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Abstract:
The experience of the 1990s renewed economists' interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic cycles is the expansion of the 1920s and the Great Depression. In this paper we ask how well quantitative measures of the credit boom phenomenon can explain the uneven expansion of the 1920s and the slump of the 1930s. We complement this macroeconomic analysis with three sectoral studies that shed further light on the explanatory power of the credit boom interpretation: the property market, consumer durables industries, and high-tech sectors. We conclude that the credit boom view provides a useful perspective on both the boom of the 1920s and the subsequent slump. In particular, it directs attention to the role played by the structure of the financial sector and the interaction of finance and innovation. The credit boom and its ultimate impact were especially pronounced where the organisation and history of the financial sector led intermediaries to compete aggressively in providing credit. And the impact on financial markets and the economy was particularly evident in countries that saw the development of new network technologies with commercial potential that in practice took considerable time to be realised. In addition, the structure of management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining the developments in credit markets that helped to set the stage for the Great Depression.

On 28-29 March 2003, the BIS held a conference on "Monetary stability, financial stability and the business cycle". This event brought together central bankers, academics and market participants to exchange views on this issue (see the conference programme and list of participants in this document). This paper was presented at the conference. Also included in this publication are the comments by the discussants. The views expressed are those of the author(s) and not those of the BIS. The opening speech at the conference by the BIS General Manager and the prepared remarks of the four participants on the policy panel are being published in a single volume in the BIS Papers series.

Abstract:
We analyze banking crises using a panel of macroeconomic and financial data for more than 100 developing countries from 1975 through 1992. We find that banking crises in emerging markets are strongly associated with adverse external conditions. In particular, high Northern interest rates are strongly associated with the onset of banking crises in developing countries, even after taking into account a host of internal macroeconomic factors.

Abstract:
This paper pursues the comparison of economic integration today and pre 1914 for trade as well as finance, primarily for the United States but also with reference to the wider world. We establish the outlines of international integration a century ago and analyze the institutional and informational impediments that prevented the late nineteenth century world from achieving the same degree of integration as today. We conclude that the world today is different: commercial and financial integration before World War I was more limited. Given that integration today is even more pervasive than a hundred years ago, it is surprising that trade tensions and financial instability have not been worse in recent years. In the conclusion we point to the institutional innovations that have taken place in the past century as an explanation. This in turn suggests the way forward for national governments and multilaterals.

Abstract:
This paper examines the determinants of the currency composition of international reserves. Our single most important finding is the striking stability over time of the relationship between the demand for reserves denominated in different currencies and its principal determinants: trade flows, financial flows and currency pegs. This result contrasts sharply with recent predictions of sharp shifts in the currency composition of central banks` holdings of foreign exchange. The message would seem to be that in this, as in other respects, the international monetary system is in a mode of gradual, continuous evolution, not of rapid, discontinuous change.

International reserves, currency composition

Abstract:
This paper examines some popular explanations for the smooth operation of the pre-1914 gold standard. We find that the rapid adjustment of economies to underlying disturbances played an important role in stabilizing output and employment under the gold standard system, but no evidence that this success also reflected relatively small underlying disturbances. Finally, the paper also suggests an explanation for the evolution of the international monetary system based on growing nominal inertia over time.

Abstract:
The relationship between democracy and globalisation has been the focus of substantial policy and academic debate. Some argue that democracy and globalisation go hand in hand suggesting that unrestricted international transactions leads to increased political accountability and transparency. And, politically free societies are likely to have minimal restrictions on the mobility of goods and services across national borders. Others argue that the causal relationship should be reversed: democracies are more likely to have closed markets and vice versa. We examine these relationships between political democracy and trade and financial globalisation over the period 1870-2000 and treat both democracy and globalisation as both cause and effect. Our empirical strategy uses instrumental variables and estimates relationships using the Generalised Method of Moments framework. Our general findings support the hypothesis of a positive two-way relationship between democracy and globalisation.

Democracy, globalisation

Abstract:
International banks provide more credit to smaller borrowers (about whom information is least complete) than bond markets do. High external short-term debt can coexist with rapid growth for extended periods. But overdependence on such debt is risky, because it is likely to unravel if perceptions of sustainability shift.

Academics pay little attention to international bank lending, focusing instead on rapidly growing market segments such as the international bond market and derivative credit instruments. Eichengreen and Mody argue for paying more attention to international bank lending.

Why? Three reasons.

First, the syndicated bank loan is one of the workhorses of international capital markets.

Second, international bank lending is especially important for private-sector borrowers, whose participation in international capital markets will grow as capital markets are liberalized and state enterprises privatized. Sovereigns and other governmental borrowers rely more on the bond market, while private borrowers are disproportionately important to the market in international bank loans.

Private-sector borrowers establish long-term relationships with banks to resolve information problems. Eichengreen and Mody find that international banks provide more credit to smaller borrowers (about whom information is least complete) than bond markets do. Bank finance dominates that segment of international financial markets with the greatest information asymmetry.

Third, spreads on syndicated bank loans show much less variation than spreads on international bonds. Are bank lenders properly pricing country and credit risk? Does spread compression on syndicated bank loans suggest excessive moral hazard in international bank lending?

Eichengreen and Mody warn against overdependence on high levels of domestic debt. While growth in domestic debt reflects improved intermediation between savers and investors, rapid increases to high levels are viewed as unsustainable and raise the cost of international borrowing. They find evidence of growing bullishness among bank lenders to East Asia in the first half of the 1990s, which could reflect moral hazard, but the jury is still out on that issue. High external short-term debt can coexist with rapid growth for extended periods but is likely to unravel if perceptions of sustainability shift.

This paper - a product of the Development Prospects Group - is part of a larger effort in the group to study the microstructure of international capital markets. Ashoka Mody may be contacted at amody@worldbank.org.

Abstract:
At the April 2003 meeting of the International Monetary and Financial Committees, it was decided to further encourage the contractual approach to smoothing the process of sovereign debt restructuring by encouraging the more widespread use of collective action clauses (CACs) in international bonds. This decision was shaped partly by Mexico's successful launch of a bond subject to New York law but featuring CACs, and by subsequent issues with similar provisions from other emerging market countries. This paper reviews the developments leading up to that event, its implications, and prospects for the future. It asks whether we can expect to see additional issuance by emerging markets of bonds featuring CACs, whether such a trend would in fact help to make the world a safer financial place, and what additional steps might be taken to further enhance modalities for crisis resolution.

Debt Restructuring, Collective Action, Aggregation, Transition

Abstract:
At the April 2003 meeting of the International Monetary and Financial Committees, it was decided to further encourage the contractual approach to smoothing the process of sovereign debt restructuring by encouraging the more widespread use of collective action clauses (CACs) in international bonds. This decision was shaped partly by Mexico's successful launch of a bond subject to New York law but featuring CACs, and by subsequent issues with similar provisions from other emerging market countries. This paper reviews the developments leading up to that event, its implications, and prospects for the future. It asks whether we can expects to see additional issuance by emerging markets of bonds featuring CACs, whether such a trend would in fact help to make the world a safer financial place, and what additional steps might be taken to further enhance modalities for crisis resolution.

Abstract:
At the spring 2003 meetings of the IMF and World Bank it was decided to push ahead with the contractual approach to smoothing the process of sovereign debt restructuring by encouraging the more widespread use of collective action clauses (CACs) in international bonds. This decision was shaped by Mexico's successful launch the preceding March of a $1 billion global bond, subject to New York law but featuring CACs, and by
subsequent issues with similar provisions from a number of other emerging market countries. In this paper we reassess the efficacy of this strategy for addressing problems of crisis resolution. We concentrate on two questions, drawing on both theory and new empirical evidence. First, are speculative credits likely to follow investment grade countries in adding CACs to their loan instruments? While our analysis of sources of resistance to contractual innovation creates reasons for hoping that Mexico's pathbreaking issue may have broken an important logjam, both theory and evidence highlight the moral hazard associated with restructuring-friendly provisions for countries with poor credit. They suggest that CACs may raise the cost of borrowing for countries with poor credit ratings, especially in periods when sentiment toward emerging markets is relatively
unfavorable, leaving them slow to embrace these provisions. Second, are CACs sufficient to solve problems of cross issue coordination among creditors, the so-called aggregation problem? The market appears to be most concerned about aggregation with
respect to poor credits with very limited market access. However, because investors may not anticipate the relapse of good credits into repayment difficulties, cross issue
coordination may become a problem for other issuers as well. We therefore conclude that there is a need to encourage the development of super-collective action clauses, bondholders committees, and a code of creditor conduct.

