Building a Case for Currency Boards

Two common objections to currency boards are that they are dominated by more flexible policies and that they are unsustainable. The paper confronts these objections with the insights from a model economy in which several constituencies who compete for subsidies do not have the ability to monitor the allocation of government spending. Such assumptions are meant to capture important features of the reality of many countries for which currency boards have been proposed. The model suggests that, in such environments, flexible policies in a certain class have an inflationary bias that a sustainable currency board can – but not necessarily – eliminate.     

The loan structure and housing tenure decisions in an equilibrium model of mortgage choice

The objective of this paper is to understand how loan structure affects (i) the borrower's selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (nominal) mortgage loans. The model accounts for observed patterns in housing consumption, ownership, and portfolio allocations. We find that the loan structure is a quantitatively significant factor in a household's housing finance decision. The model suggests that the mortgage structure preferred by a household is dependent on age and income and that loan products with low initial payments offer an alternative to mortgages with no downpayment. These effects are more important when inflation is low. The presence of inflation reduces the real value of the mortgage payment and the outstanding loan over time reducing mobility. Changes in the structure of mortgages have implications for risk sharing.     

Are changes in spreads of external-market debt also induced by contagion?

As governments and private companies from emerging markets have increasingly issued foreign-currency denominated debt through the 1990s, the economies concerned have become more vulnerable to abrupt changes in sovereign risk. At the same time, with closer economic integration countries have become more likely to be affected by economic problems that arise in neighboring countries. The following article uses the example of four Latin American countries to evaluate empirically the extent to which “contagion” explains changes in sovereign risk.     

Generalized spectral tests for the martingale difference hypothesis

This article proposes a test for the martingale difference hypothesis (MDH) using dependence measures related to the characteristic function. The MDH typically has been tested using the sample autocorrelations or in the spectral domain using the periodogram. Tests based on these statistics are inconsistent against uncorrelated non-martingales processes. Here, we generalize the spectral test of Durlauf (1991) for testing the MDH taking into account linear and nonlinear dependence. Our test considers dependence at all lags and is consistent against general pairwise nonparametric Pitman's local alternatives converging at the parametric rate n^-1/2,$n^{-1/2},$ with n$n$ the sample size. Furthermore, with our methodology there is no need to choose a lag order, to smooth the data or to formulate a parametric alternative. Our approach could be extended to specification testing of the conditional mean of possibly nonlinear models. The asymptotic null distribution of our test depends on the data generating process, so a bootstrap procedure is proposed and theoretically justified. Our bootstrap test is robust to higher order dependence, in particular to conditional heteroskedasticity. A Monte Carlo study examines the finite sample performance of our test and shows that it is more powerful than some competing tests. Finally, an application to the S&P 500 stock index and exchange rates highlights the merits of our approach.     

Entrepreneurship and unemployment: A nonlinear bidirectional causality?

This paper tests the view that the relation between unemployment and entrepreneurship is dynamic and possibly nonlinear. It performs Granger-causality tests and STAR-EXT estimation to assess the causality direction and the nonlinear nature of the relation for a set of OECD countries. The results reveal a bidirectional and nonlinear relation between business creation and changes in unemployment.     

An index of political support for decentralization: the Spanish case

This paper presents a method to make measurable what was not: the discourses of politicians regarding decentralization. For this purpose, we develop a “matrix of arguments” and a set of indexes, and apply them to provide a snapshot of the politicians’ views on the “General Law of Budgetary Stability”, a landmark for the process of decentralization in Spain.     

Privatization of state holding corporations

Many countries have privatized part of their state holding corporations in recent years. However, the literature on this issue has analyzed mainly the privatization of uniproduct public firms. We consider a state holding corporation with two plants that may produce complement or substitute goods. Assuming that private firms are more efficient than the state holding corporation we find the following: If the marginal cost of the state corporation is low, it is not privatized either if goods are substitutes or if they are complements. However, if the marginal cost of the state corporation is high the two plants of the state holding corporation are sold to a single private investor if goods are complements, and to different investors if goods are substitutes. If goods are close substitutes and the marginal cost of the state corporation takes an intermediate value only one plant is privatized. We extend the model to consider that firms are equally efficient, that they face quadratic cost functions and that there are n uniplant private firms producing each good. We find two differences with the previous result: The government never privatizes just one plant of the state corporation, and when goods are complements the two plants of the state corporation are sold to different investors if n is high.     

Bayesian and consistent assessments

In a Bayesian assessment, beliefs are computed from the strategy profile applying Bayes rule at positive probability information sets. A consistent assessment is the limit point of a sequence of completely mixed Bayesian assessments. We characterize the set of extensive forms for which the sets of Bayesian and consistent assessments coincide. As an illustration of the results, we characterize consistency in some multi-period games with simultaneous actions.     

Estimates of output gaps in four Southeast Asian countries

The output gaps derived for four countries using a generalized Hamilton model are compared with conventional output gap estimates. Further research is needed to explain why the output gap identifies crisis episodes as slowdowns instead of recessions in some countries.     

Balance sheet effects and the country risk premium: An empirical investigation

Based on recent theories emphasizing financial imperfections, this paper is an empirical investigation of the link between a country's risk premium and the balance sheet effect of a devaluation. In a panel of emerging economies, balance sheet effects, due to increased external debt service after an unexpected real depreciation, significantly raise the risk premium. This result is robust to various checks and appears driven by those countries with the largest financial imperfections. Also, particularly large real depreciations turn out to be disproportionately important, meaning that balance sheet effects may be strongest at times of economic crisis. JEL no. F34, F41