The optimal design of a fiscal union

Dmitriev, Mikhail and Hoddenbagh, Jonathan (2012): The optimal design of a fiscal union.

Abstract

We study the optimal design of a fiscal union within a currency union using an open economy model with nominal rigidities. We show that the optimal design of a fiscal union depends crucially on the degree of financial integration across countries as well as the elasticity of substitution between domestic and foreign goods. Empirical estimates of substitutability range between 1 and 12. If substitutability is low (around 1), risk-sharing occurs naturally via terms of trade movements even in financial autarky, country-level monopoly power is high and losses from terms of trade externalities dominate other distortions. On the other hand, if substitutability is high (greater than 1), risk-sharing does not occur naturally via terms of trade movements, country-level monopoly power is low and losses from nominal rigidities dominate other distortions. We show that members of a fiscal union should (1) coordinate labor and consumption taxes when substitutability is low to eliminate terms of trade distortions, and (2) coordinate contingent cross-country transfers when substitutability is high to improve risk-sharing, particularly when union members lose access to international financial markets. Contingent fiscal policy at the national level is also necessary to eliminate nominal rigidities in the presence of asymmetric shocks, and yields large welfare gains when goods are close substitutes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal Union, International Macroeconomics
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

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@Article{CP05, author={Corsetti, Giancarlo and Pesenti, Paolo}, title={International dimensions of optimal monetary policy}, journal={Journal of Monetary Economics}, year=2005, volume={52}, number={2}, pages={281-305}, month={March}, keywords={}, abstract={This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies, with monopolistic firms that set prices one period in advance. Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency fluctuations. Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk. In general, optimal rules trade off a larger domestic output gap against lower import prices. Monetary rules in a world Nash equilibrium lead to smaller exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any inflationary (or deflationary) bias. Gains from international monetary cooperation are related in a non-monotonic way to the degree of exchange rate pass-through.<P>(This abstract was borrowed from another version of this item.)}, url={http://ideas.repec.org/a/eee/moneco/v52y2005i2p281-305.html} }

@Article{GM08, author={Gali, Jordi and Monacelli, Tommaso}, title={Optimal monetary and fiscal policy in a currency union}, journal={Journal of International Economics}, year=2008, volume={76}, number={1}, pages={116-132}, month={September}, keywords={}, abstract={We lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union. The monetary authority sets a common interest rate for the union, whereas fiscal policy is implemented at the country level, through the choice of government spending. In the presence of country-specific shocks and nominal rigidities, the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank, whereas fiscal policy has a country-specific stabilization role, one beyond the efficient provision of public goods.}, url={http://ideas.repec.org/a/eee/inecon/v76y2008i1p116-132.html} }

@Unpublished{DmitrievHoddenbagh, author={Dmitriev, Mikhail and Jonathan Hoddenbagh}, title={Financial Integration, Fiscal Unions and Currency Unions}, year=2013, abstract={} }

@Unpublished{DmitrievHoddenbagh1, author={Dmitriev, Mikhail and Jonathan Hoddenbagh}, title={Price Stability In Small Open Economies}, year=2013, abstract={} }

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@Unpublished{HeviaNicolini, author={Hevia, Constantino and Juan Pablo Nicolini}, title={Optimal Devaluations}, year=2012, abstract={We analyze optimal policy in a simple small open economy model with price setting frictions. In particular, we study the optimal response of the nominal exchange rate following a terms of trade shock. We depart from the New Keynesian literature in that we explicitly model internationally traded commodities as intermediate inputs in the production of local Önal goods and assume that the small open economy takes this price as given. This modi- Öcation is not only in line with the long standing tradition of small open economy models, but also drastically changes the optimal movements in the exchange rate. We perform our analysis in the tradition of optimal dynamic Ramsey problems, so we characterize optimal allocation and the government policies that implement it. We show that, while we can derive general second best policy principles, the exact way the nominal exchange rate ought to comove with the terms of trade depends on speciÖc details of the model.} }