Abstract:
This paper provides an historical perspective on reserve currency competition and on the prospects of the dollar as an international currency. It questions the conventional wisdom that competition for reserve-currency status is a winner-take-all game, showing that several currencies have often shared this role in the past and arguing that innovations in financial markets make it even more likely that they will do so in the future. It suggests that the dollar and the euro are likely to share this position for the foreseeable future. Hopes that the yuan could become a major international currency 20 or even 40 years from now are highly premature.

Abstract:
Asia's underdeveloped bond markets and dependence on bank finance have been topics of concern since the crisis of 1997-98. In this paper we document that the slow development of Asian bond markets is a phenomenon with multiple dimensions. Larger country size, stronger institutions, less volatile exchange rates, and more competitive banking sectors tend to be positively associated with bond market capitalization. Asian countries' strong fiscal balances, while admirable on other grounds, have not been conducive to the growth of government bond markets. The results suggest that the region's structural characteristics and macroeconomic and financial policies account fully for differences in bond market development between Asia and the rest of the world. Once one controls for these characteristics and policies, in other words, there is no residual "Asia effect."

bond markets, financial development

Abstract:
Asia's underdeveloped bond markets and dependence on bank finance have been topics of concern since the crisis of 1997-8. In this paper we document that the slow development of Asian bond markets is a phenomenon with multiple dimensions. Larger country size, stronger institutions, less volatile exchange rates, and more competitive banking sectors tend to be positively associated with bond market capitalization. Asian countries' strong fiscal balances, while admirable on other grounds, have not been conducive to the growth of government bond markets. The results suggest that the region's structural characteristics and macroeconomic and financial policies account fully for differences in bond market development between Asia and the rest of the world. Once one controls for these characteristics and policies, in other words, there is no residual 'Asia effect'.

Abstract:
This paper considers the extent to which the North American Free Trade Area (NAFTA) meets the criteria for a common currency area. NAFTA is compared with the EC, a regional grouping for which initial plans for a monetary union are already in place. Most of the anticipated benefits from a monetary union in the EC apply with equal force to NAFTA. However, because the underlying disturbances are more diverse across members of NAFTA, the costs of abandoning the exchange rate instrument are likely to be higher. This is particularly true when NAFTA is compared to the EC`s continental core.

Abstract:
An influential school of thought views the current international monetary and financial system as Bretton Woods reborn. Today, like 40 years ago, the international system is composed of a core, which has the exorbitant privilege of issuing the currency used as international reserves, and a periphery, which is committed to export-led growth based on the maintenance of an undervalued exchange rate. In the 1960s, the core was the United States and the periphery was Europe and Japan. Now, with the spread of globalization, there is a new periphery, Asia, but the same old core, the United States, with the same tendency to live beyond its means. This view suggests that the current pattern of international settlements can be maintained indefinitely. The United States can continue running current account deficits because the emerging markets of Asia and Latin America are happy to accumulate dollars. There is no reason why the dollar must fall, since there is no need for balance of payments adjustment; in particular, the Asian countries will resist the appreciation of their currencies against the greenback. I argue that this image of a new Bretton Woods System confuses the incentives that confronted individual countries under Bretton Woods with the incentives that confronted groups of countries. It imagines the existence of a cohesive bloc of countries called the periphery ready and able to act in their collective interest. I argue, to the contrary, that the countries of Asia constituting the new periphery are unlikely to be able to subordinate their individual interest to the collective interest. This image of the current system as Bretton Woods reborn also overlooks how the world has changed since the 1960s. This alternative reading of history and current circumstances suggests that even if there exists today something vaguely resembling the Bretton Woods System, it is not long for this world.

Abstract:
How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal component analysis to identify common factors in the movement of banks’ credit default swap spreads. We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels - but now they more clearly reflected heightened funding and counterparty risk. After Lehman’s failure, the prospect of global recession became imminent, auguring the further deterioration of banks’ loan portfolios. At this point the entire global financial system had become infected.

Abstract:
The Global Credit Crisis of 2008-09 has underscored the urgency of reforming the international financial architecture. While a number of short-term reforms are already in train, this paper contemplates more ambitious reforms of the international financial architecture that might be implemented over the next ten years. It proposes routinizing the expansion of IMF quotas and the conduct of exchange rate surveillance. It contemplates an expanded role for the SDR in international transactions, which would require someone - like the IMF - to act as market maker. It considers proposals for reimposing Glass-Steagall-like restrictions on commercial and investment banking, something that will have to be coordinated internationally to be feasible. Other proposals would require banks to purchase capital insurance; here the question is who would be on the other side of the market. Again there is likely to be a role for the IMF. Then there are arguments for a new agency or institution to deal with cross-border bank insolvencies. Any such entity will require staff support, which might plausibly come from the Fund. Finally, some insist that international colleges of regulators are not enough - that it is desirable to create a World Financial Organization (WFO) with the power to sanction members whose national regulatory policies are not up to international standards. A WFO will similarly need staff support, of which the IMF would be one possible source. All this of course presupposes meaningful IMF governance reform so that the institution has the legitimacy and efficiency to assume these additional responsibilities. The paper therefore concludes with some conventional and unconventional proposals for IMF governance reform.

Banking sector, Credit risk, Exchange rate policy surveillance, Financial crisis, Fund role, International cooperation, International financial system, Quota increases, Risk management, SDR role, SDR transactions, SDRs

Abstract:
How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal components analysis to identify common factors in the movement of banks' credit default swap spreads. We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels - but now they more clearly reflected heightened funding and counterparty risk. After Lehman's failure, the prospect of global recession became imminent, auguring the further deterioration of banks' loan portfolios. At this point the entire global financial system had become infected.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We use data on the extent to which residents of one country hold the bonds of issuers resident in another as a measure of financial integration or interrelatedness, asking how Asia compares with Europe and Latin America and with the base case in which the purchaser and issuer of the bonds reside in different regions. Not surprisingly, we find that Europe is more financially integrated than other regions. Asia, more interestingly, already seems to have made more progress on this front than Latin America and other parts of the world. The contrast with Latin America is largely explained by stronger creditor and investor rights, better contract enforcement, and greater transparency, all of which are conducive to foreign participation in local markets and to intraregional cross holdings of Asian bonds generally. Further results based on a limited sample suggest that one factor holding back investment in foreign bonds in East Asia may be limited geographical diversification by mutual funds, in turn reflecting a dearth of appropriate assets. Asian Bond Fund 2, by creating a passively managed portfolio of local currency bonds potentially attractive to mutual fund managers and investors, may help to relax this constraint.

Asia, bond markets, cross-border investment, gravity model

Abstract:
We use data on the extent to which residents of one country hold the bonds of issuers resident in another as a measure of financial integration or interrelatedness, asking how Asia compares with Europe and Latin America and with the base case in which the purchaser and issuer of the bonds reside in different regions. Not surprisingly, we find that Europe is head and shoulders above other regions in terms of financial integration. More interesting is that Asia already seems to have made some progress on this front compared to Latin America and other parts of the world. The contrast with Latin America is largely explained by stronger creditor and investor rights, more expeditious and less costly contract enforcement, and greater transparency that lead to larger and better developed financial systems in Asia, something that is conducive to foreign participation in local markets and to intra-regional cross holdings of Asian bonds generally. Further results based on a limited sample suggest that one factor holding back investment in foreign bonds in East Asia may be limited geographical diversification by mutual funds, in turn reflecting a dearth of appropriate assets. Asian Bond Fund 2, by creating a passively managed portfolio of local currency bonds potentially attractive to mutual fund managers and investors, may help to relax this constraint.

