Fiscal Shocks and the Exchange Rate in a Generalized Redux Model

This paper studies how the interaction between the monetary policy regime and the degree of home bias in public consumption affects the exchange- rate response to fiscal shocks in a generalized version of the Redux model of Obstfeld and Rogoff (1995). We show that the joint presence of home bias in public consumption and endogenous monetary policy overturns the result of the Redux model implying an exchange-rate appreciation in response to an expansionary fiscal shock

Coordination approaches and systems - part I : a strategic perspective

This is the first part of a two-part paper presenting a fundamental review and summary of research of design coordination and cooperation technologies. The theme of this review is aimed at the research conducted within the decision management aspect of design coordination. The focus is therefore on the strategies involved in making decisions and how these strategies are used to satisfy design requirements. The paper reviews research within collaborative and coordinated design, project and workflow management, and, task and organization models. The research reviewed has attempted to identify fundamental coordination mechanisms from different domains, however it is concluded that domain independent mechanisms need to be augmented with domain specific mechanisms to facilitate coordination. Part II is a review of design coordination from an operational perspective

Gaucho Banking Redux

Argentina's economic crisis has strong similarities with previous crises stretching back to the nineteenth century. A common thread runs through all these crises: the interaction of a weak, undisciplined, or corruptible banking sector, and some other group of conspirators from the public or private sector that hasten its collapse. This pampean propensity for crony finance was dubbed gaucho banking' more than one hundred years ago. What happens when such a rotten structure interacts with a convertibility plan? We compare the 1929 and 2001 crises the two instances where rigid convertibility plans failed and reach two main conclusions. First, a seemingly robust currency-board can be devastated by an ill-conceived approach to the problems of internal and external convertibility (or, to rephrase Gresham, bad inside money drives out good outside money'). Second, when modern economic orthodoxy collides with caudillo-style institutional backwardness, a desperate regime with its hands tied in both monetary and fiscal domains will be sorely tempted by a capital levy' on the financial sector (for, as Willie Sutton said when asked why he robbed banks, because that's where the money is).

Toward a new paradigm in open economy modeling: where do we stand?

This paper provides a selective, up-to-date survey of the recent, fast-growing literature on new open economy macroeconomics. Lucio Sarno begins with a review of the seminal paper in this literature, describing the baseline model proposed therein. He then covers a number of variants and generalizations of the baseline model involving the allowance for nominal rigidities, pricing to market, alternative preference specifications, and alternative financial markets structures. The author also discusses the recent stochastic extensions of these models, especially focusing on their implications for the link between risk and exchange rates and on new directions for the relevant literature.Econometric models ; Macroeconomics

Gaucho banking redux

Argentina's economic crisis has strong similarities with previous crises stretching back to the nineteenth century. A common thread runs through all these crises: the interaction of a weak, undisciplined, or corruptible banking sector, and some other group of conspirators from the public or private sector that hasten its collapse. This pampean propensity for crony finance was dubbed "gaucho banking" more than one hundred years ago. What happens when such a rotten structure interacts with a convertibility plan? We compare the 1929 and 2001 crises-the two instances where rigid convertibility plans failed-and reach two main conclusions. First, a seemingly robust currency-board can be devastated by an ill-conceived approach to the problems of internal and external convertibility (or, to rephrase Gresham, "bad inside money drives out good outside money"). Second, when modern economic orthodoxy collides with caudillo-style institutional backwardness, a desperate regime with its hands tied in both monetary and fiscal domains will be sorely tempted by a "capital levy" on the financial sector (for, as Willie Sutton said when asked why he robbed banks, "because that's where the money is").Argentina

The Empirical Relevance of a basic sticky-price intertemporal model

In this paper, we first outline the monetary version of the sticky price intertemporal model of Obstfeld and Rogoff (1995, 1996), in which monetary shocks unambiguously generate apermanent nominal exchange rate depreciation and a temporary current account surplus. Wethen empirically investigate these theoretical predictions in two structural VAR systems for15 OECD countries over the period 1979-1999, using the long-run restriction identificationscheme suggested by Clarida and Galì (1994). Our empirical findings support the mainpredictions of the basic model, as well as suggesting that monetary shocks play an importantrole in the current account fluctuations. Moreover, we find that more open economies showgreater sensitivity of the current account to monetary shocks.

