Small Open Economies with Frictions in Credit Markets: Target inflation or money growth when floating?

I compare the relative merits of a policy of inflation targeting for small open economies with frictions in financial markets with an alternative floating regime that has a constant rate of domestic money growth. The differences between these two policies appear only in the dynamic properties of equilibria with credit rationing. When the probability of loan repayment is low, inflation targeting eliminates endogenous volatility when compared with a constant money growth, but equilibria remain indeterminate. When the probability of loan repayment is high, inflation targeting always improves on the stability of equilibria, and sometimes it also eliminates endogenous fluctuations.Floating exchange rates, Inflation targeting, Multiple reserve requirements, Private Information, Stabilization, Endogenous volatility

International Reserves Crises, Monetary Integration and the Payments System during the International Gold Standard

I model an international payments system with a financial center and periphery to reproduce various aspects of the International Gold Standard. This period was characterized by frequent crises associated with scarce stocks of reserves, high short-term interest rates with subsequent gold inflows and transmission of output contractions across countries. I find that a common international currency and no legal restrictions on exchange help the periphery share reserves with the financial center, improving the world’s welfare and mitigating output losses due to reserve crises. Also, the center has incentives for restrictive rediscounting while the periphery has motives for developing central banking.International Gold Standard, International payments systems, International reserve crises, Monetary integration

Multiple Layers of Credit and Mortgage Crises

I examine a production economy with a financial sector that contains multiple layers of credit. Such layers are designed to constitute credit chains which are inclusive of a simple mortgage market. The focus is on the nature and contagion properties of credit chains in an economy where the financial sector plays a real allocative role and agents have a nontrivial choice of whether to default on mortgages or not. Multiple equilibria with different rates of default are observed, due to the presence of strategic complementarities. Default can trigger a financial crisis as well as constrain the purchases of factors of production, thus leading to potentially serious effects on real activity.Endogenous default, Mortgage Crises, Payments System

A Semiparametric Time Trend Varying Coefficients Model: With An Application to Evaluate Credit Rationing in U.S. Credit Market

In this paper, we propose a new semiparametric varying coefficient model which extends the existing semi-parametric varying coefficient models to allow for a time trend regressor with smooth coefficient function. We propose to use the local linear method to estimate the coefficient functions and we provide the asymptotic theory to describe the asymptotic distribution of the local linear estimator. We present an application to evaluate credit rationing in the U.S. credit market. Using U.S. monthly data (1952.1-2008.1) and using inflation as the underlying state variable, we find that credit is not rationed for levels of inflation that are either very low or very high. For the remaining values of inflation in the sample, we find that credit is rationed and the Mundell-Tobin effect holds.non-stationarity, semi-parametric smooth coefficients, nonlinearity, credit rationing

Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy

We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises.

Inflation, Growth and Exchange Rate Regimes in Small Open Economies

This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –with high rates of domestic inflation- increases the scope for indeterminacy and economic fluctuations.Currency Board, Endogenously Arising Volatility, Fixed exchange rates, Floating exchange rates, Growth, Indeterminacy, Inflation, Multiple Reserve Requirements, Private Information, Stabilization

Inflation, Growth and Exchange Rate Regimes in Small Open Economies

Summary. This is an extended working paper version of the paper that appeared in Economic Theory. It paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –with high rates of domestic inflation- increases the scope for indeterminacy and economic fluctuations.Currency Board; Endogenously Arising Volatility; Fixed exchange rates; Floating exchange rates; Growth; Indeterminacy; Inflation; Multiple Reserve Requirements; Private Information; Stabilization

Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy

We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.Sudden stops, Exchange rate regimes, Multiple reserve requirements

Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy

We model a typical Asian-crisis-economy using dynamic general equilibrium techniques. Meaningful exchange rates obtain from nontrivial demands for fiat currencies. Sudden stops/bank-panics are possible, and key for evaluating the relative merits of alternative exchange rate regimes in promoting stability. Strategic complementarities contribute to the severe indeterminacy of the continuum of equilibria; there is a strong association between the scope for existence and indeterminacy of equilibria, the properties along dynamic paths and the underlying policy regime. Binding multiple reserve requirements reduce the scope for financial fragility and panic equilibria; backing the money supply acts as a stabilizer only in fixed regimes.Sudden stops; Exchange rate regimes; Multiple reserve requirements

Private Electronic Money, Fiat Money and the Payments System

This paper provides insight on how a modern system of private electronic money would work and how the necessary network shall function. We present a model with two types of private electronic currencies with one being local, and the other being global. Both of them display transactional advantages and dominate fiat money in rate of return. However, in spite of these different returns, the two electronic currencies and fiat money circulate in equilibrium. We further observe that the local electronic currency can be sold with a premium or with a discount, depending on several factors including the probability of relocation faced by the agents in this economy. The higher the probability of relocation, the higher is this discount, and the lower the share of the local electronic currency in the young creditors’ portfolio.Private Money, Commodity Money, Network, Payments System, Competition