Abstract:
This paper takes stock of the evolution of the international monetary system over the last thousand years. Several points stand out from the analysis. One is the reluctance of governments to embrace radical changes in international monetary relations. Another is the conflict between external and domestic objectives over the cycle, which has been a source of significant tension in the industrial core through much of this century, is now becoming a significant issue for developing countries. Finally, recent developments represent a return to the more market-driven international monetary system that characterized the better part of the preceeding millennium.

International monetary system, globalization, money

Abstract:
This paper, written primarily for historians, attempts to explain why political leaders and central bankers continued to adhere to the gold standard as the Great Depression intensified. We do not focus on the effects of the gold standard on the Depression, which we and others have documented elsewhere, but on the reasons why policy makers chose the policies they did. We argue that the mentality of the gold standard was pervasive and compelling to the leaders of the interwar economy. It was expressed and reinforced by the discourse among these leaders. It was opposed and finally defeated by mass politics, but only after the interaction of national policies had drawn the world into the Great Depression.

Abstract:
The IMF attempts to catalyze and stabilize private capital flows to emerging markets by providing public monitoring and emergency finance. In analyzing its role we contrast cases where banks and bondholders do the lending. Banks have a natural advantage in monitoring and creditor coordination, while bonds have superior risk sharing characteristics. Consistent with this assumption, banks reduce spreads as they obtain more information through repeat transactions with borrowers. By comparison, repeat borrowing has little influence in bond markets, where publicly available information dominates. But spreads on bonds are lower when they are issued in conjunction with IMF-supported programs, as if the existence of a program conveyed positive information to bondholders. The influence of IMF monitoring in bond markets is especially pronounced for countries vulnerable to liquidity crises.

IMF programs, signaling, capital market access

Abstract:
The IMF attempts to stabilize private capital flows to emerging markets by providing public monitoring and emergency finance. In analyzing its role we contrast cases where banks and bondholders do the lending. Banks have a natural advantage in monitoring and creditor coordination, while bonds have superior risk sharing characteristics. Consistent with this assumption, banks reduce spreads as they obtain more information through repeat transactions with borrowers. By comparison, repeat borrowing has little influence in bond markets, where publicly-available information dominates. But spreads on bonds are lower when they are issued in conjunction with IMF-supported programs, as if the existence of a program conveyed positive information to bondholders. The influence of IMF monitoring in bond markets is especially pronounced for countries vulnerable to liquidity crises.

Capital market, Developing countries, International Monetary Fund

Abstract:
The IMF attempts to stabilize private capital flows to emerging markets by providing public monitoring and emergency finance. In analyzing its role we contrast cases where banks and bondholders do the lending. Banks have a natural advantage in monitoring and creditor coordination, while bonds have superior risk sharing characteristics. Consistent with this assumption, banks reduce spreads as they obtain more information through repeat transactions with borrowers. By comparison, repeat borrowing has little influence in bond markets, where publicly-available information dominates. But spreads on bonds are lower when they are issued in conjunction with IMF-supported programs, as if the existence of a program conveyed positive information to bondholders. The influence of IMF monitoring in bond markets is especially pronounced for countries vulnerable to liquidity crises.

Abstract:
Could a high-access, quick-disbursing "insurance facility" in the IMF help to reduce the incidence of sharp interruptions in capital flows ("sudden stops")? We contribute to the debate around this question by analyzing the impact of conventional IMF-supported programs on the incidence of sudden stops. Correcting for the non-random assignment of programs, we find that sudden stops are fewer and generally less severe when an IMF arrangement exists and that this form of "insurance" works best for countries with strong fundamentals. In contrast there is no evidence that a Fund-supported program attenuates the output effects of capital account reversals if these nonetheless occur.

Sudden stops, insurance, IMF-supported programs

Abstract:
Could a high-access, quick-disbursing "insurance facility" in the IMF help to reduce the incidence of sharp interruptions in capital flows ("sudden stops")? We contribute to the debate on this question by analyzing the impact of conventional IMF-supported programs on the incidence of sudden stops. Correcting for the non-random assignment of programs, we find that sudden stops are fewer and generally less severe when an IMF arrangement exists and that this form of "insurance" works best for countries with strong fundamentals. In contrast there is no evidence that a Fund-supported program attenuates the output effects of capital account reversals if these nonetheless occur.

Abstract:
We consider the operation of international capital markets in two periods of globalization, before 1914 and after 1971, with a focus on the crisis problem. We explore the idea that the incidence of crises in these two periods reflects how capital flows were embedded in the larger economic system. Other authors have made similar connections, suggesting that the international monetary framework was responsible for the relatively short-lived and mild nature of pre-World War I financial crises. However, we show that currency crises in fact were of longer duration before 1914. Only for banking and twin crises is there evidence that recovery was faster then than now. This leads us to a somewhat different view of the role of the monetary regime in the propagation of financial crises. A key difference between then and now, we suggest, is that prior to 1914 banking crises were less prone to undermine confidence in the currency, and to thereby compound financial problems, in the countries that were at the core of the international monetary system.

Abstract:
In this paper we analyze data on nearly 1,000 developing-country bonds issued in the years 1991-96 the recent episode of heavy reliance on bonded debt. We analyze both the issue decision of debtors and the pricing decision of investors, minimizing selectivity bias by treating the two issues jointly. Overall, the results confirm that higher credit quality translates into a higher probability of issue and a lower spread. Importantly, however, we find that observed changes in fundamentals explain only a fraction of the spread compression in the period leading up to the recent crisis in emerging markets.

Abstract:
This paper is concerned with the fact that the incidence of speculative attacks tend to be temporally correlated; that is, currency crises appear to pass 'contagiously' from one country to another. The paper provides a survey of the theoretical literature, and analyses the contagious nature of currency crises empirically. Using 30 years of panel data from 20 industrialized countries, we find evidence of contagion. Contagion appears to spread more easily to countries that are closely tied by international trade linkages than to countries in similar macroeconomic circumstances.

Channels, data, international, macroeconomic, panel, similarity, speculative, trade

Abstract:
This paper is concerned with the fact that the incidence of speculative attacks tends to be temporally correlated; that is, currency crises appear to pass contagiously from one country to another. The paper provides a survey of the theoretical literature, and analyzes the contagious nature of currency crises empirically. Using thirty years of panel data from twenty industrialized countries, we find evidence of contagion. Contagion appears to spread more easily to countries which are closely tied by international trade linkages than to countries in similar macroeconomic circumstances.

Abstract:

Abstract:
An optimum currency area is an economic unit composed of regions affected symmetrically by disturbances and between which labor and other factors of production flow freely. The symmetrical nature of disturbances and the high degree of factor mobility make it optimal to forsake nominal exchange rate changes as an instrument of adjustment and to reap the reduction in transactions costs associated with a common currency. This paper assesses labor mobility and the incidence of shocks in Europe by comparing them with comparable measures for Canada and the United States. Real exchange rates, a standard measure of the extent of asymmetrical disturbances, remain considerably more variable in Europe than within the United States. Real securities prices, a measure of the incentive to reallocate productive capital across regions, appear considerably more variable between Paris and Dusseldorf than between Toronto and Montreal. A variety of measures suggests that labor mobility and the speed of labor market adjustment remain lower in Europe than in the United States. Thus, Europe remains further than the currency unions of North America from the ideal of an optimum currency area.

Abstract:
Recent years have seen the development of a large literature on balance sheet factors in emerging-market financial crises. In this paper we discuss three concepts widely used in this literature. Two of them original sin' and debt intolerance' seek to explain the same phenomenon, namely, the volatility of emerging-market economies and the difficulty these countries have in servicing and repaying their debts. The debt-intolerance school traces the problem to institutional weaknesses of emerging-market economies that lead to weak and unreliable policies, while the original-sin school traces the problem instead to the structure of global portfolios and international financial markets. The literature on currency mismatches, in contrast, is concerned with the consequences of these problems and with how they are managed by the macroeconomic and financial authorities. Thus, the hypotheses and problems to which these three terms refer are analytically distinct. The tendency to use them synonymously has been an unnecessary source of confusion.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This Paper reviews the controversy over China's exchange rate regime. Placing the issue in the context of the literature on exit strategies, it argues that now is the best time for China to exit from its peg. Moving to a managed float would be in the country's own interest; it would help the Chinese authorities to gain better control of domestic money and credit conditions. The Paper argues that the principal objections to this recommendation - that the country's banking system is weak, many of its state enterprises are bankrupt, and its capital account is not yet sufficiently open - are unconvincing. Finally it assesses the likely impact on other Asian countries, concluding contrary to the conventional wisdom that these are likely to be minor at best.