@TechReport{CataoChang, author={Catao, Luis and Roberto Chang}, title={Monetary Rules For Commodity Traders}, year=2012, month=Nov, institution={National Bureau of Economic Research}, type={NBER Working Papers}, url={}, number={18536}, abstract={We develop a dynamic model of a small open economy that trades commodities whose world prices are subject to realistic random fluctuations, and study the implications of monetary policy alternatives. The model is much more flexible than those of previous studies, especially in allowing to compare perfect risk sharing against �nancial autarky. In each case we show how to derive analytically optimal Ramsey allocations and flexible price allocations, and hence to examine the crucial role of behavioral elasticities, production structure, and capital mobility in determining the welfare properties of different monetary choices. Applying these insights to a calibrated example, we �nd that the impulse responses associated with PPI targeting track flexible price allocations closely, but can diverge greatly from the Ramsey allocations, especially when risk sharing is perfect and the elasticity of demand for exports of a home aggregate is high. In those cases, policies that stabilize the real exchange rate more than PPI targeting, such as targeting expected inflation, deliver higher welfare. But PPI targeting is the clear winner under portfolio autarky} }

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@Article{Woodford2001, author={Michael Woodford}, title={Inflation Stabilization and Welfare}, journal={The B.E. Journal of Macroeconomics}, year=2002, volume={0}, number={1}, pages={1}, month={}, keywords={Price Stability; Loss Function; Optimal Monetary Policy; Taylor Series Approximation}, abstract={This paper derives loss functions for analyses of optimal monetary policy that are grounded in the welfare of private agents, in the case of explicit optimizing models of private-sector behavior in which the real effects of monetary policy result from nominal price rigidity. A quadratic approximation to the utility-based welfare criterion is developed that allows comparison between this criterion and the ad hoc quadratic loss functions typically assumed in the literature on monetary policy evaluation. It is shown that the goal of inflation stabilization, generally presumed to be an important (and perhaps the preeminent) goal of monetary policy, can in fact be justified in such a framework, insofar as variable inflation results in real distortions when prices are not adjusted throughout the economy in a perfectly synchronized fashion. The exact sense in which inflation variability matters for welfare, however, depends upon the details of price-setting behavior. Conditions are described under which optimal policy involves complete stabilization of the price level. It is shown that this may be optimal even in the presence of \&quot;supply shocks\&quot; of several possible sorts (including technology shocks and exogenous variation in preferences regarding labor supply), and even in the presence of distortions that imply that the optimal output gap is positive (and despite existence of a non-vertical long-run Phillips curve). At the same time, a variety of reasons are discussed why complete price-level stabilization is not optimal in more complicated (and probably more realistic) settings.}, url={http://ideas.repec.org/a/bpj/bejmac/vcontributions.2y2002i1n1.html} }

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@InCollection{GoodfriendKing1997, author={Marvin Goodfriend and Robert King}, title={The New Neoclassical Synthesis and the Role of Monetary Policy}, booktitle={NBER Macroeconomics Annual 1997, Volume 12}, publisher={National Bureau of Economic Research, Inc}, year=1997, month={}, volume={}, number={}, series={NBER Chapters}, edition={}, chapter={}, pages={231-296}, keywords={}, abstract={Macroeconomics is moving toward a New Neoclassical Synthesis, which like the synthesis of the 1960s melds Classical with Keynesian ideas. This paper describes the key features of the new synthesis and its implications for the role of monetary policy. We find that the New Neoclassical Synthesis rationalizes an activist monetary policy which is a simple system of inflation targets. Under this \&quot;neutral\&quot; monetary policy, real quantities evolve as suggested in the literature on real business cycles. Going beyond broad principles, we use the new synthesis to address several operational aspects of inflation targeting. These include its practicality, the response to oil shocks, the choice of price index, the design of a mandate, and the tactics of interest rate policy.<P>(This abstract was borrowed from another version of this item.)}, url={http://ideas.repec.org/h/nbr/nberch/11040.html} }

