In this paper we present a model of international interest rate arbitrage under conditions of entry and exit costs to and from the domestic capital market. We seek to measure the maximum potential effect of capital controls, such as non-interest paying reserve requirements, on interest rate differentials. We quantify the effect of such taxes using a dynamic optimization model with uncertainty a...

The ability to engineer real wage cuts in centralized labor markets has depended on exchange rate interventions. This paper provides some structure to the question of how a monetary union would a¤ect the connection between bargaining structure and macroeconomic performance. The results indicate that the precautionary saving motive in anticipation of transitory terms of trade shock is signi...ca...

We use a structural vectorautoregressive technique to assess whether the EMU project and associated harmonization policies have made economic shocks in the respective countries to converge. We find that after implementation of the ECB, shock correlations have generally grown among EMU members while Germany can be identified as reference point. This may be a hint that, according to the Lucas cri...

This paper studies the effect of real effective exchange rate (REER) volatility on economic growth as well as the euro’s effect on REER volatility. We first show that, after a plausible endogeneity correction, REER volatility is negatively associated with growth in a 1980~2011 panel of OECD countries. One standard deviation volatility decrease is associated with about two percentage points (0.8...

The paper examines the transmission mechanism of monetary policy in an open economy with and without a binding zero bound on nominal interest rates. In particular, a foolproof way of escaping from a liquidity trap is suggested, consisting of a price-level target path, a devaluation of the currency and a temporary exchange rate peg, which is later abandoned in favor of price-level or in‡ation ta...

Previous attempts to analyze the effect of liability dollarization on “fear of floating” have focused exclusively on the role played by foreign liabilities. Liability dollarization of the domestic banking system, however, poses a similar risk as dollar-denominated deposits and credit impose a source of currency risk on domestic banks and firms respectively. Findings from a large cross-country s...

This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in n...

The IMF potentially creates moral hazard when it provides bailouts to countries in a financial crisis. We ask whether a creditor moral hazard is observable in the data. We test the hypothesis that recent unprecedented bailouts – starting with the 1994 Mexican crisis – changed international investors’ perception of default risk on international borrowing. Our events-study approach identifies imp...

The accession of several Central and Eastern European Countries to Euroland is likely to be realised within the next years. Some studies aim at analysing the suitability of these Euro aspirants for currency union with EMU by evaluating the related macroeconomic costs. Still, they are prone to the Lucas critique since they do not consider endogeneity of the relevant criteria. We build on methodo...