China, exchange rate, monetary policy, Asia

Abstract:
This paper considers the impact on trade of preferential arrangements in Europe since the 1950s. Using a first difference version of the gravity model, we find that the EEC and EFTA altered the pattern of international trade. We also find evidence of trade diversion in several cases, notably that of the EEC in the 1960s.

Abstract:
In this paper we reconsider the international market integration, starting at high levels in the late nineteenth century, collapsing between the wars, and recovering gradually after 1945 to reach levels comparable to pre-1914 in the 1990's. The empirical evidence we survey suggests that in some respects the financial integration of the pre-1914 era remains unsurpassed, but in others today's financial markets are even more closely integrated than those in the past. The difference today is that new information-generating and processing technologies have reduced the market-segmenting effects of asymmetric information. In consequence, the range of financial claims that are traded internationally has broadened. While international financial transactions were once determined by claims on governments, railroads, and mining companies, entities with tangible and therefore relatively transparent assets, international investors now transact freely in a much broader range of securities.

Abstract:
No abstract is available for this paper.

Abstract:
State budgets in the United States played a significant macroeconomic role in the 1970s and 1980s, and the level of cyclical responsiveness was affected by the severity of statutory and constitutional fiscal restraints. Moving from no fiscal restraints to the most stringent restraints lowered the fiscal offset to income fluctuations by around 40 percent. Simulations indicate that a reduction in aggregate fiscal stabilizers of this size could lead to a significant increase in the variance of aggregate output.

Fiscal stabilization, fiscal restraints

Abstract:
A financial crisis is a disturbance to financial markets. associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the markets capacity to allocate capital. In this paper we analyze the generation and propagation of financial crises in an international setting. We provide a perspective on the danger of a serious disruption to the global financial system by comparing the last full-fledged financial crisis - that of the 1930s - with conditions prevailing today. Our definition of a financial crisis implies a distinction between generalized financial crises on the one hand and isolated bank failures, debt defaults and foreign-exchange market disturbances on the other. We represent this distinction in three sets of linkages: between debt defaults; and between exchange-market disturbances and bank failures. In both the 1930s and 1980s, the institutional environment was drastically altered by rapid change in foreign exchange markets, in international capital markets, and in the structure of domestic banking systems. Our comparative analysis underscores the critical role played by institutional arrangements in financial markets as a determinant of the system`s vulnerability to destabilizing shocks.

Abstract:
The possibility of a single currency for the Mercosur countries was raised by Argentine President Menem in December 1997 and again at the regional summit this past June. This paper argues that whether Mercosur needs a common currency depends on what kind of integrated regional market its architects are creating. A customs union can be sustained despite the existence of separate national currencies that fluctuate against one another. But deeper integration extending beyond the border implies even more open domestic markets and more intense cross-border competition, making exchange-rate changes more disruptive. If South American policy makers intend to press ahead to deeper integration, then they like their European counterparts may have to contemplate monetary integration.

Abstract:
We analyze the impact of China's growth on the exports of other Asian countries. Our innovation is to distinguish the increase in China's demand for imports from its increased penetration of export markets. Using the gravity model, we disaggregate among commodity types and account for the endogeneity of Chinese exports. We confirm the tendency for China's exports to crowd out the exports of other Asian countries. But this effect is felt mainly in markets for consumer goods and hence by less-developed Asian countries, not in markets for capital goods or by the more advanced Asian economies for which machinery and equipment are a significant fraction of exports. At the same time, there has been a strong tendency for a rapidly growing China to suck in imports from its Asian neighbors. But this effect is mainly felt in markets for capital goods, where China's income elasticity of import demand is highest, and thus by the more advanced Asian economies. Hence, more and less developed Asian countries are being affected very differently by China's rise.

Abstract:
The possibility that the euro area might break up was being raised even before the single currency existed. These scenarios were then lent new life five or six years on, when appreciation of the euro and problems of slow growth in various member states led politicians to blame the European Central Bank for disappointing economic performance. Highly-placed European officials reportedly discussed the possibility that one or more participants might withdraw from the monetary union. How seriously should we take these scenarios? And how significant would be the economic and political consequences? It is unlikely, I argue here, that one or more members of the euro area will leave in the next ten years; total disintegration of the euro area is even more unlikely. While other authors have minimized the technical difficulties of reintroducing a national currency, I suggest that those technical difficulties would be quite formidable. Nor is it certain that the economic problems of the participating member states would be significantly ameliorated by abandoning the euro. And even if there are immediate economic benefits, there would be longer-term political costs.

Abstract:
This Paper reconsiders the 1992/3 crisis in the European Monetary System in light of its emerging market successors. That episode was a predecessor of the Mexican and Asian crises in the sense that both capital movements and domestic financial fragility played important roles. The output effects of this currency crisis resemble those of the typical emerging market crisis as much as they do the more moderate effects of the typical industrial-country crisis, reflecting the influence of the aforementioned capital mobility and financial fragility. Leading indicator models, constructed using data from the Tequila and the Asian flu are shown to do a surprisingly good job at backcasting what European countries suffered currency instability in 1992/3, although these models also point to what was distinctive about the European case.

Emerging markets, EMS, Europe, financial crises

Abstract:
This paper reconsiders the 1992-3 crisis in the European Monetary System in light of its emerging market successors. That episode was a predecessor of the Mexican and Asian crises in the sense that both capital movements and domestic financial fragility placed important roles. The output effects of this currency crisis resemble those of the typical emerging market crisis as much as they do the moderate effects of the typical industrial-country event of its kind to take place in an environment of fully free capital mobility. Leading indicator models' constructed using data from the Tequila and the Asian flu are shown to do a surprisingly good job at 'backcasting' which European countries suffered currency instability in 1992-3, although these models also point to what was distinctive about the European case.

Abstract:
This paper presents an empirical analysis of speculative attacks on pegged exchange rates in 22 countries between 1967 and 1992. We define speculative attacks or crises as large movements in exchange rates, interest rates, and international reserves. We develop stylized facts concerning the univariate behavior of a variety of macroeconomic variables, comparing crises with periods of tranquility. For ERM observations we cannot reject the null hypothesis that there are few significant differences in the behavior of key macroeconomic variables between crises and non-crisis periods. This null can be decisively rejected for non-ERM observations, however. Precisely the opposite pattern is evident in the behavior of actual realignments and changes in exchange rate regimes. We attempt to tie these findings to the theoretical literature on balance of payments crises.

Abstract:
We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason - limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations - firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions.

Abstract:
Collective action clauses raise borrowing costs for low-rated borrowers and lower them for high-rated borrowers. This result holds for all developing country bonds and also for the subset of sovereign bond issuers.

It is easy to say that the International Monetary Fund should not resort to financial rescue for countries in crisis; this is hard to do when there is no alternative. That is where collective action clauses come in. Collective action clauses are designed to facilitate debt restructuring by the principals - borrowers and lenders - with minimal intervention by international financial institutions. Despite much discussion of this option, there has been little action. Issuers of bonds fear that collective action clauses would raise borrowing costs.

Eichengreen and Mody update earlier findings about the impact of collective action clauses on borrowing costs. It has been argued that only in the past year or so have investors focused on the presence of these provisions and that, given the international financial institutions' newfound resolve to bail in investors, they now regard these clauses with trepidation.

Extending their data to 1999, Eichengreen and Mody find no evidence of such changes but rather the same pattern as before: Collective action clauses raise the costs of borrowing for low-rated issuers but reduce them for issuers with good credit ratings. Their results hold both for the full set of bonds and for bonds issued only by sovereigns.
They argue that these results should reassure those who regard collective action clauses as an important element in the campaign to strengthen international financial architecture.