@TechReport{GoodfriendKing2001, author={Marvin Goodfriend and Robert G. King}, title={The Case for Price Stability}, year=2001, month=Aug, institution={National Bureau of Economic Research, Inc}, type={NBER Working Papers}, url={http://ideas.repec.org/p/nbr/nberwo/8423.html}, number={8423}, abstract={Reasoning within the New Neoclassical Synthesis (NNS) we previously recommended that price stability should be the primary objective of monetary policy. We called this a neutral policy because it keeps output at its potential, defined as the outcome of an imperfectly competitive real business cycle model with a constant markup of price over marginal cost. We explore the foundations of neutral policy more fully in this paper. Using the principles of public finance, we derive conditions under which markup constancy is optimal monetary policy. Price stability as the primary policy objective has been criticized on a number of grounds which we evaluate in this paper. We show that observed inflation persistence in U.S. time series is consistent with the absence of structural inflation stickiness as is the case in the benchmark NNS economy. We consider reasons why monetary policy might depart from markup constancy and price stability, but we argue that optimal departures are likely to be minor. Finally, we argue that the presence of nominal wage stickiness in labor markets does not undermine the case for neutral policy and price stability.}, keywords={} }

@Article{FaiaMonacelli2008, author={Ester Faia and Tommaso Monacelli}, title={Optimal Monetary Policy in a Small Open Economy with Home Bias}, journal={Journal of Money, Credit and Banking}, year=2008, volume={40}, number={4}, pages={721-750}, month={06}, keywords={}, abstract={ We analyze optimal monetary policy in a small open economy characterized by home bias in consumption. Peculiar to our framework is the application of a Ramsey-type analysis to a model of the recent open-economy New Keynesian literature. We show that home bias in consumption is a sufficient condition for inducing the monetary policymaker of an open economy to deviate from a strategy of strict markup stabilization and contemplate some (optimal) degree of exchange rate stabilization. We focus on the optimal setting of policy both in the case of firms setting prices one period in advance and in a gradual fashion subject to adjustment costs. While the first setup allows us to analytically highlight home bias as an independent source of equilibrium markup variability, the second setup allows to study the effects of future expectations on the optimal policy problem and the effect of home bias on optimal inflation volatility. The latter, in particular, is shown to be related to the degree of trade openness in a U-shaped fashion, whereas exchange rate volatility is monotonically decreasing in openness. Copyright (c) 2008 The Ohio State University.}, url={http://ideas.repec.org/a/mcb/jmoncb/v40y2008i4p721-750.html} }

@Article{DE03, author={Michael B. Devereux and Charles Engel}, title={Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility}, journal={Review of Economic Studies}, year=2003, volume={70}, number={4}, pages={765-783}, month={October}, keywords={}, abstract={ This paper develops a welfare-based model of monetary policy in an open economy. We examine the optimal monetary policy under commitment, focusing on the nature of price adjustment in determining policy. We investigate the implications of these policies for exchange-rate flexibility. The traditional approach maintains that exchange-rate flexibility is desirable in the presence of real country-specific shocks that require adjustment in relative prices. However, in the light of empirical evidence on nominal price response to exchange-rate changes-specifically, that there appears to be a large degree of local-currency pricing (LCP) in industrialized countries-the expenditure-switching role played by nominal exchange rates may be exaggerated in the traditional literature. In the presence of LCP, we find that the optimal monetary policy leads to a fixed exchange rate, even in the presence of country-specific shocks. This is true whether monetary policy is chosen cooperatively or non-cooperatively among countries. Copyright The Review of Economic Studies Limited, 2003.}, url={http://ideas.repec.org/a/bla/restud/v70y2003i4p765-783.html} }

@Article{coleobstfeld91, author={Cole, Harold L. and Obstfeld, Maurice}, title={Commodity trade and international risk sharing : How much do financial markets matter?}, journal={Journal of Monetary Economics}, year=1991, volume={28}, number={1}, pages={3-24}, month={August}, keywords={}, abstract={This paper evaluates the gains from international risk sharing in some simple general-equilibrium models with output uncertainty. Under empirically plausible calibration, the Incremental loss from a ban on international portfolio diversification is estimated to be quite small--0.15 percent of output per year is a representative figure. Even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology. The paper argues that the small magnitude of potential trade gains, when coupled with small costs of cross-border financial transactions, may explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility.<P>(This abstract was borrowed from another version of this item.)}, url={http://ideas.repec.org/a/eee/moneco/v28y1991i1p3-24.html} }

