1,721,601 research outputs found
Rethinking the Informal Economy and the Hugo Effect
No full textThis paper offers a new approach to measuring the size of the informal economy based on VAT data for the European Union. Although data intensive, our EVADE measure is simpler and more transparent than existing measures. EVADE also shows more variation across countries of Europe than earlier measures, including higher informality in Greece, Italy and Spain, for example. Moreover, we find considerably higher variation within countries across time; in a cross-country time series regression, controlling for tax rates, we confirm that the informal economy grows significantly in recessions and decreases in booms, which we term the “Hugo effect”
Rethinking exchange rate regimes
No full textThis paper employs an updated algorithm and database for classifying exchange rate and anchor currency choice, to explore the evolution of the global exchange rate system, including parallel rates, capital controls and reserves. In line with a large recent literature, we find that the US dollar has become ever-more central as the de facto anchor or reference currency for much of the world. The discussion encompasses the history of anchor currency choice, methods for classifying exchange rate regimes, a detailed discussion of the evolution of regimes, the growing substitution of reserves for capital controls as a tool for exchange rate stabilization, the modern Triffin dilemma, and the surprising recent trend decline in volatility of exchange rates at the core of the system. It concludes with issues surrounding the rise of China
Serial default and the “paradox” of rich to poor capital flows
Full text linkLucas (1990) argued that it was a paradox that more capital does not flow from rich countries to poor countries. He rejected the standard explanation of expropriation risk and argued that paucity of capital flows to poor countries must instead be rooted in externalities in human capital formation favoring further investment in already capital rich countries. In this paper, we review the various explanations offered for this “paradox.” There is no doubt that there are many reasons why capital does not flow from rich to poor nations – yet the evidence we present suggests some explanations are more relevant than others. In particular, as long as the odds of non repayment are as high as 65 percent for some low income countries, credit risk seems like a far more compelling reason for the paucity of rich-poor capital flows. The true paradox may not be that too little capital flows from the wealthy to the poor nations, but that too much capital (especially debt) is channeled to “debt intolerant” serial defaulters.capital flows debt default low income countries equity
Serial Default and Its Remedies
Full text linkThe main theme of this paper is that debt cycles deeply entrenched in the process of development, and one must be careful about trusting magic elixirs that purport to finesse the problem entirely. Middle income countries nascent political and economic institutions, often simultaneously face extremely high degrees of economic uncertainty, not least stemming from the extraordinary volatility of world commodity and agricultural prices. At the same time, many of these countries have exhausted autarkic growth strategies, and find themselves desparately needing to deepen financial markets in order to efficiently allocate scarce saving and expand growth. But this process of deepening – often associated with increased international capital market integration – almost invariably exposes them to heightened risks. And, unfortunately, once a country suffers one bout of default, its institutions and markets become weaker and more vulnerable to more debt problems, a phenomenon Reinhart, Rogoff and Savastano term “Debt Intolerance.”