This paper - a product of the Development Prospects Group - is part of a larger effort in the group to analyze international capital flows. The study was funded by the Bank's Research Support Budget under the research project Pricing of Bonds and Bank Loans in the Market for Developing Country Debt. The authors may be contacted at eichengr@econ.berkeley.edu or amody@worldbank.org.

Abstract:
We review and analyze the monetary and financial policies of the Clinton administration with a focus on the strong dollar policy, the Mexican rescue, the response to the Asian crisis, and the debate over reform of the international financial architecture. While we consider the role of ideas, interests and institutions in the formulation of policy, our emphasis here is on institutions, and specifically on how personnel and administrative arrangements allowed the Treasury department to exercise an unusually important influence in the development of these policies. This allowed a set of ideas imported by Treasury from academia and the markets to strongly influence the formulation of the international monetary and financial policies during the Clinton years.

Abstract:
In this paper we analyze the changing role of gold in the international monetary system, in particular the persistence of gold holdings by monetary authorities for 20 years following the breakdown of the Brettone Woods system system and the Second Amendment to the Articles of Agreement of the International Monetary Fund which severed the formal link to gold. We stress four points. First, the gold-exchange standard was a recent arrangement that emerged only around 1900 in response to a set of historically-specific factors which also help to account for it smooth operation. How long those factors would have continued to support it will never be known, due to a great war and then a great depression. Second, a system which relied on inelastically supplied precious metal and elastcially suppled foreign exchange to meet the the world economy's demand for reserves was intrinsically fragile, prone to confidence problems, and a transmission belt for policy mistakes. Third, network externalities, statutory restrictions and habit all contributed to the persistence of the practice of holding gold reserves. But the hold of even factors as powerful as these inevitably weakens with time and the effects of their erosion are reinforced by the rise of international capital mobility, which increases the ease of holding other forms of reserves, both unborrowed and borrowed, and by the shift to greater exchange-rate flexibility, which according to our results diminishes the demand for reserves in general. Fourth and finally, network externalities, in conjunction with central bankers' collective sense of responsibility for the stability of the price of what remains an important reserve asset, suggest that the same factors which have long held in place the practice of holding gold reserves, when they come unstuck, may become unstuck all at once.

Abstract:
Greater transparency in central bank operations is the most dramatic change in the conduct of monetary policy in recent years. In this paper we present new information on its extent and effects. We show that the trend is general: a large number of central banks have moved in the direction of greater transparency since the late 1990s. We then analyze the determinants and effects of central bank transparency in an integrated empirical framework. Transparency is greater in countries with more stable and developed political systems and deeper and more developed financial markets. Our preliminary analysis suggests broadly favorable if relatively weak impacts on inflation and output variability.

Abstract:
Much ink has been spilled over the connections between capital account liberalization and growth. One reason that previous studies have been inconclusive, we show, is their failure to account for the impact of crises on growth and for the capacity of controls to limit those disruptive output effects. Accounting for these influences, it appears that controls influence macroeconomic performance through two channels, directly (what we think of as their positive impact on resource allocation and efficiency) and indirectly (by limiting the disruptive effects of crises at home and abroad). Because these influences work in opposite directions, it is not surprising that previous studies, in failing to distinguish between them, have been unable to agree whether the effect of controls tilts one way or the other. And because vulnerability to crises varies across countries and with the structure and performance of the international financial system, it is not surprising that the effects of capital account liberalization on growth are contingent and context specific. We document these patterns using two entirely different data sets: A panel of historical data for 21 countries covering the period 1880-1997, and a wider panel for the post-1971 period like that employed in other recent studies.

Abstract:
In this Paper we reconsider the evidence on capital account liberalization and growth. While we find indications of a positive association, the effects vary with time, with how capital account liberalization is measured, and with how the relationship is estimated. The evidence that the effects of capital account liberalization are stronger in high-income countries is similarly fragile. There is some evidence that the positive growth effects of liberalization are stronger in countries with strong institutions, as measured by standard indicators of the rule of law, but only weak evidence that the benefits grow with a country's financial depth and development. We find more evidence of a correlation between capital account liberalization and growth when we allow the effect to vary with other dimensions of openness. There are two interpretations of this finding, one in terms of the sequencing of trade and financial liberalization, the other in terms of the need to eliminate major macroeconomic imbalances before opening the capital account. By and large our results support the second interpretation.

Capital

Abstract:
In this paper we reconsider the evidence on capital account liberalization and growth. While we find indications of a positive association, the effects vary with time, with how capital account liberalization is measured, and with how the relationship is estimated. The evidence that the effects of capital account liberalization are stronger in high-income countries is similarly fragile. There is some evidence that the positive growth effects of liberalization are stronger in countries with strong institutions, as measured by standard indicators of the rule of law, but only weak evidence that the benefits grow with a country's financial depth and development. We find more evidence of a correlation between capital account liberalization and growth when we allow the effect to vary with other dimensions of openness. There are two interpretations of this finding, one in terms of the sequencing of trade and financial liberalization, the other in terms of the need to eliminate major macroeconomic imbalances before opening the capital account. By and large our results support the second interpretation.

Abstract:
In this paper we analyse the current state, past performance, and future prospects of the Greek banking system. Greek banking is in a period of rapid transformation, reflecting the impact of national, European and international forces. Deregulation and European integration are already intensifying competition. The most revolutionary transformation will follow from the privatization of Greece's public banks. We focus on two challenges for policy makers: the need to strengthen prudential supervision, and the need to manage the process of restructuring so as to deliver a more efficient, competitive banking system.

Banking, European integration, Greece

Abstract:
No abstract is available for this paper.

Abstract:
The relationship between democracy and globalization has been a subject of both scholarly and policy debate. Some argue that the two go hand in hand that unrestricted international transactions encourage political accountability and transparency and that politically free societies are least likely to restrict the mobility of goods and services. But others argue that democracies, in which special interests that suffer from foreign competition have voice, are more likely to have closed markets, and vice versa. Our analysis differs from its predecessors in three ways. We seek to uncover general patterns by considering as long a period as possible and all countries with the relevant data. We consider multiple dimensions of globalization, analyzing both trade liberalization and capital account liberalization. And we estimate these relationships using an instrumental variables strategy that allows us to confront the issue of simultaneity. Our findings support the existence of positive relationships between democracy and globalization.

Abstract:
The connections between globalization and democracy are a classic question in international political economy and a topic much debated in foreign policy circles. While the analytical literature is extensive, few previous studies have acknowledged the possibility of bidirectional causality or developed an instrumental variables strategy suitable for addressing it. We do so in this paper and apply our approach to an extensive historical data set. The results suggest the existence of positive relationships running both ways between globalization and democracy, though exceptions obtain at particular times (during the Bretton Woods era) and places (in labor scarce economies).

Abstract:
U.S. balance-of-payments problems in the 1960s remain poorly understood. In this paper I argue that they had two aspects. On the one hand there was a problem of real overvaluation, evident in the erosion of the current account and reflecting the reluctance of the Fed, the Executive and Congress to subordinate domestic political and economic objectives to balance-of-payments goals. In addition there was the systemic aspect, that the main source of international liquidity for the expanding world economy was dollar balances. The role of the United States was to act as banker to the world, borrowing short and lending long. But just like a bank providing liquidity transformation services, the U.S. was vulnerable to a depositor run.' So long as foreign central banks, concerned to preserve the Bretton Woods System, stood ready to support the dollar, they provided the equivalent of deposit insurance. But unlike a classic lender of last resort, their willingness to do so was limited. When that limit was reached in 1971, the dollar -- and the Bretton Woods System -- came crashing down.

Abstract:
U.S. balance-of-payments problems in the 1960s remain poorly understood. In this paper I argue that they had two aspects. On the one hand there was a problem of real overvaluation, evident in the erosion of the current account and reflecting the reluctance of the Fed, the Executive and Congress to subordinate domestic political and economic objectives to balance-of-payments goals. In addition there was the systemic aspect, that the main source of international liquidity for the expanding world economy was dollar balances. The role of the United States was to act as banker to the world, borrowing short and lending long. But just like a bank providing liquidity transformation services, the U.S. was vulnerable to a 'depositor run.' So long as foreign central banks, concerned to preserve the Bretton Woods System, stood ready to support the dollar, they provided the equivalent of deposit insurance. But unlike a classic lender of last resort, their willingness to do so was limited. When that limit was reached in 1971, the dollar -- and the Bretton Woods System -- came crashing down.