@Book{canzonerihenderson, author={Matthew B. Canzoneri and Dale W. Henderson}, title={Monetary Policy in Interdependent Economies: A Game-Theoretic Approach}, publisher={The MIT Press}, year=1991, month={}, volume={1}, number={0262031787}, series={MIT Press Books}, edition={}, keywords={monetary policy; game theory}, abstract={Monetary Policy in Interdependent Economies provides the first comprehensive overview of the implications of using game theory to analyze interactions among national monetary policymakers. It synthesizes the pessimistic view of sovereign policymaking that results from the analysis of one-shot games with the optimistic view derived from the analysis of quid pro quo strategies in repeated games. Good outcomes, the authors conclude, require coordination among noncooperative policymakers, and that sometimes policymakers, must be forced to cooperate. They suggest two roles for supranational institutions such as the International Monetary Fund: the IMF can provide a forum where noncooperative policymakers, can work to achieve good outcomes, and it can police agreements among cooperative policymakers Canzoneri and Henderson take clear stands on controversial issues and make recent advances in game theory accessible by using a single unified framework to explain a wide range of concepts. They begin by analyzing one-shot interactions between two policymakers, In subsequent chapters they extend their analysis to allow for more policymakers, and coalitions, for repeated interactions among policymakers, and for the possibility of time inconsistency.}, url={http://ideas.repec.org/b/mtp/titles/0262031787.html} }

@InCollection{oudizsachs, author={Gilles Oudiz and Jeffrey Sachs}, editor={Willem Buiter and Richard Marston}, title={International Policy Coordination In Dynamic Macroeconomic Models}, booktitle={International Economic Policy Coordination}, publisher={National Bureau of Economic Research, Inc}, year=1985, month={July}, volume={}, number={}, series={NBER Chapters}, edition={}, chapter={}, pages={274-330}, keywords={}, abstract={No abstract is available for this item.}, url={http://ideas.repec.org/h/nbr/nberch/4137.html} }

@Article{GM05, author={Jordi Galí and Tommaso Monacelli}, title={Monetary Policy and Exchange Rate Volatility in a Small Open Economy}, journal={Review of Economic Studies}, year=2005, volume={72}, number={3}, pages={707-734}, month={07}, keywords={}, abstract={ We lay out a \&quot;small open economy\&quot; version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap. We use the resulting framework to analyse the macroeconomic implications of three alternative rule-based policy regimes for the small open economy: domestic inflation and CPI-based Taylor rules, and an exchange rate peg. We show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail. We also discuss a special case for which domestic inflation targeting constitutes the optimal policy, and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules. Copyright The Review of Economic Studies Limited, 2005.}, url={http://ideas.repec.org/a/bla/restud/v72y2005i3p707-734.html} }

@Article{CP05, author={Corsetti, Giancarlo and Pesenti, Paolo}, title={International dimensions of optimal monetary policy}, journal={Journal of Monetary Economics}, year=2005, volume={52}, number={2}, pages={281-305}, month={March}, keywords={}, abstract={This paper provides a baseline general-equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms that set prices one period in advance. Strict adherence to inward-looking policy objectives such as the stabilization of domestic output cannot be optimal when firms' markups are exposed to currency fluctuations. Such policies induce excessive volatility in exchange rates and foreign sales revenue, leading exporters to set higher prices in response to higher profit risk. In general, optimal rules trade off a larger domestic output gap against lower import prices. Monetary rules in a world Nash equilibrium lead to less exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any inflationary (or deflationary) bias. Gains from international monetary cooperation are related in an nonmonotonic way to the degree of exchange rate pass-through.><P>(This abstract was borrowed from another version of this item.)}, url={http://ideas.repec.org/a/eee/moneco/v52y2005i2p281-305.html} }

