Productivity,Preferences and UIP Deviations in an Open Economy Business Cycle Model

We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (1) traded and non-traded sectors; (2) financial market incompleteness; (3) preference shocks; (4) deviations from UIP condition for the exchange rates; and (5) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.     

The Effect of Health and Poverty on Early Childhood Cognitive Development

Although evidence of a link between socioeconomic status and child health has been researched extensively, much less attention has been devoted to studying the link between child health and cognitive development. This paper seeks to determine whether early childhood illnesses and poverty significantly impede cognitive development. The empirical model attempts to control for observed and unobserved heterogeneity through the use of panel data models. Results indicate that a child’s cognitive development is not directly related to health problems acquired after birth or socioeconomic standing. Rather, cognitive development is primarily influenced by unobserved child- and family-specific factors that happen to be correlated with health and socioeconomic status. On the other hand, birth weight appears to affect cognitive performance later in childhood, even after taking unobserved heterogeneity into account.     

Price Stability and the Case for Flexible Exchange Rates

We revisit Friedman’s case for flexible exchange rates in a small open economy with several distortions and rigidities and a variety of domestic and external shocks. We find that, for external shocks, the flexible exchange rate regime outperforms the fixed regime independent of the source of domestic nominal rigidities provided that the monetary authorities pursue a policy of strict inflation targeting. For domestic supply shocks, a joint policy of a flexible exchange rate and strict inflation targeting fares well when the main source of nominal rigidities is in the domestic goods markets, but not if rigidities arise in the labor markets.     

An Interpretation of the Collapsing Process of the Bretton Woods System

This paper attempts to determine the environments that market confidence might play a significant role in the collapse of the Bretton Woods system. We build a game-theoretic model of currency crises where a continuum of small speculators can decide their market confidence and trading positions. In the model, the convertibility of dollar is assumed to exhibit a long-term downtrend due to Triffin’s dilemma. The problem is analyzed on the grounds of both certainty and uncertainty. In the certainty case, we find that if the convertibility of dollar is low enough, a dollar crisis is inevitable, but if the convertibility is in an intermediate range with multiple equilibria, the Bretton Woods system is vulnerable to self-fulfilling speculation. In the uncertainty case, the incidence of the confidence crises will disproportionately increase as the convertibility of dollar falls. Lastly, this paper shows that the Federal Reserve Bank’s secrecy may extend the maximum lifespan of the Bretton Woods system.     

Do Sovereign Defaults Hurt Exporters?

This paper uses a difference-in-difference methodology similar to the one originally proposed by Rajan and Zingales to test whether sovereign defaults hurt the more export-oriented industries disproportionately, and it finds strong support for this hypothesis. However, contrary to the findings of previous studies, our estimates suggest that the effect of defaults is short-lived.     

Optimal Stabilization Policy Under Governmental Risk Aversion

Governmental stabilization policies take account of the underlying risk aversion of its voters. A utility function for the government is defined, one which includes variances of national income changes with respect to its policy instruments—here the budget variable, the bond rate of interest, and the currency-exchange rate. The consequence of this for the optimal set of policies is a target level of national income less than what a risk-neutral government aims at. This applies to an open economy when this is a key-currency country, as it need attend to balance-of-payments effects only insofar as they affect national income. The non-key-currency country, by contrast, must take account directly of balance-of-payments effects and their variance, so it reaches a lower level of utility than the key-currency country.     

Market Share and Price in Dutch Home Care: Market Power or Quality?

The paper uses unique data on contracts concluded by providers of home care to evaluate the effect of provider market power on prices of home care services in the Netherlands. Since, at least in some regions, one or two providers dominate the market, there are concerns about the effect of providers’ market power on the pricing of home care services. Using data on contracted prices and quantities for 2004–2006, we find that providers with a larger market share are able to contract at a higher price. The effect remains after controlling for quality.     

Attitudes Towards Foreign Products and Welfare with Capital Mobility

We develop a model of trade with imperfect competition to study the welfare implications in developing and developed countries of the asymmetry in attitudes towards foreign products. In the developed country, consumers benefit from a better perception of foreign products while the rental rate of capital declines as long as the location of capital remains unchanged. However, when capital is mobile, the developing country hosts more and more capital at the expense of the developed country as perception of varieties produced in the developed country improves and the surplus of consumers in the developed country can decrease.     

Has the Internet Eliminated Regional Price Differences? Evidence from the Used Car Market

We study the effects of the Internet on regional price differences. Comparing two Dutch regions, we find that before the rise of the Internet, price differences of used cars between those regions amounted to some 11–15%, controlling for mileage, age, fuel type and engine volume. These price differences have completely disappeared after the rise of the Internet, in particular a website that allows consumers to make detailed comparisons between almost all used cars for sale in the Netherlands.