Knowledge that Transforms

Trade Structure, Industrial Structure, and International Business Cycles by Marianne Baxter and Michael A. Kouparitsas. Published in volume 93, issue 2, pages 51-56 of American Economic Review, May 2003

Following the financial crises of the late 1990's an increasing number of emergingmarket countries have adopted a flexible exchange-rate regime and an inflation-targeting monetary-policy framework. This trend has generated a growing debate on the appropriate monetary-policy rule for "financially fragile" economies with thin and incomplete financial markets that are subject to highly volatile capital flows. Within this context, I examine the implications of alternative monetary-policy rules and the choice of instruments and targets in a small open economy with imperfect capital markets. I compare a benchmark efficient-markets model with a monetary-targeting regime and three different inflation-targeting rules: the Taylor rule, a CPI inflation-target rule, and a non-tradable inflation-target rule. Furthermore, I study how sensitive the results are to varying degrees of capital-market integration. In addressing this question of the "second best" policy, the paper resembles that of Michael Devereaux and Phillip Lane (2001), who study the role of financial accelerator effects on various monetary-policy rules. I adopt a small open-economy setup rather than a two-country framework. In contrast to most small open-economy models, however, this paper does not assume a zero current-account balance. Net foreign-asset holdings and capital flows affect real volatility through the interest-rate risk premium. Given the significant role the risk premium plays in the external borrowing costs for emerging markets, this channel may have important consequences for economic dynamics.

To address the economic significance of national border effects, this paper provides evidence on two fundamental questions: (1) Do large border effects arise because of high perceived-price wedges between foreign and domestic products, or because imports and domestic goods are very close substitutes?; and (2) If price wedges are important, do they reflect distortionary barriers to trade or do they arise from nondistortionary factors, such as differences in transactions costs or product characteristics? I conclude that, while border effects may imply barriers, welfare costs, and a role for policy, distortions are probably not as substantial as initial border results suggested.

We study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post-Bretton Woods period, using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables. In contrast with previous studies, we find that, for developing countries, less flexible exchange rate regimes are associated with slower growth, as well as with greater output volatility. For industrial countries, regimes do not appear to have any significant impact on growth. The results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature.

Improved information allows home firms to rule out more potential foreign trade partners in advance of attempting to form a match. The increased responsiveness to country wage or goods price differentials resulting from this better first cut causes the general-equilibrium elasticity of substitution between national labor forces or the Armington elasticity of substitution between domestic and imported output to increase. Further results include an increase in the elasticity of domestic labor demand, an increase in the extent to which reductions in conventional trade barriers equalize national wages, and reduced “natural protection” for domestic producers.

The following sections are included:The ModelAn Example with a Continuum of StrategiesAn Example with Finitely Many StrategiesDiscussionAppendixReferences

This paper presents a model of rational Bayesian agents with speculative attacks in a regime of exchange rate which is pegged within a band. Speculators learn from the observation of the exchange rate within the band whether their mass is sufficiently large for a successful attack. Multiple periods are necessary for the existence of speculative attacks. Various defense policies are analyzed. A trading policy by the central bank may defend the peg if it is unobserved and diminishes the market's information for the coordination of speculators.

In a standard New Keynesian model, a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal, timeless perspective, precommitment policy. By stabilizing output gap changes, the central bank imparts inertia into output and inflation that is absent under pure discretion. Even a fully optimizing (i.e., non-myopic) central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting.(This abstract was borrowed from another version of this item.)

During the 1990’s the Earned Income Tax Credit (EITC) emerged as a primary means of providing income support for low-income families in the United States. In an effort to keep the program well targeted, the credit largely restricts eligibility to tax filers with children. One potentially unintended consequence of this design is that it might encourage childbearing. We raise the question of whether the EITC, through its generous benefits to families with children, actually increases fertility. We approach this topic for three reasons. The first is to expand upon an existing literature of economic incentives and fertility using the EITC expansion as a large exogenous variation in the price of childbearing. Findings in the welfare literature are inconclusive (Robert A. Moffitt, 1998), and the income tax literature typically finds small, but statistically significant effects of the income-tax system on fertility behavior (e.g., Leslie A. Whittington et al., 1990). Second, declining fertility rates in many Western counties raise the general issue of whether the tax system can be used as a tool for encouraging fertility. Finally, by considering the link between the EITC and fertility, we question a common, yet untested, assumption in the literature on the EITC and the labor supply of single parents: that the presence of a child is exogenous to the value of the EITC.

Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era by J. Ernesto López-Córdova and Christopher M. Meissner. Published in volume 93, issue 1, pages 344-353 of American Economic Review, March 2003