@InCollection{CDL12, author={Corsetti, Giancarlo and Dedola, Luca and Leduc, Sylvain}, editor={Benjamin M. Friedman and Michael Woodford}, title={Optimal Monetary Policy in Open Economies}, booktitle={Handbook of Monetary Economics}, publisher={Elsevier}, year=2010, month={}, volume={3}, number={}, series={Handbook of Monetary Economics}, edition={}, chapter={16}, pages={861-933}, keywords={Currency Misalignments; Demand Imbalances; Pass-Through; Asset Markets and Risk Sharing; Optimal Tar}, abstract={This chapter studies optimal monetary stabilization policy in interdependent open economies, by proposing a unified analytical framework systematizing the existing literature. In the model, the combination of complete exchange-rate pass-through ('producer currency pricing') and frictionless asset markets ensuring efficient risk sharing, results in a form of open-economy 'divine coincidence': in line with the prescriptions in the baseline New-Keynesian setting, the optimal monetary policy under cooperation is characterized by exclusively inward-looking targeting rules in domestic output gaps and GDP-deflator inflation. The chapter then examines deviations from this benchmark, when cross-country strategic policy interactions, incomplete exchange-rate pass-through ('local currency pricing') and asset market imperfections are accounted for. Namely, failure to internalize international monetary spillovers results in attempts to manipulate international relative prices to raise national welfare, causing inefficient real exchange rate fluctuations. Local currency pricing and incomplete asset markets (preventing efficient risk sharing) shift the focus of monetary stabilization to redressing domestic as well as external distortions: the targeting rules characterizing the optimal policy are not only in domestic output gaps and inflation, but also in misalignments in the terms of trade and real exchange rates, and cross-country demand imbalances.}, url={http://ideas.repec.org/h/eee/monchp/3-16.html} }

@Article{BB03, author={Gianluca Benigno and Pierpaolo Benigno}, title={Price Stability in Open Economies}, journal={Review of Economic Studies}, year=2003, volume={70}, number={4}, pages={743-764}, month={October}, keywords={}, abstract={ This paper studies the theoretical conditions under which price stability is the optimal policy in a two-country open-economy model with imperfect competition and price stickiness. Special conditions on the levels of country-specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied. These restrictions apply to both cooperative and non-cooperative settings. Importantly, we show that cooperative and non-cooperative solutions do not coincide despite market completeness and producer currency pricing. We study the conditions under which quadratic approximations of single countries' welfare can be correctly evaluated by relying only on log-linear approximations of the equilibrium conditions. Copyright The Review of Economic Studies Limited, 2003.}, url={http://ideas.repec.org/a/bla/restud/v70y2003i4p743-764.html} }

@Article{BB06, author={Benigno, Gianluca and Benigno, Pierpaolo}, title={Designing targeting rules for international monetary policy cooperation}, journal={Journal of Monetary Economics}, year=2006, volume={53}, number={3}, pages={473-506}, month={April}, keywords={}, abstract={This study analyzes international monetary policy cooperation in a two-country dynamic general equilibrium model with nominal rigidities, monopolistic competition and producer currency pricing. A quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers. It is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained-efficient solution depend on the kind of disturbance that affects the economy. It might be the case either for fixed or floating exchange rates. Despite this result, simple targeting rules that involve only targets for the growth of output and for both domestic GDP and CPI inflation rates can replicate the cooperative allocation. JEL Classification: E52; F41; F42.<P>(This abstract was borrowed from another version of this item.)}, url={http://ideas.repec.org/a/eee/moneco/v53y2006i3p473-506.html} }

@Article{OR02, author={Maurice Obstfeld and Kenneth Rogoff}, title={Global Implications Of Self-Oriented National Monetary Rules}, journal={The Quarterly Journal of Economics}, year=2002, volume={117}, number={2}, pages={503-535}, month={May}, keywords={}, abstract={ It is well-known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. But when goods and financial markets are tightly linked, is it problematic if countries unilaterally design their monetary policy rules? Are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination? We argue that under plausible assumptions the answer is no. Unless risk aversion is very high, lack of coordination in rule setting is a second-order problem compared with the overall gains from macroeconomic stabilization. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology}, url={http://ideas.repec.org/a/tpr/qjecon/v117y2002i2p503-535.html} }

@Article{CGG02, author={Clarida, Richard and Gali, Jordi and Gertler, Mark}, title={A simple framework for international monetary policy analysis}, journal={Journal of Monetary Economics}, year=2002, volume={49}, number={5}, pages={879-904}, month={July}, keywords={}, abstract={We study the international monetary policy design problem within an optimizing two-country sticky price model, where each country faces a short run tradeoff between output and inflation. The model is sufficiently tractable to solve analytically. We find that in the Nash equilibrium, the policy problem for each central bank is isomorphic to the one it would face if it were a closed economy. Gains from cooperation arise, however, that stem from the impact of foreign economic activity on the domestic marginal cost of production. While under Nash central banks need only adjust the interest rate in response to domestic inflation, under cooperation they should respond to foreign inflation as well. In either scenario, flexible exchange rates are desirable.<P>(This abstract was borrowed from another version of this item.)}, url={http://ideas.repec.org/a/eee/moneco/v49y2002i5p879-904.html} }

