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"Jeanne, Olivier"
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Macroprudential Regulation versus mopping up after the crash
How should macroprudential policy be designed when policymakers also have access to liquidity provision tools to manage crises? We show in a tractable model of systemic banking risk that there are three factors at play: first, ex post liquidity provision mitigates financial crises, and this reduces the need for macroprudential policy. In the extreme, if liquidity provision is untargeted and costless or if it completely forestalls crises by credible out-of-equilibrium lending-of-last-resort, there is no role left for macroprudential regulation. Second, however, macroprudential policy needs to consider the ex ante incentive effects of targeted liquidity provision. Third, if shadow banking reduces the effectiveness of macroprudential instruments, it is optimal to commit to less generous liquidity provision as a second-best substitute for macroprudential policy.
Journal Article
The Macroprudential Role of International Reserves
There has been a lot of interest since the global financial crisis in policies allowing emerging market economies to smooth the effects of the global financial cycle. Although the literature has focused mostly on capital controls emerging market governments have relied mostly on international reserves management. This paper discusses the role of reserves in capital flow management based on a simple welfare-based model of capital flows with international banking frictions.
Journal Article
Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach
This paper presents a welfare case for prudential controls on capital flows to emerging markets as a form of Pigouvian taxation that aims to reduce the externalities associated with the deleveraging cycle. We argue that restricting capital inflows during boom times reduces the potential outflows during busts. This mitigates the feedback cycle during such deleveraging episodes, when tightening financial constraints on borrowers and collapsing prices of collateral assets mutually reinforce each other. As a result, macroeconomic volatility is smoothed and welfare is unambiguously increased. This paper presents a simple model of collateralized international borrowing, in which the value of collateral assets endogenously depends on the state of the economy. When financial constraints are binding in such a setup, financial amplification effects (sudden stops) arise as declining collateral values, tightening financial constraints and falling consumption mutually reinforce each other. Such amplification effects are not internalized by individual borrowers and constitute a negative externality that provides a natural rational for the Pigouvian taxation of international borrowing.
Journal Article
Capital Flow Management
There is a wide variety in the capital account policies of emerging markets and developing economies. Some countries, such as Brazil, have recently experimented with prudential controls on capital inflows, whereas others, such as China, have continued to maintain tight controls. This paper reviews the recent theoretical literature explaining the motivations behind capital account policies, and whether there is a case for international coordination in this area.
Journal Article
The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications
We present a model of the optimal level of international reserves for a small open economy seeking insurance against sudden stops in capital flows. We derive a formula for the optimal level of reserves and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. The buildup of reserves in emerging market Asia can be explained only if one assumes a large anticipated output cost of sudden stops and a high level of risk aversion.
Journal Article
The Elusive Gains from International Financial Integration
Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of convergence. We show in a calibrated neoclassical model that conventionally measured welfare gains from this type of convergence appear relatively limited for the typical emerging market country. The welfare gain from switching from financial autarky to perfect capital mobility is roughly equivalent to a 1 % permanent increase in domestic consumption for the typical non-OECD country. This is negligible relative to the welfare gain from a take-off in domestic productivity of the magnitude observed in some of these countries.
Journal Article
International Reserves in Emerging Market Countries: Too Much of a Good Thing?
Provides a welfare-based model of the optimal level of international reserves to handle the risk of capital account crises or sudden cessation of capital flows in emerging market countries. Formulas for the optimal level are derived & compared with the traditional rules of thumb, & policy implications of the reserve buildup in emerging markets are considered. Commentators offer their views on the paper, & a general discussion is summarized. Tables, Figures, Appendixes, References. Adapted from the source document.
Journal Article
Sovereign Default Risk and Bank Fragility in Financially Integrated Economies
The paper analyzes contagious sovereign debt crises in financially integrated economies. Under financial integration banks optimally diversify their holdings of sovereign debt in an effort to minimize the costs with respect to an individual country's sovereign debt default. Although diversification generates risk diversification benefits ex ante, it also generates contagion ex post. The paper shows that financial integration without fiscal integration results in an inefficient equilibrium supply of government debt. The safest governments inefficiently restrict the amount of high-quality debt that could be used as collateral in the financial system and the riskiest governments issue too much debt, as they do not take account of the costs of contagion. Those inefficiencies can be removed by various forms of fiscal integration, but fiscal integration typically reduces the welfare of the country that provides the \"safe-haven\" asset below the autarky level.
Journal Article
Debt Maturity and the International Financial Architecture
This paper presents a theory of the maturity of international sovereign debt, and derives its implications for the reform of the international financial architecture. The analysis is based on a model in which the need to roll over external debt disciplines the policies of debtor countries, but makes them vulnerable to unwarranted debt crises due to bad shocks. The paper presents a welfare analysis of several measures that have been discussed in recent debates, such as international lending-in-last-resort or the establishment of a mechanism for suspending payments on the external debt of crisis countries. (JEL F34, O19)
Journal Article