Abstract:
How will free trade affect monetary policy and exchange rate regime choices in the Americas? While the European Union illustrates how the creation of an integrated market in goods and services can enhance monetary cooperation and integration, it is not clear that Europe's experience translates to Latin America, where the political circumstances are different. We try to understand whether the monetary consequences of existing regional trade agreements, including but not limited to the European Union, mainly reflect spillovers from trade integration, or whether observed outcomes have been mainly about politics. Our results incline us toward the latter interpretation, leaving us pessimistic about the basis for deeper monetary cooperation. If exchange rate volatility is to be tamed, then the more widespread adoption of inflation targeting, which we find to be associated with a significant reduction in bilateral exchange rate volatility, may be the most promising path.

Regional trade arrangements, exchange rates

Abstract:
How will free trade affect monetary policy and exchange rate regime choices in the Americas? While the European Union illustrates how the creation of an integrated market in goods and services can enhance monetary cooperation and integration, it is not clear that Europe's experience translates to Latin America, where the political circumstances are different. We try to understand whether the monetary consequences of existing regional trade agreements, including but not limited to the European Union, mainly reflect spillovers from trade integration, or whether observed outcomes have been mainly about politics. Our results incline us toward the latter interpretation, leaving us pessimistic about the basis for deeper monetary cooperation. If exchange rate volatility is to be tamed, then the more widespread adoption of inflation targeting, which we find to be associated with a significant reduction in bilateral exchange rate volatility, may be the most promising path.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We explore the parallels between Japanese currency policy after World War II and Chinese currency policy today. After two decades of pegging at 360 yen, Japan decoupled from the dollar on August 1971 and then repegged at a revalued rate of 308 yen. After stabilizing the exchange rate at this new level for about a year, greater flexibility was introduced. This phased adjustment - revaluation followed after a time by an increase in flexibility - bears more than a passing resemblance to recent Chinese policy initiatives.

We analyze the impact of Japan's exit from its peg on exports and investment. The results point to sizeable effects of the yen's revaluation on both variables, especially investment. While our analysis suggests that a rapidly-growing, export-oriented economy can operate a heavily managed float despite the presence of capital controls and the absence of sophisticated foreign currency forward markets, it underscores the importance of managing the exchange rate with domestic conditions in mind and avoiding the kind of large real appreciation that would sharply compress profits and damage investment.

For China this suggests starting with a modest band widening and a limited increase in flexibility, and not with a large step revaluation which could have a sharp negative impact on investment and growth. Our results thus provide support for the kind of measures taken at the end of July.

Abstract:
This paper studies the role of unemployment in sterling's interwar experience. According to most narrative accounts, the proximate cause of the 1931 sterling crisis was a high and rising unemployment rate that placed pressure on British governments to pursue reflationary policies. We present a model which, in the spirit of the second generation' approach to currency crises, highlights the conflict between the objective of low unemployment and defense of the currency and show that it can reproduce the main features of sterling's interwar experience. Econometric evidence lends further support to the view that the proximate cause of the sterling crisis was the dramatic rise in unemployment brought about by external deflationary forces.

Abstract:
The post-World War II reconstruction of Western Europe was one of the greatest economic policy and foreign policy successes of this century. "Fold wisdom" assigns a major role in successful reconstruction to the Marshall Plan: the program that transferred some $13 billion to Europe in the years 1948-51. We examine the economic effects of the Marshall Plan, and find that it was not large enough to have significantly accelerated recovery by financing investment, aiding the reconstruction of damaged infrastructure, or easing commodity bottlenecks. We argue, however, that the Marshall Plan did play a major role in setting the stage for post-World War II Western Europe's rapid growth. The conditions attached to Marshall Plan aid pushed European political economy in a direction that left its post World War II "mixed economies" with more "market" and less "controls" in the mix.

Abstract:
In this paper we show that the acceleration of inflation in the United States after 1965 reflected a shift in perceived responsibility for managing the country's international financial position. Prior to 1965 this responsibility was lodged primarily with the Fed, whose policies resembled those of a central bank playing by the gold standard rules of the game. Over time, however, this responsibility was increasingly assumed by the Treasury, while the Federal Reserve acquired increasing room for maneuver as a result of the adoption of the Interest Equalization Tax and other policies with effects analogous to capital controls. Once the external constraint shaped policy less powerfully, the Fed pursued other goals more aggressively, resulting in more inflationary pressure. We document these points with a quantitative and qualitative analysis of the minutes of the Federal Open Market Committee.

Abstract:
No abstract is available for this paper.

Abstract:
We examine the implications for borrowing costs of including collective-action clauses in loan contracts. For a sample of some 2,000 international bonds, we compare the spreads on bonds subject to UK governing law, which typically include collective-action clauses, with spreads on bonds subject to US law, which do not. Contrary to the assertions of some market participants, we find that collective-action clauses in fact reduce the cost of borrowing for more credit-worthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. In contrast, less credit-worthy issuers pay, if anything, higher spreads. We conjecture that for less credit-worthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions.

Abstract:
This paper considers the impact on trade of preferential arrangements in Europe since the 1950s. Using a first difference version of the gravity model, we find that the EC and EFTA altered the pattern of international trade. We also find evidence of trade diversion in several cases, notably that of the EC in the 1960s.

Abstract:
No abstract is available for this paper.

Abstract:
The last decade has seen an outpouring of scholarship on the economics of the Great Depression. If there is anything approaching a consensus, it is a synthetic view which admits a role both for monetary policy mistakes and for the international monetary and financial system in transmitting those destabilizing impulses to the rest of the world. It explains the speed and extent of the subsequent decline in terms of both banking crises and the collapse of the gold standard, which conspired in placing deflationary pressure to different degrees on different countries. And, it explains the eventual recovery in terms of the abandonment of the gold standard, which facilitated the pursuit of stabilizing monetary policies, but also in terms of the restoration of stability to banking and financial systems, something that occurred at different times in different countries. One way of understanding the veneer of disputation on this consensus is that different elements dominated in different countries. For the United States, there is no denying the role of monetary policy mistakes in the onset of the Depression, whereas for other countries international monetary instability played the most important part.

Abstract:
No abstract is available for this paper.

Abstract:
We consider the political economy of exchange rate choice and its implications for economic growth from an historical perspective. Previous studies have tended to find only a weak association between the choice of exchange rate regime on the one hand and growth and cohesion on the other. Our findings confirm this negative result, but then go on to explain it by showing that the implications of the exchange rate regime for growth and cohesion are context-specific. They show that the choice of entry rate is important and that when the global monetary regime operates as an engine of deflation it is inadvisable for countries to link up to it. We draw out the implications of these findings for the debate over Britain and the euro.

Abstract:
null

Abstract:
This paper investigates the theory and evidence that history plays a role in shaping the direction of international trade. Because there are reasons to anticipate a positive correlation between the predominant direction of trade flows in the past and membership in preferential arrangements in the present, there may be a tendency to spuriously attribute to preferential arrangements the effects of historical factors and to exaggerate the influence of the former. Thus, the standard gravity-model formulation, which neglects the role of historical factors, suffers from omitted-variables bias. We illustrate these points by analyzing the evolution of trade between 1949 and 1964. We find that historical factors exercise an important influence on trade even after controlling for the arguments of the standard gravity model.