The Asymmetry Problem: Reflections on Calvin Massey’s Standing in State Courts, State Law, and Federal Review

This paper is based on remarks delivered at a symposium to honor my University of New Hampshire School of Law colleague Calvin Massey, who passed away in the fall of 2015. The paper discusses an asymmetry in federal standing law. The asymmetry lies in the fact that, when a state’s highest court decides the merits of a federal claim brought in circumstances where the claimant has standing under state law but not federal law, the United States Supreme Court has jurisdiction to review the decision only if the state supreme court upholds the federal claim. This asymmetry was the subject of a 2015 essay that was Calvin’s last piece of published scholarship. In the essay, Calvin used a hypothetical state-aid-to-religion fact pattern to illuminate the asymmetry, to emphasize its problematic nature, and to propose a solution. This paper agrees with Calvin that the asymmetry is problematic and advances three preliminary hypotheses, to be developed in future work, about how various federal and state institutional actors could ameliorate the problem. The first hypothesis is that Congress should consider legislating to ensure that a party facing a federal claim in state court in circumstances where a federal justiciability doctrine would bar the claim in federal court can remove the claim and obtain its dismissal. The second hypothesis is that the United States Supreme Court should consider using its power to create constitutional common law to fashion remedy-limiting doctrines drawn from federal justiciability principles and to impose these doctrines on state courts as affirmative defenses to federal claims. The third hypothesis is that, even in the absence of a federal mandate, state courts should apply conflict-of-laws theory to withhold relief for claims based on federal law in circumstances where federal courts would lack the power to afford the claimant a remedy

Does higher openness cause more real exchange rate volatility ?

The"New Open Economy Macroeconomics"argues that: (a) non-monetary factors have gained importance in explaining exchange rate volatility, and (b) trade and financial openness may have a potential role of mitigating and/or amplifying real and nominal shocks to real exchange rates. The goal of the present paper is to examine the ability of trade and financial openness to exacerbate or mitigate real exchange rate volatility. The authors collected information on the real effective exchange rate, its fundamentals, and (outcome and policy measures of) trade and financial openness for a sample of industrial and developing countries for the period 1975-2005. Using instrumental variables techniques, the analysis finds that: (a) High real exchange rate volatility is the result of highly volatile productivity shocks, and sharp oscillations in monetary and fiscal policy shocks. (b) Countries more integrated with international markets of goods and services tend to display more stable real exchange rate fluctuations. (c) Financial openness seems to amplify the fluctuations in real exchange rates. (d) The composition of trade and capital flows plays a role in explaining the smoothing properties of trade and financial openness. Although the former is mainly driven by manufacturing trade, the latter depends on the share of debt (and equity) in total foreign liabilities. (e) Financial openness would attenuate (magnify) real exchange rate volatility, the greater the share of equity (debt) in foreign liabilities. (f) The composition of flows also matters for explaining the smoothing properties of trade and financial openness in periods of currency crisis.Emerging Markets,Debt Markets,Currencies and Exchange Rates,Economic Theory&Research,Economic Conditions and Volatility

Fiscal Deficits, Current Account Dynamics and Monetary Policy

This paper develops a stochastic two-country "perpetual youth" Dynamic New Keynesian model of the international business cycle with incomplete international financial markets and stationary net foreign assets. The model allows for a thorough analysis of the interaction of endogenous monetary policy with endogenous, non-balanced budget fiscal policy. We derive the dynamic and cyclical properties of fiscal deficit feedback rules under alternative monetary regimes, discuss the international transmission of productivity shocks, and the implications for net foreign assets and exchange rate dynamics. Our results imply that the degree of "fiscal discipline", i.e. the extent to which the fiscal rule responds to debt dynamics, is crucial for the dynamics of net foreign assets. We show that under low fiscal discipline (characterizing most industrialized countries, first and foremost the U.S.) temporary positive productivity shocks may result in highly persistent deteriorations of the external position in the medium run. Our results also suggest that any attempt by monetary policy alone to stabilize the dynamics of net foreign assets would induce excessive and costly fluctuations of the exchange rate.Fiscal Deficit, Current Account, DSGE Models, Monetary and Fiscal Policy.