College of Behavioral & Social Sciences
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The collections in this community comprise faculty research works, as well as graduate theses and dissertations..
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Item Empirical Puzzles of Chilean Stabilization Policy(The World Bank Publications, 1998-03-05) Calvo, Guillermo A.; Mendoza, Enrique G.This paper reviews Chilean stabilization policy during the 1990s and argues that, while the merits of Chilean policy should be praised, there are four puzzles in conventional interpretations of the Chilean experience worth studying. First, the policy of targeting indexed interest rates does not coincide with a policy of targeting real interest rates. Second, there is no systematic link between the decline in inflation and the upward adjustments in indexed interest rates. Third, changes in the exchange rate and in the performance of the external sector help explain the decline in inflation. Fourth, the strong cyclical growth of the real economy was influenced in part by the large and persistent increase in the world price of Copper. We provide statistical evidence favoring these arguments using recursively-identified vector-autoregression models, and sketch a model of staggered pricing under indexation that sheds some light on the Chilean case.Item On Dollarization(1999-04-20) Calvo, Guillermo A.Recent worldwide turmoil in financial markets is triggering a major revision of the conventional wisdom about Emerging Market countries’ (EMs) macroeconomic management. As a result, the debate is wide open as to the set of policies and institutional arrangements that would ensure EMs’ macroeconomic stability. Opinions range from those favoring further pursuing market-friendly reforms to controls on capital mobility and even trade, and from dollarization to floating exchange rates. The debate on the appropriate exchange rate system, in particular, has taken center-stage.Item Fixed Versus Flexible Exchange Rates: Preliminaries of a Turn-of-Millenium Rematch(1999-05-16) Calvo, Guillermo A.This note examines the pros and cons of flexible and fixed exchange rates in terms of a bear-bones model which, however, takes into account features that have played a prominent role in recent currency crises, namely, volatility of capital flows and the real exchange rate, currency substitution and financial fragility, and the Credit Channel.Item Fear of Floating(2000-09-25) Calvo, Guillermo A.; Reinhart, Carmen M.In recent years, many countries have suffered severe financial crises, producing a staggering toll on their economies, particularly in emerging markets. One view blames fixed exchange rates-- “soft pegs”--for these meltdowns. Adherents to that view advise countries to allow their currency to float. We analyze the behavior of exchange rates, reserves, the monetary aggregates, interest rates, and commodity prices across 154 exchange rate arrangements to assess whether “official labels” provide an adequate representation of actual country practice. We find that, countries that say they allow their exchange rate to float mostly do not--there seems to be an epidemic case of “fear of floating.” Since countries that are classified as having a free or a managed float mostly resemble noncredible pegs--the so-called “demise of fixed exchange rates” is a myth--the fear of floating is pervasive, even among some of the developed countries. We present an analytical framework that helps to understand why there is fear of floating.Item When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options(1999-06-29) Calvo, Guillermo A.; Reinhart, Carmen M.In this paper we present evidence that capital account reversals have become more severe for emerging markets. Because policy options are limited in the midst of a capital market crisis and because so many countries have already had crises recently, we focus on some of the policies that could reduce the incidence of crises in the first place, or at least make the sudden stop problem less severe. In this regard, we consider the relative merits of capital controls and dollarization. We conclude that, while the evidence suggests that capital controls appear to influence the composition of flows skewing flows away from short maturities, such policies are not likely to be a long-run solution to the recurring problem of sudden capital flow reversals. Yet, because fear of floating, many emerging markets are likely to turn to increased reliance on controls. Dollarization would appear to have the edge as a more marketoriented option to ameliorate, if not eliminate, the sudden stop problem.Item Uncertain Duration of Reform: Dynamic Implications(Cambridge University Press, 1998) Calvo, Guillermo A.; Drazen, AllanWe develop a framework to study the effects of policies of uncertain duration on consumption dynamics under both complete and incomplete markets. We focus on the dynamic implications of market incompleteness, specifically on the lack of state-contingent bonds. Two policies are considered: pure output-increasing and tariff-reducing (trade liberalization). With complete markets, the output-increasing policy leads to flat consumption, while with no contingent assets, consumption jumps upward on the announcement of the policy, continues rising as long as the policy is in effect, and collapses when it is abandoned. A similar consumption path obtains in a trade liberalization in the realistic case of low elasticity of substitution and no rebate of tariffs. Market incompleteness rationalizes the existence of gradual changes in consumption.Item Rational Contagion and the Globalization of Securities Markets(Elsevier, 2000-06) Calvo, Guillermo A.; Mendoza, Enrique G.This paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios. In the presence of short-selling constraints, the gain of gathering information at a fixed cost may diminish as markets grow. Moreover, if a portfolio manager’s marginal cost for yielding below-market returns exceeds the marginal gain for above-market returns, there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows. Numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets.Item Inflation Stabilization and BOP Crises in Developing Countries(Elsevier, 1999) Calvo, Guillermo A.; Végh, Carlos A.High and persistent inflation has been one of the distinguishing macroeconomic characteristics of many developing countries - particularly in Latin America - since the end of World War II. Pazos (1972) coined the term "chronic inflation" to refer the this phenomenon. In his view, chronic inflation is quite a different creature from the much more spectacular hyperinflations studied by Cagan (1956). First, unlike hyperinflations whose duration is measured in terms of months, chronic inflation may last for decades. Second, countries learn how to live with high and persistent inflation by creating various indexation mechanisms which, in turn, tend to perpetuate the inflationary process. As a result, inflation does not have an inherent propensity to accelerate and, if it does, soon reaches a new plateau.Item Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops(Journal of Applied Economics, 1998-11) Calvo, Guillermo A.The paper studies mechanisms through which a sudden stop in international credit flows may bring about financial and balance of payments crises. It is shown that these crises can occur even though the current account deficit is fully financed by foreign direct investment. However, equity and long-term bond financing may shield the economy from sudden stop crises. The paper also examines possible factors that could trigger sudden stops, and argues that the greater independence that countries have, as compared to regions of a given country, could help to explain why sudden stop crises are more prevalent and destructive at international than at national levels.Item Contagion in Emerging Markets: When Wall Street is a carrier(1999-05-02) Calvo, Guillermo A.The paper examines the case in which the capital market is populated by informed and uninformed investors. The uninformed try to extract information from informed investors’ trades. This opens up the possibility that if informed investors are forced to sell emerging market securities to meet margin calls, for example, this action may be misread by the uninformed investors as signaling low returns in emerging markets. The paper presents a simple model in which this type of Wall Street confusion may result in a collapse in emerging markets’ output.