Abstract:
The Great Depression was marked by protectionist trade policies and the breakdown of the multilateral trading system. But contrary to the presumption that all countries scrambled to raise trade barriers, there was substantial cross-country variation in the movement to protectionism. Specifically, countries that remained on the gold standard resorted to tariffs, import quotas, and exchange controls to a greater extent than countries that went off gold. Just as the gold standard constraint on monetary policy is critical to understanding macroeconomic developments in this period, national policies toward the exchange rate help explain changes in trade policy. This suggests that trade protection in the 1930s was less an instance of special interest politics run amok than second-best macroeconomic policy management when monetary and fiscal policies were constrained.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
The positive association between the service sector share of output and per capita income is one of the best-known regularities in all of growth and development economics. Yet there is less than complete agreement on the nature of that association. Here we identify two waves of service sector growth, a first wave in countries with relatively low levels of per capita GDP and a second wave in countries with higher per capita incomes. The first wave appears to be made up primarily of traditional services, the second wave of modern (financial, communication, computer, technical, legal, advertising and business) services that are receptive to the application of information technologies and increasingly tradable across borders. In addition, there is evidence of the second wave occurring at lower income levels after 1990. But this change in the second wave is not equally evident in all economies: it is most apparent in democracies, in countries that are open to trade, and in those that are relatively close to the major global financial centers. This points to both political and economic conditions that can help countries capitalize on the opportunities afforded by an increasingly globalized post-industrial economy.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
The paper offers some reflections on the convergence of productivity in the United States and Europe, which essentially stopped in the 1990s. It argues that the barriers preventing further convergence in the early 1990s were removed subsequently. But since then trends in productivity growth have been importantly affected by the advent of the New Economy, which poses further challenges for Europe. Without additional reform of European labor markets, financial markets, and university systems, we may be on the eve of another era of persistent divergence.

Abstract:
No abstract available.

Abstract:
In this paper we analyze the recent efforts of the international financial institutions to limit the moral hazard created by their assistance to crisis countries. We question the wisdom of the case-by-case approach taken in Pakistan, Ecuador, Romania and Ukraine. We show that because default and restructuring are so painful and costly, it is simply not time consistent for the IFIs to plan to stand aside if the markets refuse to roll over maturing claims, restructure problem debts, or provide new money. Because these realities create an incentive to disburse even if investors fail to comply, the IFIs are then placed in the position of having to back down on their previous conditionality, which undermines their credibility. And since investors are aware of these facts, their behavior is unlikely to be modified by the IFIs' less-than-credible statements of intent. Hence, this approach to bailing in the private sector' will not work. Fortunately, there is an alternative: introducing collective-action clauses into loan agreements. This, and not ad hoc efforts to bail in the private sector, is a forward-looking solution to the moral hazard problem.

Abstract:
The Maastricht Treaty on Europe Union features an Excessive Deficit Procedure limiting the freedom to borrow of governments participating in the European monetary union. One justification is to prevent states from over- borrowing and demanding a bailout which could divert the European Central Bank from its pursuit of price stability. We challenge this rationale. Using data for a cross section of federal states, we find no association between monetary union and restraints on borrowing by subcentral governments. There is,however, an association between fiscal restraints and the share of the tax base under the control of sub-national authorities. Restraints are prevalent where subcentral governments finance a relatively small share of spending with their own taxes. Lacking control of the tax base, such governments cannot be expected to resort to increased taxation to deal with debt crises. Prohibiting borrowing by subcentral governments will not eliminate the demand for tax smoothing and public investment. Governments whose ability to provide such services is limited may therefore pressure the central government to borrow for them. We report evidence that the financial position of central governments is more fragile where subcentral jurisdictions are prevented from borrowing. The implications for the EU are direct. That EU member states control their own taxes should strengthen the hand of authorities seeking to resist pressure for a bailout. But in the longer run, borrowing restraints may weaken the financial position of Brussels, transferring bailout risk from the member states to the EU itself.

Abstract:
The twenty years that have passed since the collapse of the Bretton Woods System provide sufficient distance to safely assess the operation of the post-World War II international monetary system. This paper considers the history and historiography of Bretton Woods from three perspectives. First, I ask how the questions posed today about the operation of Bretton Woods differ from those asked twenty years ago. Second, I explore how today's answers to familiar questions differ from the answers offered in the past. Third, I examine the implications of Bretton Woods experience for international monetary reform.

Abstract:
No abstract is available for this paper.

Abstract:
This paper analyzes U.S. monetary-financial policy in the period leading up to the Treasury-Fed Accord. We model policy as an implicit target zone for the price level and an explicit zone for interest rates, and the difficulties on the eve of the Accord as an incipient run on a collapsing target-zone regime. The regime was implemented to maintain the stability of the financial system in a period when there was a serious maturity mismatch between the assets and liabilities of the banking system.

Abstract:
In this paper we speculate about the evolution of the international monetary system in the last 2/3 of the 20th century absent the Great Depression but present the major post-Depression political and economic upheavals: WWII and II and the Cold War. We argue that without the Depression the gold-exchange standard of the 1920s would have persisted until the outbreak of WWI. It would have been suspended during the war and for a period of postwar reconstruction before being restored in the first half of the 1950s. The Bretton Woods Conference would not have taken place, and instead of a Bretton Woods System of pegged-but-adjustable exchange rates and restrictions on capital-account convertibility, an unreformed gold-exchange standard of pegged exchange rates and unlimited international capital mobility would have been restored. But this gold-exchange standard would have collapsed even earlier than actually was the case with Bretton Woods. The move toward floating exchange rates that followed would have taken place well before 1971 in our conterfactual We construct a model of the international monetary system from 1928-1971 and simulate its implications for the determination of the world price level and the durability of the hypothetical gold-exchange standard. We then examine, based on regressions for a 61-country panel, the implications for economic growth and resource allocation of allowing 1920s-style international capital mobility after World War II. Based on the implications of our model simula- tions and the capital controls regression we contemplate the implications for institution building and international cooperation of the `no Great Depression' scenario.

Abstract:
In this paper we speculate about the evolution of the international monetary system in the last two-thirds of the twentieth century absent the Great Depression, but present the major post-Depression political and economic upheavals: World War II and the Cold War.

Abstract:
No abstract is available for this paper.

Abstract:
We present new evidence on the currency composition of foreign exchange reserves in the 1920s and 1930s. Contrary to the presumption that the pound sterling continued to dominate the U.S. dollar in central bank reserves until after World War II, we show that the dollar first overtook sterling in the mid-1920s. This suggests that the network effects thought to lend inertia to international currency status and to create incumbency advantages for the dominant international currency do not apply in the reserve currency domain. Our new evidence is similarly incompatible with the notion that there is only room in the market for one dominant reserve currency at a point in time. Our findings have important implications for our understanding of interwar monetary history but also for the prospects of the dollar and the euro as reserve currencies.

Abstract:
This paper reports evidence on the characteristics of fixed and flexible exchange rate regimes. It contrasts experience under three interwar exchange rate regimes: the free float of the early 1920s, the fixed rates of 1927-31, and the managed float of the early 1930s. A number of important differences across nominal exchange rate regimes emerge. Major findings include: (1) The variability of nominal exchange rates was positively associated with the freedom of the float. Nominal rates were considerably more variable under free than managed floating. (2) The reduction in nominal exchange rate variability achieved with the move from free to managed floating was not accompanied by a commensurate fall in exchange rate uncertainty. Yhile government policy succeeded in damping spot rate fluctuations, it seems to have been subject to periodic shifts that heightened risk. (3) There was a strong association between nominal exchange rate predictability and real exchange rate predictability in both the free float of 1922-26 and the managed float of 1932-36. Together with (2), this implies that intervention of stabilize nominal rates did not guarantee a commensurate reduction in real exchange rate uncertainty. (4) There was no direct correspondence between the degree of exchange rate stability and the volume of international capital flows. Real interest differentials were larger under the managed float of the 1930s than under the free float of the 1920s. (5) Capital controls provide a major part of the explanation for differences across regimes in the magnitude of real interest differentials. Controls were considerably more prevalent under managed floating than under either free floating or fixed rates. Thus, interwar experience provides a counterexample to the popular notion that capital controls tend to be associated with fixed rate regimes.

Abstract:
This article considers the evolution of Europe's monetary union over the next five to ten years, concentrating on the most important likely change, namely the increased number and heterogeneity of participating states.

