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Author: Ricardo J. Caballero
Publisher:
ISBN:
Category : Monetary policy
Languages : en
Pages : 70
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Book Description
Even well managed emerging market economies are exposed to significant external risk, the bulk of which is financial. At a moment's notice, these economies may be required to reverse the capital inflows that have supported the preceding boom. Even if such a reversal does not take place, its anticipation often leads to costly precautionary measures and recessions. In this paper, we characterize the business cycle of an economy that on average needs to borrow but faces stochastic financial constraints. We focus on the optimal financial policy of such an economy under different imperfections and degrees of crowding out in its hedging opportunities. The model is simple enough to be analytically tractable but flexible and realistic enough to provide quantitative guidance. Keywords: Capital Flows, Sudden Stops, Financial Constraints, Recessions, Hedging, Insurance, Signals, Contingent Credit Lines, Asymmetric Information. JEL Classification: E2, E3, F3, F4, G0, C1.
Author: Ricardo J. Caballero
Publisher:
ISBN:
Category : Monetary policy
Languages : en
Pages : 70
Get Book Here
Book Description
Even well managed emerging market economies are exposed to significant external risk, the bulk of which is financial. At a moment's notice, these economies may be required to reverse the capital inflows that have supported the preceding boom. Even if such a reversal does not take place, its anticipation often leads to costly precautionary measures and recessions. In this paper, we characterize the business cycle of an economy that on average needs to borrow but faces stochastic financial constraints. We focus on the optimal financial policy of such an economy under different imperfections and degrees of crowding out in its hedging opportunities. The model is simple enough to be analytically tractable but flexible and realistic enough to provide quantitative guidance. Keywords: Capital Flows, Sudden Stops, Financial Constraints, Recessions, Hedging, Insurance, Signals, Contingent Credit Lines, Asymmetric Information. JEL Classification: E2, E3, F3, F4, G0, C1.
Author: Ricardo J. Caballero
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Even well managed emerging market economies are exposed to significant external risk, the bulk of which is financial. At a moment's notice, these economies may be required to reverse the capital inflows that have supported the preceding boom. While capital flows crises are sudden nonlinear events (sudden stops), their likelihood fluctuates over time. The question we address in the paper is how should a country react to these fluctuations. Depending on the hedging possibilities the country faces, the options range from pure self-insurance to hedging the sudden stop jump itself. In between, there is the more likely possibility to hedge the smoother fluctuations in the likelihood of sudden stops. The main contribution of the paper is to provide an analytically and empirically tractable model that allows us to characterize and quantify optimal contingent liability management in a variety of scenarios. We show, with a concrete example, that the gains from contingent liability management can easily exceed the equivalent of cutting a country's external liabilities by 10 percent of GDP. *This is a revision of the June 2003 version.
Author: Ricardo J. Caballero
Publisher:
ISBN:
Category : Monetary policy
Languages : en
Pages : 58
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Book Description
Even well managed emerging market economies are exposed to significant external risk, the bulk of which is financial. At a moment's notice, these economies may be required to reverse the capital inflows that have supported the preceding boom. While capital flows crises are sudden nonlinear events (sudden stops), their likelihood fluctuates over time. The question we address in the paper is: how should a country react to these fluctuations. Depending on the hedging possibilities the country faces, the options range from pure self-insurance to hedging the sudden stop jump itself. In between, there is the more likely possibility to hedge the smoother fluctuations in the likelihood of sudden stops. The main contribution of the paper is to provide an analytically and empirically tractable model that allows us to characterize and quantify optimal contingent liability management in a variety of scenarios. We show, with a concrete example, that the gains from contingent liability management can easily exceed the equivalent of cutting a country's external liabilities by 10 percent of GDP. Keywords: Capital flows, sudden stops, financial constraints, contractions, hedging, insurance, signals. JEL Classifications: E2, E3, F3, F4, G0, C1.
Author: Joshua Aizenman
Publisher: Cambridge University Press
ISBN: 1139446940
Category : Business & Economics
Languages : en
Pages : 615
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Book Description
Economic volatility has come into its own after being treated for decades as a secondary phenomenon in the business cycle literature. This evolution has been driven by the recognition that non-linearities, long buried by the economist's penchant for linearity, magnify the negative effects of volatility on long-run growth and inequality, especially in poor countries. This collection organizes empirical and policy results for economists and development policy practitioners into four parts: basic features, including the impact of volatility on growth and poverty; commodity price volatility; the financial sector's dual role as an absorber and amplifier of shocks; and the management and prevention of macroeconomic crises. The latter section includes a cross-country study, case studies on Argentina and Russia, and lessons from the debt default episodes of the 1980s and 1990s.
