Near-Rationality, Heterogeneity and Aggregate Consumption

The simple permanent income model provides a good description of the medium-long run behavior of aggregate nondurables consumption, while it fails in describing its short run behavior. In this paper I present a non-representative agent model with near-rational microeconomic units that simultaneously explains the observed excess smoothness of consumption to wealth innovations, the excess sensitivity of consumption to lagged income changes, as well as small conditional asymmetries found in the data. In spite of the presence of large non-diversifiable idiosyncratic uncertainty, the estimated dollar equivalent utility cost of the micreconomic near-rational strategy required to explain the aggregate facts is only 0.26y percent of consumption per year, where y is the coefficient of relative risk aversion.

On the International Financial Architecture: Insuring Emerging Markets

In spite of significant institutional and macroeconomic reforms over the last decade or two, capital flows to developing economies remain highly volatile. In 1996, net private capital flows to emerging markets reached US$230 billions; by 1997 these flows had been cut in half; by 1998 halved again; and after a mild recovery during 1999, flows fell in 2000 and 2001 to slightly over one-tenth the level of 1996. These reversals in capital flows have enormous economic and social costs for developing economies. For well behaved' countries, a significant share of these fluctuations is triggered by events that are outside their direct control, and often outside the control of emerging markets as a whole. Building on this observation, this paper highlights some of the desirable features of insurance and hedging instruments against capital flow volatility, and discusses steps to facilitate the creation of these markets.

Structural Volatility in Chile: A Policy Report

This paper identifies Chile`s economic weaknesses and offers policy recommendations for increasing stability. Current problems include weak international financial links, a Central Bank mandate that is ill-designed to deal with terms of trade shocks, a propensity to waste scarce liquidity in the banking system; and limited development of financial markets. The paper`s policy recommendations include improving external financial links, molding terms of trade contingencies into anti-cyclical policies, Improving liquidity aggregation through and within the banking sector during crises, and improving the liquidity and immediacy of domestic financial instruments.

On the Macroeconomics of Asset Shortages

The world has a shortage of financial assets. Asset supply is having a hard time keeping up with the global demand for store of value and collateral by households, corporations, governments, insurance companies, and financial intermediaries more broadly. The equilibrium response of asset prices and valuations to these shortages has played a central role in global economic developments over the last twenty years. The so-called "global imbalances," the recurrent emergence of speculative bubbles (which recently have transited from emerging markets, to the dot-coms, to real estate, to gold...), the historically low real interest rates and associated "interest-rate conundrum," and even the widespread low inflation environment and deflationary episodes in parts of the world, all fall into place once one adopts this asset shortage perspective.