Fixed Exchange Rate Credibility with Heterogeneous Expectations

After disinflation has been achieved, agents who form more sophisticated forecasts have lower confidence in the sustainability of a peg compared to less sophisticated agents. Furthermore, sustained financial stability leads to a declining proportion of sophisticated agents. Thus, the credibility of a fixed exchange rate regime grows over time partly because fewer people pay attention to the workings of the monetary regime. These results are derived in a rules-versus-discretion model of a fixed exchange rate regime with heterogeneous agents. We provide unique supporting evidence using data on expectations and information about the monetary regime from Bulgaria's currency board. Working Paper 06-2

Tenuous Financial Stability

Many countries fix their exchange rate in order to bring financial stability. Usually, inflation declines and output expands but contractual agreements retain their short time frame, investment is sluggish, and economic growth slows down a few years later. This outcome is often attributed to persistent doubts on the part of agents in the commitment and ability of the government to maintain the peg. Yet direct evidence for credibility is difficult to obtain. Unique survey data from Bulgaria reveal that expectations of devaluation were indeed very much present three, four, and five years after that country achieved financial stability under a currency board regime.http://deepblue.lib.umich.edu/bitstream/2027.42/39925/3/wp540.pd

The M2 slowdown and depository intermediation: implications for monetary policy

An examination of credit flow rechanneling away from depository institutions over the past decade in response to evolving financial markets and regulatory structure, and a discussion of how this trend has complicated monetary policymaking.Money supply ; Monetary policy

Beliefs about Exchange-Rate Stability: Survey Evidence From the Currency Board in Bulgaria

We use unique survey data from Bulgaria’s currency board to examine the reasons for persistent incomplete credibility of a financial stabilization regime. Although it produced remarkably positive effects in terms of sustained low inflation since 1997, the currency board has not achieved full credibility. This is not uncommon in other less-developed countries with fixed exchange rate regimes. Our results reveal that incomplete credibility is explained primarily by concerns about external economic shocks and the persistent high unemployment in the country. Past experiences with high inflation do not rank among the top reasons to expect financial instability in the future.Credibility, Currency Boards, Financial Stabilization Programs

Tenuous Financial Stability

Many countries fix their exchange rate in order to bring financial stability. Usually, inflation declines and output expands but contractual agreements retain their short time frame, investment is sluggish, and economic growth slows down a few years later. This outcome is often attributed to persistent doubts on the part of agents in the commitment and ability of the government to maintain the peg. Yet direct evidence for credibility is difficult to obtain. Unique survey data from Bulgaria reveal that expectations of devaluation were indeed very much present three, four, and five years after that country achieved financial stability under a currency board regime.Credibility, Currency boards, Stabilization programs

Sovereignty conditions and governance modes: An option theory approach

This study extends previous work which has examined governance decisions using option theory. In particular, it evaluates the contribution of option theory in both domestic and international environments. Empirical results from a multinomial logit model suggest that the influence of option value differs across segments

Will the valuation ratios revert to their historical means? Some evidence from breakpoint tests

If valuation ratios return to their historical means any time soon, then equity prices must fall substantially, or earnings and dividends must accelerate sharply, or some combination of these events must occur. Historical patterns over the past century suggest that stock prices will fall to align valuation ratios with their means. Of course, the means of the valuation ratios could have changed. To assess the likelihood of such changes, the authors employ breakpoint tests, which allow for multiple breakpoints at unknown break dates. The authors also review alternative explanations for changes in the ratios. They conclude that although no single explanation may be convincing by itself, taken in toto with empirical evidence of structural change, the preponderance of evidence suggests that the mean of the dividend-price ratio is now somewhere between 1% and 2%, probably nearer to 1%. They also conclude that the mean price-to-earnings ratio is now somewhere between 20 and 25, perhaps even higher.Stock - Prices

The short-run dynamics of long-run inflation policy

An examination of the short- and long-term implications of an inflation policy on real output, using a method that allows structural interpretation of a simple VAR applied to a macroeconomic system that includes real output and inflation.Inflation (Finance) ; Monetary policy ; Gross national product

Mutual funds, fee transparency, and competition

Mutual funds enable small, less experienced investors to hold diversified portfolios of stocks and bonds at relatively low costs. Though the mutual fund market is competitive in many ways, fees can vary substantially for what are essentially identical products. This may be due to bundling of services, but it may also reflect some confusion on the part of less experienced investors, which inhibits comparative shopping among funds. Suggested reforms for improved fee disclosure seek to make fees more transparent for less informed investors and should improve competitive discipline among funds.Mutual funds