Author: Ricardo J. Caballero
Publisher:
ISBN:
Category : Capital movements
Languages : en
Pages : 72
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Book Description
"Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sudden stops of capital inflow. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia's historical experience. We argue that in order to understand sudden stops and the mechanisms to smooth them, it is useful to identify and then distinguish between two inter-related dimensions of investors' confidence: country-trust and currency-trust. Lack of country-trust is a more fundamental and serious problem behind sudden stops. But lack of currency-trust may both be a source of country-trust problems and weaken a country's ability to deal with sudden stops. We discuss steps to improve along these two dimensions of investors' confidence in the medium run, and policies to reduce the impact of country-trust and currency-trust weaknesses in the short run"--NBER website
Author: Guillermo A. Calvo
Publisher: MIT Press
ISBN: 0262336022
Category : Business & Economics
Languages : en
Pages : 265
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Book Description
An examination of Liquidity Crunch in triggering and characterizing financial crises. Since the subprime mortgage crisis that began in 2007, advanced economies have felt a nagging sense of insecurity. In parallel, the profession has witnessed phenomena that are alien to mainstream macroeconomic models. Financial crises are systemic, occurring simultaneously in different economies. In this book, Guillermo Calvo focuses on liquidity factors as a commonality in financial crises. Specifically, he examines the role of “liquidity crunch” in triggering crises. He also identifies a fundamental (but overlooked) idea in Keynes's General Theory, termed by Calvo the price theory of money, to rationalize the resiliency of the U.S. dollar when other dollar-backed assets suffered a devastating liquidity crunch. Calvo shows that a sharp focus on liquidity reveals some characteristics of liquid assets that are easy to miss otherwise. He argues for liquidity's centrality, presenting what he calls the Liquidity Approach. He shows that simple extensions of standard monetary models help rationalize the implications of the liquidity crunch, and then examines slightly more technical models that highlight liquidity issues. He explores the empirical effects of liquidity crunch by studying systemic sudden stops (of capital inflows), presuming that they are triggered by liquidity crunch-type phenomena.
Author: International Monetary Fund
Publisher: International Monetary Fund
ISBN: 9781589064539
Category : Business & Economics
Languages : en
Pages : 410
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Book Description
This book examines the challenges facing the international monetary and financial system, as well as the future role of the Bretton Woods institutions in addressing those challenges. The volume is based on the proceedings of a 2004 conference cosponsored by the Banco de Espana and the International Monetary Fund to commemorate the 60th anniversary of the Bretton Woods meetings in July 1944. The chapters look at global imbalances, exchange rate issues, debt in emerging economies, and innovations in private and multilateral lending.
Author: Bernd Scherer
Publisher: Oxford University Press
ISBN: 0199553432
Category : Business & Economics
Languages : en
Pages : 530
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Book Description
This book explores the current state of the art in quantitative investment management across seven key areas. Chapters by academics and practitioners working in leading investment management organizations bring together major theoretical and practical aspects of the field.
Author: Guillermo A. Calvo
Publisher:
ISBN:
Category : Argentina
Languages : en
Pages : 68
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Book Description
We offer an alternative explanation for the fall of Argentina's Convertibility Program based on the country's vulnerability to Sudden Stops in capital flows. Sudden Stops are typically accompanied by a substantial increase in the real exchange rate that breaks havoc in countries that are heavily dollarized in their liabilities, turning otherwise sustainable fiscal and corporate sector positions into unsustainable ones. In particular, we stress that the required change in relative prices is larger the more closed an economy is in terms of its supply of tradable goods. By contrasting Argentina's performance relative to other Latin American countries that were also subject to the Sudden Stop triggered by the Russian crisis of 1998, we identify key vulnerability indicators that separated Argentina from its piers. We also provide an explanation for the political maelstrom that ensued after the Sudden Stop, based on a War of Attrition argument related to the wealth redistribution conflict triggered by the Sudden Stop and fiscal collapse. This framework also provides elements to rationalize the banking crisis that accompanied the fall of Convertibility.
Author: International Monetary Fund. Research Dept.
Publisher: International Monetary Fund
ISBN: 1589069129
Category : Business & Economics
Languages : en
Pages : 244
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Book Description
This paper introduces a new database of financial reforms covering 91 economies over 1973-2005. It describes the content of the database, the information sources utilized, and the coding rules used to create an index of financial reform. It also compares the database with other measures of financial liberalization, provides descriptive statistics, and discusses some possible applications. The database provides a multifaceted measure of reform, covering seven aspects of financial sector policy. Along each dimension the database provides a graded (rather than a binary) score, and allows for reversals.
