Special Interests, Regime Choice, and Currency Collapse

With heterogeneous productivity and sticky prices in the short run, exchange rate changes can generate real effects on agents in the economy; the result is that the currency regime becomes a policy variable amenable to political competition. This paper discusses how special interests and government policymakers interact in the decisionmaking processes concerning the optimal level of the exchange rate, and how these interactions may lead to a disconnect between the exchange rate and economic fundamentals which---under appropriate conditions---may affect the timing, and possibility, of a currency crisis. The model is also tested empirically with exchange rate data from 25 countries.Currency crisis; exchange rate policy; special interest politics; new open-economy macroeconomics

Political Economic Pressures in Financial Crisis Resolution

The free flow of global capital has resulted in destabilizing financial crises, coupled with significant redistributive effects. However, the existing literature has not adequately addressed the channels for this redistribution, nor the different factors that influence the formation of post-crisis redistributive policy. This paper develops a microfounded theoretical model that applies the modeling framework of special interest lobbying together with bilateral bargaining to the formation of equilibrium lending, bailout, and reallocation decisions. The paper then takes the theoretical model to the data, testing two key predictions of the model using both micro- and macro-level datasets. Finally, implications for international financial reform are then examined in light of the model's findings.Financial crisis; redistribution; special interest politics; IMF

The political economy of a managed float: Special interests, monetary authorities, and regime choice

With heterogeneous productivity and sticky prices in the short run, exchange rate changes can generate real effects on agents in the economy; the result is that the currency regime becomes a policy variable amenable to political competition. This paper discusses how special interests and government policymakers interact in the decisionmaking processes concerning the optimal level of the exchange rate, and how these interactions may lead to a disconnect between the exchange rate and economic fundamentals. Three extensions to the benchmark model consider the possibility of a semi-independent monetary authority, the existence of a legislature, and electoral pressures

Estimates of Trade-Related Adjustment Costs in Syria

The scope and complexity of international trading arrangements in the Middle East, as well as their spotty historical record of success, underscores the urgent need for an adequate understanding of the relative costs and benefits of participation in preferential trading arrangements and, more generally, of changes in the domestic import regimes. This paper seeks to address this problem by providing estimates of the adjustment costs associated with two broad classes of hypothetical trade policy scenarios scenarios for Syria: Participation in preferential trading arrangements, and changes in the domestic import regime. We find that the revenue consequences of the first scenario may be substantial, while our analysis of the second scenario suggests that the number of tariff bands can be reduced to a lower number, while ensuring revenue neutrality, via the introduction of a VAT of sufficient but reasonable size.Trade policy; trade adjustment costs; tariff reform; Syria

Estimates of trade-related adjustment costs in Syria

The scope and complexity of international trading arrangements in the Middle East, as well as their spotty historical record of success, underscores the urgent need for an adequate understanding of the relative costs and benefits of participation in preferential trading arrangements and, more generally, of changes in domestic import regimes. This paper seeks to address this problem by providing estimates of the adjustment costs associated with two broad classes of hypothetical trade policy scenarios for Syria: participation in preferential trading arrangements, and changes in the domestic import regime. The authors find that the revenue consequences of the first scenario may be substantial. Their analysis of the second scenario suggests that the number of tariff bands can be reduced, while ensuring revenue neutrality, via the introduction of a value added tax of sufficient but reasonable size.Trade Policy,Debt Markets,Free Trade,International Trade and Trade Rules,Economic Theory&Research

Fun, Games & Economics: An appraisal of game theory in economics

Game theory has had a profound influence on many fields of the social sciences since its rise to prominence more than fifty years ago. This paper provides an overview of the main concepts in game theory and studies four main areas of its application in economic problems – oligopolistic competition, externalities & public goods, market equilibrium and general equilibrium. The conclusion is that game theory has found a natural place in economics and will continue to contribute to it for many years to come

Growth poles and multipolarity

This paper develops an empirical measure of growth poles and uses it to examine the phenomenon of multipolarity. The authors formally define several alternative measures, provide theoretical justifications for these measures, and compute polarity values for nation states in the global economy. The calculations suggest that China, Western Europe, and the United States have been important growth poles over the broad course of world history, and in modern economic history the United States, Japan, Germany, and China have had prominent periods of growth polarity. The paper goes on to analyze the economic and institutional determinants, both at the proximate and fundamental level, that underlie this measure of polarity, as well as compute measures of dispersion in growth polarity shares for the major growth poles.Economic Theory&Research,Achieving Shared Growth,Economic Growth,Population Policies,Currencies and Exchange Rates

Democracy and Trade: An Empirical Study

The theoretical discussion on globalization has suggested that there are linkages between democracy and trade, although the direction of influence is less certain. Formal empirical studies remain scarce, and have often focused on the question of whether democratic regimes influence trade policy, as opposed to the actual relationship between democracy and trade. This paper seeks to answer the question, ``Do democracies trade more?'' by applying the gravity equation to a large dataset of bilateral trade data for the period 1948-1999, while taking into account the role of democracy. It finds that democracy has a positive effect on trade flows, but only after controlling for trade pair heterogeneity. In addition, it makes the case for studies of this nature to draw a distinction between trade flows in the pre- and post-1990s period of rapid democratization as well as between developed and developing countries.Democracy, trade, gravity model

Managing Openness and Volatility: The Role of Export Diversification

As developing countries look to embrace an outward-oriented growth strategy, some may be concerned about the possibility that increased openness will be accompanied by increased volatility. However, although a more open economy may face increased volatility in its terms of trade, openness confers diversification benefits. In this note, we argue that export diversification is a key mitigating factor for the total effect of openness on volatility. More specifically, we show that most developing countries fall on the “good” side of a diversification threshold, where they are likely to experience less volatility as they pursue a strategy of greater openness.trade, openness, volatility, export, diversification, developing countries, trade policy, imports, terms of trade, development

Trade openness reduces growth volatility when countries are well diversified

This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export diversification indicators, it presents strong evidence pointing to an important role for export diversification in reducing the effect of trade openness on growth volatility. The authors also identify positive thresholds for product diversification at which the effect of openness on volatility changes sign. The effect is shown to be positive only for a minority of countries with highly concentrated export baskets. This result is shown to be robust to both explicit accounting for endogeneity as well as the inclusion of a host of additional controls.Economic Conditions and Volatility,Achieving Shared Growth,Markets and Market Access,Free Trade,Emerging Markets