@Article{CP01, author={Giancarlo Corsetti and Paolo Pesenti}, title={Welfare And Macroeconomic Interdependence}, journal={The Quarterly Journal of Economics}, year=2001, volume={116}, number={2}, pages={421-445}, month={May}, keywords={}, abstract={ We develop a baseline model of monetary and fiscal transmission in interdependent economies. The welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade. An unanticipated exchange rate depreciation can be beggar-thyself rather than beggar-thy-neighbor, as gains in domestic output are offset by deteriorating terms of trade. Smaller and more open economies are more prone to suffer from inflationary shocks. Larger economies benefit from moderate demand-led expansions, but may be worse off if policy-makers attempt to close the output gap. Fiscal shocks are generally beggar-thy-neighbor in the long run; in the short run they raise domestic demand at given terms of trade, thus reducing the welfare benefits from monetary expansions. Analytical tractability makes our model uniquely suitable as a starting point to approach the recent \&quot;new open-economy macroeconomic\&quot; literature. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology}, url={http://ideas.repec.org/a/tpr/qjecon/v116y2001i2p421-445.html} }

@TechReport{chari_kehoe09, author={V.V. Chari and Patrick J.Kehoe}, title={Bailouts, Time Inconsistency and Optimal Regulation}, year=2009, month=November, institution={Federal Reserve Bank of Minneapolis}, type={Research Department Staff Report}, url={http://www.economics.harvard.edu/faculty/stein/files/MonetaryPolicyAsRegulationJanuary2011-2.pdf}, number={}, abstract={}, keywords={} }

@TechReport{stein10, author={Jeremy Stein}, title={Monetary Policy as Financial-Stability Regulation }, year=2010, month=April, institution={Harvard University}, type={Working Paper}, url={http://www.economics.harvard.edu/faculty/stein/files/MonetaryPolicyAsRegulationJanuary2011-2.pdf}, number={}, abstract={}, keywords={} }

@Book{canzoneri_henderson91, author={Matthew B. Canzoneri and Dale W. Henderson}, title={Monetary Policy in Interdependent Economies: A Game-Theoretic Approach}, publisher={The MIT Press}, year=1991, month={June}, volume={1}, number={0262031787}, series={MIT Press Books}, edition={}, keywords={}, abstract={}, url={http://ideas.repec.org/b/mtp/titles/0262031787.html} }

@Article{giavazzi_pagano88, author={Giavazzi, Francesco and Pagano, Marco}, title={The advantage of tying one's hands : EMS discipline and Central Bank credibility}, journal={European Economic Review}, year=1988, volume={32}, number={5}, pages={1055-1075}, month={June}, keywords={}, abstract={}, url={http://ideas.repec.org/a/eee/eecrev/v32y1988i5p1055-1075.html} }

@Article{lorenzoni08, author={Guido Lorenzoni}, title={Inefficient Credit Booms}, journal={Review of Economic Studies}, year=2008, volume={75}, number={3}, pages={809-833}, month={07}, keywords={}, abstract={ What were the market and regulatory issues that led to the subprime crisis? How should prudential regulation be fixed? The answers depend on the interpretive lenses - or 'paradigms'- through which one sees finance. The agency paradigm, which has dominated recent regulatory policy and provides the most popular interpretation of the crisis, seems to be influencing much of the emerging reform agenda. But collective welfare failures (particularly externalities) and collective cognition failures (particularly mood swings) were as important, if not more so, in driving the crisis. These three paradigms should therefore be integrated into a more balanced policy agenda. But doing so will be difficult because they often have inconsistent policy implications. Copyright 2010 Blackwell Publishing Ltd}, url={http://ideas.repec.org/a/bla/restud/v75y2008i3p809-833.html} }