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The Debt-Inflation Dance: The Relationship Between Unexpected Government Debt Increases and Inflation
No full textThis paper investigates the impact of debt shocks on inflation across developing and emerging economies in the post-pandemic economic landscape. It does so by utilizing panel regressions and a local projection method to explore the direct and temporal effects of unexpected increases in national debt, defined as debt shocks, on inflation. The dataset for this country includes 117 countries across 2010-2022. The results for the full sample of emerging and developing economies show a positive correlation between debt shocks and inflation. Specifically, a 10 percentage point increase in debt shock is associated with a statistically significant 24 basis point rise in inflation after one year. This relationship exhibits significant regional variation. The strongest inflationary response in Eastern European and Central Asian countries which exhibit a very similar trajectory to the full sample. These results highlight the important role of geographic, economic, and policy factors in the debt-inflation dynamic. These results underscore the need for tailored fiscal and monetary policies to address the inflationary pressures stemming from debt shocks for emerging and developing economies
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Three Essays in Macroeconomics and International Finance
Full text linkThis dissertation includes three chapters. The first chapter studies the question of whether countries with different fiscal capacity should optimally have different ex-ante minimum bank capital requirements. In an environment with endogenously incomplete markets and overinvestment because of moral hazard and pecuniary externalities, I show that countries with larger fiscal capacity should have lower minimum ex-ante bank capital requirements. I also show that, in addition to the minimum capital requirement, regulators in countries with a concentrated financial sector and large fiscal capacity (which are also countries with strong moral hazard) should impose a limit on the amount of liquidity pledged by financial institutions in a crisis state (for example, restrict the amount of put options/CDS contracts sold by financial institutions). The second chapter studies the welfare implications of a concentrated, imperfectly competitive banking sector, which faces a bank net worth constraint in a small open economy (SOE) environment. There are two standard sources of inefficiency --- pecuniary externalities, which lead to overinvestment, and a standard monopolistic underinvestment force. I show that the optimal policy instruments include subsidies on firm borrowing costs in certain periods and capital account controls in others, which is a good proxy for the behavior of emerging markets. For every country, there exists a financial sector with a particular banking sector concentration, for which the inefficiencies offset each other and no government intervention is required in some periods. Furthermore, this paper documents a novel theoretical result --- the interaction between future binding bank net worth constraints and dynamic (future) underinvestment could lead to ex-ante overinvestment even in economies with a single monopolistic bank where there are no pecuniary externalities. The last third chapter, which is coauthored with Kenneth Rogoff, evaluates a new class of exchange rate forecasting studies, which claim that structural models are getting closer to being able to forecast exchange rates at short horizons. We argue that misinterpretation of some new out-of-sample tests for nested models, over-reliance on asymptotic test statistics, and failure to sufficiently check robustness to alternative time windows have led many studies to overstate even the relatively thin positive results that have been found.Economic
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Measuring Macroeconomic Conditions
No full textThis dissertation focuses on three measurement questions that are central to the design of macroeconomic policy. The first chapter, which is joint work with Thomas Laubach and John C. Williams, introduces time-varying volatility and incorporates a persistent supply shock to the Holston-Laubach-Williams model of the natural rate of interest to address the extraordinary effects of the COVID-19 pandemic on the economy. We find no evidence that estimated natural rates of interest in the United States, Canada, and the Euro Area have increased from their historically low pre-pandemic levels. In the context of our model, the main consequence from the pandemic period was a reduction in estimated natural rates of output. The second chapter explores estimation of the natural rate of output across unobserved components models that vary in terms of their labor market, output, and interest rate dynamics. Estimates of the output gap in the United States from similar models diverge dramatically: differences exceed 5 percentage points and paint a markedly different picture of macroeconomic conditions not just during the COVID-19 pandemic, but also over the entire fifteen-year period following the global financial crisis. This dispersion translates to differences in prescribed policy rates from simple monetary policy rules and acts as a source of uncertainty for central bankers. In the third chapter, I provide new evidence that banking crises commence throughout the business cycle: a large share of crises do not follow the canonical boom-bust timeline. I document differences in the start dates of banking crises across twelve databases, covering 467 episodes in 143 countries, and explore implications for the measurement of the macroeconomic aftermath of banking crises
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Exchange Rate Pass-Through from Parallel Foreign Exchange Markets
No full textRecent global interest rate hikes and corresponding currency depreciations have raised concerns about inflation in open developing economies. Yet, much empirical research paradoxically reports quite low exchange rate pass-through (ERPT) to domestic prices. This study contends that overlooking the presence of parallel foreign exchange markets, which are increasingly prevalent worldwide, contributes to the underestimation of true pass-through in conventional analyses. Using Egypt as a case study, we show that incorporating parallel market movements yields consistently higher pass-through estimates from bilateral dollar-to-EGP official rate movements over 6, 12, and 18 month horizons. Moreover, our findings indicate an independent transmission mechanism from the parallel market to aggregate retail prices—even when the official rate remains unchanged—suggesting that inflation can manifest prior to official devaluations. We find that pass-through from parallel premium movements to domestic prices is consistently positive and significant at 0.121, 0.175, and 0.276 for 6, 12, and 18 month horizons, respectively.Applied Mathematic
Financial Reforms in Pakistan: The Effect of Interest Rate Policies on the Pakistani Banking Sector
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