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Fiscal Fragility: what the Past May Say about the Future/ Joshua Aizenman and Gurnain Kaur Pasricha
The end of the great moderation has profound implications on the assessment of fiscal sustainability. The pertinent issue goes beyond the increase in stock of public debt/GDP induced by the global recession, to include the perspective that the sustainability of a given public debt/GDP depends on the future volatility of the difference between real interest rates and GDP growth rate. For a given future projected public debt/GDP, we evaluate the possible distribution of the fiscal burden of debt for each OECD country, based on the historical realizations of the real interest rate and GDP growth differential. Fiscal projections may be alarmist if one jumps from the prior of low fiscal burdens t...
Financial Opening
This paper evaluates the empirical evidence of increasing the chances of financial crises induced by opening up developing countries to short-term capital inflows, and appraises the various proposals made for mitigating the severity of financial crises. We point out that there is solid evidence that financial opening increases the chance of financial crises. There is more tenuous evidence that financial opening contributes positively to long-run growth. Hence, there may be a complex trade off between the adverse intermediate run and the beneficial long run effects of financial opening. The literature is abounded with proposals aimed at improving this intertemporal trade-off, reducing the cos...
Policy Uncertainty, Persistence and Growth
This paper explores links between policy uncertainty and growth. It provides evidence on the correlation between policy uncertainty and per capita real GDP for 46 developing countries over the 1970-85 period. Cross-section regressions on growth suggest that after accounting for standard variables from the endogenous growth literature, policy uncertainty and growth are correlated. The importance of the correlation and even its sign depend on the particular policy and on the geographical region examined. One channel through which policy uncertainty may affect growth is the investment channel. Using an endogenous growth model where domestic investment is characterized by irreversibilities and policy fluctuates between a high and lowtax regime, we show that the gap between the two regimes and the persistence of a regime jointly determine the pattern of investment and growth. Policy uncertainty in the absence of persistence does not affect long run growth.
Foreign Direct Investment as a Commitment Mechanism in the Presence of Managed Trade
The purpose of this paper is to evaluate the degree to which the threat of managed trade leads to foreign direct investment (FDI) in a time-consistent manner. We study the role of capital mobility in a two-countries world economy characterized by monopolistic competition. Investment decisions are implemented ex-ante, prior to the realization of productivity shocks. International trade among the countries is the outcome of either free or managed trade. An endogenous switch from free to managed trade may occur ex-post as the outcome of a cost-benefit assessment of the two countries. Under managed trade, the patterns of international commerce are determined as the outcome of costly bargaining. ...
Foreign Direct Investment, Employment Volatility and Cyclical Dumping
This paper analyzes the impact of foreign direct investment (FDI) on the patterns of cyclical dumping (exporting at a price below marginal cost). We consider a global economy where manufacturing is monopolistic-competitive, and productivity is subject to country- specific shocks. Labor is risk averse and immobile across countries, and entrepreneurs are risk neutral. Labor employment and income is governed by implicit contracts, which offer stable real income and volatile employment. Capacity investment is irreversible, and is done prior to the resolution of uncertainty. If investment in manufacturing capacity is characterized by returns to scale, higher volatility of productivity shocks is s...
Financial Sector Inefficiencies and Coordination Failures Implication for Crisis Management
"This paper analyzes the implication of inefficient financial intermediation for crisis management in a country where firms are highly-indebted. The analysis is based on a model in which firms rely on bank credit to finance their working capital needs and lenders face high state verification and enforcement costs of loan contracts. The analysis shows that higher contract enforcement and verification costs, lower expected productivity, or higher volatility, may shift the economy to the wrong side of the debt Laffer curve, with potentially sizable employment and output losses. The main implication of this analysis for the current policy debate on crisis management is [i.e. in?] East Asia is that dept [i.e. debt] reduction, in addition to debt rescheduling, may be required as part of the process of reducing financial sector inefficiences" -- abstract