@TechReport{aguiar_amador09, author={Mark Aguiar and Manuel Amador}, title={Growth in the Shadow of Expropriation}, year=2009, month=Jul, institution={National Bureau of Economic Research, Inc}, type={NBER Working Papers}, url={http://ideas.repec.org/p/nbr/nberwo/15194.html}, number={15194}, abstract={}, keywords={} }

@Article{rogoff85, author={Rogoff, Kenneth}, title={Can international monetary policy cooperation be counterproductive?}, journal={Journal of International Economics}, year=1985, volume={18}, number={3-4}, pages={199-217}, month={May}, keywords={}, abstract={}, url={http://ideas.repec.org/a/eee/inecon/v18y1985i3-4p199-217.html} }

@Article{armington, author={Armington, Paul}, title={A theory of demand for products distinguished by place of production}, journal={International Monetary Fund Staff Papers}, year=1969, volume={16}, number={}, pages={159-176}, month={}, keywords={}, abstract={}, url={} }

@InCollection{persson_tabellini95, author={Persson, Torsten and Tabellini, Guido}, editor={G. M. Grossman and K. Rogoff}, title={Double-edged incentives: Institutions and policy coordination}, booktitle={Handbook of International Economics}, publisher={Elsevier}, year=1995, month={January}, volume={3}, number={}, series={Handbook of International Economics}, edition={}, chapter={38}, pages={1973-2030}, keywords={}, abstract={}, url={http://ideas.repec.org/h/eee/intchp/3-38.html} }

@TechReport{oudiz_sachs84, author={Gilles Oudiz and Jeffrey Sachs}, title={International Policy Coordination in Dynamic Macroeconomic Models}, year=1984, month=Aug, institution={National Bureau of Economic Research, Inc}, type={NBER Working Papers}, url={http://ideas.repec.org/p/nbr/nberwo/1417.html}, number={1417}, abstract={}, keywords={} }

@techreport{korinek08, author = "Anton Korinek", title = "Regulating Capital Flows to Emerging markets:An Externality View", year = "2008", type="Working Paper", institution = "Department of Economics", address = "University of Maryland, US", }

@techreport{benigno07, author = "Gianluca Benigno and Huigang Chen and Christopher Otrok and Alessandro Rebucci and Eric R. Young", title = "Optimal Monetary Policty With Occasionally Binding Credit Constraints", year = "2007", type = "Working Paper",

}

@techreport{devereux08, title = "Country Portfolios in Open Economy Macro Models", author = "Michael B. Devereux and Alan Sutherland", institution = "National Bureau of Economic Research", type = "Working Paper", series = "Working Paper Series", number = "14372", year = "2008", month = "October", URL = "http://www.nber.org/papers/w14372", abstract = {This paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models. The method is widely applicable, simple to implement, and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset. It can be used in models with any number of assets, whether markets are complete or incomplete, and can be applied to stochastic dynamic general equilibrium models of any dimension, so long as the model is amenable to a solution using standard approximation methods. We first illustrate the approach using a simple two-asset endowment economy model, and then show how the results extend to the case of any number of assets and general economic structure.}, }

@Article{gali05, author={Jordi Gali and Tommaso Monacelli}, title={Monetary Policy and Exchange Rate Volatility in a Small Open Economy}, journal={Review of Economic Studies}, year=2005, volume={72}, number={3}, pages={707-734}, month={07}, keywords={}, abstract={}, url={http://ideas.repec.org/a/bla/restud/v72y2005i3p707-734.html} }

@techreport{obstfeld08, title = "Financial Stability, the Trilemma, and International Reserves", author = "Maurice Obstfeld and Jay C. Shambaugh and Alan M. Taylor", institution = "National Bureau of Economic Research", type = "Working Paper", series = "Working Paper Series", number = "14217", year = "2008", month = "August", URL = "http://www.nber.org/papers/w14217", abstract = {The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.}, }