Abstract:
Over the past century, the world economy has passed through succession of phases characterized by very different levels of international capital flows. This paper asks what accounts for these dramatic shifts in the extent of capital movements across national borders. Three categories of explanation are considered. The first emphasizes the policy regime, attributing the unusual extent of capital flows prior to 1914 to the operation of the international gold standard. The second focuses on the stages-of-indebtedness sometimes thought to characterize the process of economic development. The third ascribes changes in the extent of capital flows to the boom-and-bust cycles through which international capital markets are thought to pass. Though each approach contributes something to our understanding of the phenomenon, none is totally satisfactory. I therefore suggest an alternative explanation, which lays stress on the increase in the magnitude of real interest rate and real exchange rate variability that has occurred over the last 100 years.

Abstract:
This paper examines the controversy surrounding recent allegations that foreign producers are dumping steel products onto U.S. markets. The paper is in four sections, which take four quite distinct views of dumping and recent U.S. antidumping policies, emphasizing the changing definition of dumping and the development of administrative procedures. Section II focuses on the application of these procedures to the international steel trade, taking as a case study the most noteworthy of recent innovations : the Trigger Price Mechanism for steel. Section III considers models that can be used to analyze dumping. The models of most relevance to the practices currently at issue in the steel industry seem to us models of oligopolistic rivalry in imperfectly competitive, segmented markets. We develop a model designed to identify crucial factors upon which the incidence of dumping will depend: the number of firms producing for each national market,their costs, their market shares, and the extent to which they recognizeand exploit their mutual dependence. Finally, in Section IV we calibrate these models to illustrate how the extent of dumping and the effects of the TPM depend on the model`s parameters.

Abstract:
We analyze banking crises using a panel of macroeconomic and financial data for more than one hundred developing countries from 1975 through 1992. We find that banking crises in emerging markets are strongly associated with adverse external conditions. In particular Northern interest rates are strongly associated with the onset of banking crises in developing countries, even after taking into account a host of internal macroeconomic factors. A one percent increase in Northern interest rates is associated with an increase in the probability of Southern banking crises of around three percent. Our results also seem insensitive to the effects of differing exchange rate regimes, external debt burdens and domestic financial structures.

Abstract:
We ask whether Poland is at risk of the boom-bust problem that has afflicted economies around the time of euro adoption. Our answer, inevitably, is mixed. On the one hand the fact that Poland is an outlier, credit-growth wise, accentuates the danger of a boom if one believes in mean reversion. Our econometrics indicate that the fall in interest rates that will flow from expectations of euro adoption will further feed that boom. On the other hand the fact that interest rates have already converged part way to euro-area levels (and more extensively than in earlier adopters that experienced a sharp fall in rates and a pronounced credit boom), especially in the case of lending to firms, suggests that this shock may be less intense in Poland. And it is certainly conceivable that the same policies and country characteristics (not always visible to the econometrician) that have restrained credit growth in the past may continue to do so in the future. The broader literature also points to two set of factors, the first of which makes the danger of an unsustainable credit boom more immediate, the second of which makes it more remote. In the first category are the continuing limitations of the supervisory framework and the weakness of the finance minister in the budget-making process. In the second are a record of rigorous prudential supervision and the existence of relatively competitive labor markets.

euro, Poland

Abstract:
We ask whether Poland is at risk of the boom-bust problem that has afflicted economies around the time of euro adoption. Our answer, inevitably, is mixed. On the one hand the fact that Poland is an outlier, credit-growth wise, accentuates the danger of a boom if one believes in mean reversion. Our econometrics indicate that the fall in interest rates that will flow from expectations of euro adoption will further feed that boom. On the other hand the fact that interest rates have already converged part way to euro-area levels (and more extensively than in earlier adopters that experienced a sharp fall in rates and a pronounced credit boom), especially in the case of lending to firms, suggests that this shock may be less intense in Poland. And it is certainly conceivable that the same policies and country characteristics (not always visible to the econometrician) that have restrained credit growth in the past may continue to do so in the future. The broader literature also points to two set of factors, the first of which makes the danger of an unsustainable credit boom more immediate, the second of which makes it more remote. In the first category are the continuing limitations of the supervisory framework and the weakness of the finance minister in the budget-making process. In the second are a record of rigorous prudential supervision and the existence of relatively competitive labor markets.

Abstract:
This paper reaueses the history of the international monetary system between the wars. It confirms the generality of several widely held interpretationsl of recent experience with floating exchange rates. There is a positive association between nominal exchange rate variability and real exchange rate variability. But policies of intervention which reduce nominal ezchange rate variability do not guarantee a proportionate reduction in nominal exchange rate risk or in real exchange rate variability and unpredictability. A credible commitment to a stable intervention rule is needed to deliver these benefits. The paper then goes on to consider four potential explanations for the collapse of the fixed rate regime that prevailed from 1926 through 1931: (1) failure to play by the "rules of the game", (2) inadequate international economic leadership by the United States, (3) inadequate cooperation among the leading gold standard countries, and (4) structural features of a system in which reserves were comprised of both gold and foreign ezchange. It coocludes by aseessing the role of the internationall monetary system in the Great Depression.

Abstract:
We compare launch spreads on emerging-market bonds subject to UK governing law, which typically include collective action clauses, with spreads on bonds subject to US law, which do not. Collective-action clauses reduce the cost of borrowing for more creditworthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. Less creditworthy issuers, in contrast, pay higher spreads. It appears that for less creditworthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions. We draw out the implications for the debate over whether to encourage the wider utilization of these provisions as part of the effort to strengthen the international financial architecture.

Abstract:
No abstract is available for this paper.

Abstract:
This paper provides an historical perspective on the recent behavior of the U.S. trade deficit. Judged by U.S. historical experience, the trade deficit has reached what is now unprecedented levels. That unprecedented deficit has its principal source not in changes in market structure affecting the speed with which quantities respond to prices but in the policy environment, namely the monetary-fiscal policy mix. While other industrial countries have run comparable merchandise trade deficits at various points in the past, these countries either financed their deficits out of interest earnings on prior foreign investments or through the large-scale export of services, or used the debt they incurred to finance investment in infra- structure and to expand their capacity to export. Neither of these scenarios has a counterpart in current U.S. experience. How easily can the trade deficit be eliminated if historical experience is a guide? Typically, the rapid reduction of deficits has been achieved through the reduction of imports; this typically entails restraints on aggregate demand from which recession results. Trade deficits have been reduced most quickly and at lowest cost when at least one of two conditions prevails: a favorable shock to the terms of trade or a reallocation of resources toward investment in export-oriented sectors. The first of these conditions is largely beyond the authorities` control, while the second must be initiated well in advance. Barring a fortuitous terms-of-trade shock, this does not give cause for optimism that the conditions are present for rapidly eliminating the U.S. trade deficit at low cost.

Abstract:
This paper studies the effect of foreign aid on economic stabilization. Following Alesina and Drazen (1991), we model the delay in stabilizing as the result of a distributional struggle: reforms are postponed because they are costly and each distributional faction hopes to reduce its share of the cost by outlasting its opponents in obstructing the required policies. Since the delay is used to signal each faction's strength, the effect of the transfer depends on the role it plays in the release of information. We show that this role depends on the timing of the transfer: foreign aid decided and transferred sufficiently early into the game leads to earlier stabilization; but aid decided or transferred too late is destabilizing and encourages further postponement of reforms.

Abstract:
While many political scientists and diplomatic historians see the Bush presidency as a distinctive epoch in American foreign policy, we argue that there was no Bush Doctrine in foreign economic policy. The Bush administration sought to advance a free trade agenda but could not avoid the use of protectionist measures at home - just like its predecessors. It foreswore bailouts of financially-distressed developing countries yet ultimately yielded to the perceived necessity of lending assistance - just like its predecessors. Not unlike previous presidents, President Bush also maintained a stance of benign neglect toward the country's current account deficit. These continuities reflect long-standing structures and deeply embedded interests that the administration found impossible to resist. We see the next administration as having to address many of the same problems subject to the same constraints. The trade policy agenda will evolve slowly, with questions about the viability of multilateral liberalization under the WTO and the degree to which labor and environmental conditions can be included in trade agreements. Policy toward China will continue to confront difficult choices: even if it succeeds in pressuring the country to reduce its accumulation of dollar reserves, thereby easing the current account imbalance with the United States, this may only imply a more difficult market for U.S. Treasury debt and higher interest rates at home. Continuity will therefore remain the rule.