Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth

Countries that have pursued distortionary macroeconomic policies, including high inflation, large budget deficits and misaligned exchange rates, appear to have suffered more macroeconomic volatility and also grown more slowly during the postwar period. Does this reflect the causal effect of these macroeconomic policies on economic outcomes? One reason to suspect that the answer may be no is that countries pursuing poor macroeconomic policies also have weak 'institutions,' including political institutions that do not constrain politicians and political elites, ineffective enforcement of property rights for investors, widespread corruption, and a high degree of political instability. This paper documents that countries that inherited more 'extractive' instit utions from their colonial past were more likely to experience high volatility a nd economic crises during the postwar period. More specifically, societies where European colonists faced high mortality rates more than 100 years ago are much more volatile and prone to crises. Based on our previous work, we interpret this relationship as due to the causal effect of institutions on economic outcomes: Europeans did not settle and were more likely to set up extractive institutions in areas where they faced high mortality. Once we control for the effect of institutions, macroeconomic policies appear to have only a minor impact on volatility and crises. This suggests that distortionary macroeconomic policies are more likely to be symptoms of underlying institutional problems rather than the main causes of economic volatility, and also that the effects of institutional differences on volatility do not appear to be primarily mediated by any of the standard macroeconomic variables. Instead, it appears that weak institutions cause volatility through a number of microeconomic, as well as macroeconomic, channels.

Essays on economic crises and institutions

Thesis (Ph.D.)--Massachusetts Institute of Technology, Dept. of Economics, 2002.Includes bibliographical references.Countries that have pursued distortionary macroeconomic policies, including high inflation, large budget deficits and misaligned exchange rates, appear to have suffered bigger exchange rate crises, more macroeconomic volatility and also grown more slowly during the postwar period. Does this reflect the causal effect of these macroeconomic policies on economic outcomes? One reason to suspect that the answer may be no is that countries pursuing poor macroeconomic policies also have weak "institutions," including political institutions that do not constrain politicians and political elites, ineffective enforcement of property rights for investors, widespread corruption, and a high degree of political instability. Two papers in this thesis document that countries that inherited more "extractive" institutions from their colonial past were more likely to experience high volatility and economic crises during the postwar period. More specifically, societies where European colonists faced high mortality rates more than 100 years ago are much more volatile and prone to crises. We interpret this relationship as due to the causal effect of institutions on economic outcomes: Europeans did not settle and were more likely to set up extractive institutions in areas where they faced high mortality. Once we control for the effect of institutions, macroeconomic policies appear to have only a minor impact on volatility and crises. This suggests that distortionary macroeconomic policies are more likely to be symptoms of underlying institutional problems rather than the main causes of economic volatility, and also that the effects of institutional differences on volatility do not appear to be primarily mediated by any of the standard macroeconomic variables.(cont.) Instead, it appears that weak institutions cause volatility through a number of microeconomic, as well as macroeconomic, channels. The third paper reports relevant findings from bond markets. There appears to be no higher cost of borrowing for emerging market borrowers if their bonds are easier to restructure in the case of default. Given our findings on institutions, we suggest that default is likely to remain a recurrent event in many countries, and suggest that bond issuers and lenders should consider bonds that are easier to restructure.by Yunyong Thaicharoen.Ph.D

Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth

Countries that have pursued distortionary macroeconomic policies, including high inflation, large budget deficits and misaligned exchange rates, appear to have suffered more macroeconomic volatility and also grown more slowly during the postwar period. Does this reflect the causal effect of these macroeconomic policies on economic outcomes? One reason to suspect that the answer may be no is that countries pursuing poor macroeconomic policies also have weak ‘institutions’, including political institutions that do not constrain politicians and political elites, ineffective enforcement of property rights for investors, widespread corruption, and a high degree of political instability. This Paper documents that countries that inherited more ‘extractive’ institutions from their colonial past were more likely to experience high volatility and economic crises during the postwar period. More specifically, societies where European colonists faced high mortality rates more than 100 years ago are much more volatile and prone to crises. Based on our previous work, we interpret this relationship as due to the causal effect of institutions on economic outcomes: Europeans did not settle and were more likely to set up extractive institutions in areas where they faced high mortality. Once we control for the effect of institutions, macroeconomic policies appear to have only a minor impact on volatility and crises. This suggests that distortionary macroeconomic policies are more likely to be symptoms of underlying institutional problems rather than the main causes of economic volatility, and also that the effects of institutional differences on volatility do not appear to be primarily mediated by any of the standard macroeconomic variables. Instead, it appears that weak institutions cause volatility through a number of microeconomic, as well as macroeconomic, channels.crises; economic growth; economic instability; exchange rates; government spending; inflation; institutions; macroeconomic policies; the Washington consensus; volatility

Bond Restructuring and Moral Hazard

Many official groups have endorsed the wider use by emerging market borrowers of contract clauses which allow for a qualified majority of bondholders to restructure repayment terms in the event of financial distress. Some have argued that such clauses will be associated with moral hazard and increased borrowing costs. This paper addresses this question empirically using primary and secondary market yields and finds no evidence that the presence of collective action clauses increases yields for either higher- or lower-rated issuers. By implication, the perceived benefits from easier restructuring are at least as large as any costs from increased moral hazard.Collective action clauses;Moral hazard;Emerging markets;law, bonds, bond, bondholders, international bonds, bond yields, sovereign bonds, bond contracts, bond issue, eurobonds, bond ratings, emerging market bonds, corporate bonds, financial markets, yankee bonds, bond contract, global bonds, brady bonds, market bond, bond restructuring, international bond, bond issues, yields on bonds, sovereign bond, bearer bond, emerging market bond, bond market, financial market, financial institutions, rate bonds, outstanding bonds, foreign bonds, valuation of bonds, international financial markets, bond issuance, international bond issues, bond markets, cash flows, individual bond, international capital, convertible bonds, samurai bonds, international banks, international financial architecture, bond financing, foreign ? bonds, dollar bonds, financial law, international capital markets, eurobond, supply of bonds, financial stability, individual bondholders, international law, financial system, dual currency bonds, bond market access, international bond markets, fixed rate bonds, international finance, bond flows