@article{OR05, jstor_articletype = {primary_article}, title = {Global Current Account Imbalances and Exchange Rate Adjustments}, author = {Obstfeld, Maurice and Rogoff, Kenneth S.}, journal = {Brookings Papers on Economic Activity}, jstor_issuetitle = {}, volume = {2005}, number = {1}, jstor_formatteddate = {2005}, pages = {67--123}, url = {http://www.jstor.org/stable/3805083}, ISSN = {00072303}, abstract = {}, language = {}, year = {2005}, publisher = {The Brookings Institution}, copyright = {Copyright � 2005 The Brookings Institution}, } @Article{devereux03, author={Devereux, Michael B. and Lane, Philip R.}, title={Understanding bilateral exchange rate volatility}, journal={Journal of International Economics}, year=2003, volume={60}, number={1}, pages={109-132}, month={May}, keywords={}, abstract={}, url={http://ideas.repec.org/a/eee/inecon/v60y2003i1p109-132.html} } @Article{lucas90, author={Lucas, Robert E, Jr}, title={Why Doesn't Capital Flow from Rich to Poor Countries?}, journal={American Economic Review}, year=1990, volume={80}, number={2}, pages={92-96}, month={May}, keywords={}, abstract={}, url={http://ideas.repec.org/a/aea/aecrev/v80y1990i2p92-96.html} } @Article{caballero08, author={Ricardo J. Caballero and Emmanuel Farhi and Pierre-Olivier Gourinchas}, title={An Equilibrium Model of "Global Imbalances" and Low Interest Rates}, journal={American Economic Review}, year=2008, volume={98}, number={1}, pages={358-93}, month={March}, abstract={The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ?�?theory first?�� versus the ?�?data first?�� perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander?��s argument in his paper ?�?Economists, Incentives, Judgement, and the European CVAR Approach to Macroeconometrics?�? contrasting two different perspectives in Europe and the US that are currently dominating empirical macroeconometric modeling and delves deeper into their methodological/philosophical underpinnings. It is argued that the key to establishing a constructive dialogue between them is provided by a better understanding of the role of data in modern statistical inference, and how that relates to the centuries old issue of the realisticness of economic theories.}, url={http://ideas.repec.org/a/aea/aecrev/v98y2008i1p358-93.html} } @Article{nelson09, author={Choi, Horag and Mark, Nelson C. and Sul, Donggyu}, title={Endogenous discounting, the world saving glut and the U.S. current account}, journal={Journal of International Economics}, year=2008, volume={75}, number={1}, pages={30-53}, month={May}, keywords={}, abstract={}, url={http://ideas.repec.org/a/eee/inecon/v75y2008i1p30-53.html}

@TECHREPORT{korinek10, title = {Undervaluation through foreign reserve accumulation: static losses, dynamic gains}, author = {Korinek, Anton and Serven, Luis}, year = {2010}, institution = {The World Bank}, type = {Policy Research Working Paper Series}, number = {5250}, keywords = {Economic Theory&Research; Debt Markets; Currencies and Exchange Rates; Access to Finance; Emerging Markets}, url = {http://econpapers.repec.org/RePEc:wbk:wbrwps:5250} }

@Article{mendoza06, author={Enrique G. Mendoza}, title={Lessons from the Debt-Deflation Theory of Sudden Stops}, journal={American Economic Review}, year=2006, volume={96}, number={2}, pages={411-416}, month={May}, keywords={}, abstract={}, url={http://ideas.repec.org/a/aea/aecrev/v96y2006i2p411-416.html} }

@Article{engel06, author={Engel, Charles and Rogers, John H.}, title={The U.S. current account deficit and the expected share of world output}, journal={Journal of Monetary Economics}, year=2006, volume={53}, number={5}, pages={1063-1093}, month={July}, keywords={}, abstract={}, url={http://ideas.repec.org/a/eee/moneco/v53y2006i5p1063-1093.html}

@techreport{fof10, title = "Flow of Funds Accounts of The United States", year = "2010", type="Report", institution = "Board of Governors of the Federal Reserve System", address = "Washington DC 20551, US", }

@Article{jeanne07, author={Olivier Jeanne}, title={International Reserves in Emerging Market Countries: Too Much of a Good Thing?}, journal={Brookings Papers on Economic Activity}, year=2007, volume={38}, number={2007-1}, pages={1-80}, month={}, keywords={}, abstract={}, url={http://ideas.repec.org/a/bin/bpeajo/v38y2007i2007-1p1-80.html} }