Short-run vs. long-run cooperation among the G-20 countries

In a model of repeated games, we determine the conditions under which cooperation is an equilibrium outcome among the G-20 countries. We consider first, that members are uncertain about the lifespan of the G-20. Second, the nature of member countries and their interrelations can change because of shifts in government regimes. Monitoring and peer pressure to comply with the agreements made are necessary if the goals are to achieve cooperation and thereby attain desirable common goals. If member countries are prone to shifting government regimes and governments are not concerned about their countries' reputations, continuous cooperation becomes more difficult.Repeated games, Prisoners’ Dilemma, cooperation, monitoring, reputation

Monitoring, Liquidity and Financial Crises

This paper analyzes central bank policies on the monitoring of banks in distress in which liquidity provisions are conditional on performance when a bad shock occurs. A sequential game model is used to analyze two policies: the first one in which the central bank acts with discretion and the second in which the optimal monitoring policy rule is made public. The results show that banks exert less effort and take higher risks with a discretionary monitoring policy. With public information about monitoring rules, there is more central bank monitoring and less need to provide emergency funding. Public information about monitoring resolves the multiple equilibria that arise with discretion in fact, a unique equilibrium emerges in which the probability of a banking crisis is reduced.monitoring liquidity provision financial crises conditionality

Exchange rate uncertainty and optimal participation in international trade

Instead of just focusing on the effect of exchange rate levels (undervalued or overvalued exchange rates) on trade, this paper provides an analysis of the effects of exchange rate volatility levels on international trade. Intuitively, an increase in exchange rate volatility leads to uncertainty for agents participating in international trade, and such uncertainty might have a negative impact on international trade flows and participation, thereby reducing the advantages of world-wide specialization. This is especially crucial for countries where exchange rate derivatives markets are not yet well developed and the costs of hedging exchange rate risk are very high. The model here considers optimal decisions about participation in international trade under uncertainty about the exchange rate. The main conclusion is that a high level of exchange rate volatility can deter entrepreneurs from becoming exporters, even though exporting can be highly profitable. For those already participating in international trade, it is opposite: they may, optimally, choose not to leave the market even though staying in this market is highly unprofitable in the short run.Trade Law,Debt Markets,Emerging Markets,Currencies and Exchange Rates,Markets and Market Access

How does public information on central bank intervention strategies affect exchange rate volatility ? the case of Peru

Intervention operations in the foreign exchange market are used by the Banco Central de Reserva del Peru to manage both the level and volatility of their exchange rates. The Banco Central de Reserva del Peru provides information to the market about the specific hours of the day interventions would take place and the total amount of intervention. It consistently buys and sells on the foreign exchange market to avoid large appreciations and depreciations of the Peruvian nuevo sol against the U.S. dollar (Sol/USD), respectively. The estimates in this paper indicate that past information on interventions has moved the sol in the intended direction but only during the time the Banco Central de Reserva del Peru has announced it would be active in the foreign exchange market. The authors also find that the expectation of future interventions by the Banco Central de Reserva del Peru decreases the volatility of the sol when it intervenes to avoid an appreciation of the sol; however, the opposite occurs when the intervention takes place to defend the sol from depreciation. Indeed, the sol has been less volatile during periods when the Banco Central de Reserva del Peru has intervened than otherwise.Debt Markets,Emerging Markets,Economic Stabilization,Currencies and Exchange Rates,Macroeconomic Management

Moral Hazard Effects of Bailing out under Asymmetric Information

With a four-stage sequential game model, we study how bailouts ameliorate the effects of liquidation on fundamentals, reduce the likelihood of currency crises and affect the financial sector's (non-observable) effort. In stage 1, exchange rate regime is announced and all agents receive probabilistic information that a shock may occur in stage 4. Here, the government can commit to an optimal bailout or may wait until stage 4 when a bad shock may occur. The private sector in stage 2 forms exchange rate expectations, and decides on investments and effort. In stage 3, the government faces costs due to expectations of devaluation and liquidation, and may decide to pre-emptively abandon its exchange rate policy. We show that commitment decisions have very important implications for the agents' optimal decisions.

A Risk Allocation Approach to Optimal Exchange Rate Policy

We derive the optimal exchange rate policy for a small open economy subject to terms-of-trade shocks. Firm owners and workers are risk averse but workers more so. Wages are given or partially indexed in the short run, and capital markets are imperfect. The government sets the exchange rate to allocate risk between workers and owners. With less risk-averse firms, and greater difference in risk aversion between workers and firms, the optimal exchange rate should vary little with pure terms-of-trade shocks but more with general shocks to prices. Optimal exchange rate variation is greater with indexed wages, but is smaller when firms behave monopolistically and when wage taxes (profit taxes) change procyclically (countercyclically) with export prices (import prices). The model gives policy rules for determining optimal variations of the exchange rate, and indicates when it is, and is not, optimal to join a currency union with trading partners, implying zero exchange rate variation.currency band, monetary union, price volatility, optimal risk allocation

Case Study Analysis – SWEDEN : HTR Task Users TCP by IEA

This report was developed under the ‘Users Technology Collaboration Programme (TCP) by the International Energy Agency (IEA) Task on Hard-to-Reach (HTR) Energy Users’. The Task aims to provide country participants with the opportunity to share and exchange successful approaches identifying and better engaging HTR energy users. Under the Task, HTR energy users are broadly defined as 'any energy user from the residential and non-residential sectors, who uses any type of energy or fuel, and who is typically either hard-to-reach physically, underserved, or hard to engage or motivate in behaviour change, energy efficiency and demand-side interventions’