with debt; in another regime the Taylor principle fails to hold and taxes are exogenous. An example shows that a unique bounded non-Ricardian equilibrium exists in this environment. A computational model illustrates that because agents' decision rules embed the probability that policies will change in the future, monetary and tax shocks always produce wealth effects. When it is possible that fiscal policy will be unresponsive to debt at times, active monetary policy (like a Taylor rule) in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks. The paper also considers the implications of policy switching for two empirical issues.     

REGIONAL FINANCIAL INTEGRATION IN SUB‐SAHARAN AFRICA – AN EMPIRICAL EXAMINATION OF ITS EFFECTS ON FINANCIAL MARKET DEVELOPMENT

This article examines the effects of political agreements on regional financial integration (RFI) on financial market development and access to and cost of finance in Sub‐Saharan Africa (SSA). Our results suggest that RFI positively affects financial development – measured very broadly as ratio of liquid liabilities to gross domestic product (GDP) – when combined with a sufficient level of institutional quality. If institutional quality is below a threshold level, RFI apparently has negative effects on financial development. However, we cannot find any significant effects of RFI on the ratio of private credit to GDP or on the efficiency of the banking sector. Regarding the effects of RFI on access to and costs of finance of enterprises in SSA, our results are mixed. We can find no significant effect of RFI on access to finance for all firms in the aggregate, but the results indicate that RFI actually impedes small firms' access to finance. Furthermore, there is a significant positive influence of foreign bank involvement on the severity of the credit constraint for small enterprises, while we do not find such an influence for large enterprises. These results provide some support for the foreign bank barrier hypothesis in the context of RFI.     

UNDERSTANDING THE INTERSTATE EXPORT OF CRIME GUNS: A GRAVITY MODEL APPROACH

In 2009, the Bureau of Alcohol, Tobacco, Firearms and Explosives successfully traced over 145,000 guns recovered at crime scenes in the United States. Of these guns, more than 43,000 were originally sold in a different state from which they were recovered. What factors may explain the interstate movement of these crime guns? This article uses the well‐known gravity model of international trade to estimate interstate flow of crime guns. Empirical results show that, like trade of goods and services between nations, the traced movement of crime guns between states is proportionate to the economic sizes of trading partners and is inversely proportionate to the distance between them. In addition, the presence of gangs in one or both states tends to increase the flow of crime guns. Finally, differences in state gun laws tend to affect trade flows with crime guns flowing from states with “weak” gun laws to states with “strict” gun laws. (JEL K00, K42)     

Foreign Lenders and the Real Sector

We develop a theory of the interaction between the entry of lenders and the real sector. The high liquidation skills of incumbent lenders render them too tough in terminating high-risk/return projects. Being "foreign" to the market, newcomers have lower ability to liquidate than incumbents. This makes them softer in liquidating high-risk/return projects but renders their funding more costly. We show that the entry of lenders and the share of high-risk/return projects can reinforce each other through firms' liquidation values. This interaction dampens the output impact of liquidity shocks. Hence, financial liberalization can enhance stability.     

A Note of Caution on Shadow Rate Estimates

Shadow short rate (SSR) estimates are generated regressors proposed as a proxy for policy interest rates during unconventional monetary policy (UMP) periods. However, using the Wu and Xia (2016) shadow/lower-bound model, I show that SSR estimates can be sensitive to minor choices in their estimation. Used subsequently in a small macroeconomic model, those sensitivities lead to wide variations in the inferred effects of UMP on inflation and unemployment outcomes. Therefore, it should not be presumed that any SSR series will necessarily be quantitatively useful. Vetting SSR series allows appropriate SSR series to be retained within the suite of UMP indicators.     

Money,Bonds, and the Liquidity Trap

This paper examines a search model of money and public bonds in which coordination frictions lead to multiple, Pareto ranked equilibria. Whether money and bonds are substitutes or complements, is not a primitive of the economy, but an equilibrium outcome. There exists an equilibrium resembling a liquidity trap, in which money and bonds are perfect substitutes, interest rates are zero, and monetary policy is ineffective; and a superior equilibrium in which money and bonds are complements, interest rates are positive and monetary policy has a liquidity effect. On this view, the liquidity trap is a belief-driven phenomenon.