We analyse the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default beliefs a monetary policy, which aims to stabilize inflation through an active interest rate policy, will destabilize the economy if the feedback from debt surprises back to the primary surplus is too weak. This result, which relies on endogenous...

We develop a two-country, dynamic general equilibrium model that links cross-country differences in net foreign asset and consumption dynamics to differences in discount factors and steady-state levels of productivity. We compare the results of the model to those of VARs for the G3 economies. We identify country-specific productivity shocks by assuming that productivity does not respond contemp...

This paper provides compelling evidence that equity market liberalization, as the most efficient way to smooth financial market frictions such as credit constraints, can alleviate persistent cross-dynastic income inequality by promoting increased human capital accumulation. The authors examine the effect of equity market liberalization on inequality by using data from 72 countries for 1980–2006...

This paper models flows of foreign direct investment (FDI) in a two country, two sector DSGE framework. The allocation of capital to production capacity abroad is subject to a search-and-matching friction with endogenous capital reallocation. The model is calibrated on observed inflows and outflows of FDI and leads to dynamics of foreign direct investment consistent with the empirical evidence ...

This paper studies non-cooperative monetary policy in a two country general equilibrium model where international economic integration is endogenised through firm-level heterogeneity and monopolistic competition. Economic integration between countries is a source of policy competition, generating higher long-run inflation, and increased gains from monetary cooperation. JEL codes: E31, E52, F41 ...

What is the role of common shocks in driving the business cycles of small open economies? We investigate this question in a structural small open economy model featuring a realistic debt adjustment cost and common shocks. We estimate the model using data for 17 small developed and developing countries between 1900 and 2006. The estimated model attributes nearly 50% of the output ‡uctuations ove...

The remarkable stability of low domestic inflation in many countries requires explanation. In this paper, a number of competing hypotheses are evaluated on a stand-alone basis, and all are found to be inadequate. This includes the view that this outcome has been solely the result of more effective disinflationary monetary policies. However, a combination of these hypotheses (including a signifi...

We revisit the debate on the benefits of financial integration by providing a unified framework able to account for gains from capital accumulation and risk sharing. We consider a two-country neoclassical growth model with aggregate uncertainty. We allow for country asymmetries in terms of volatility, capital scarcity and size. In our general equilibrium model, financial integration has an effe...

One of the most striking aspects of the recent recession is the collapse in international trade. This paper uses disaggregated data on U.S. imports and exports to shed light on the anatomy of this collapse. We find that the recent reduction in trade relative to overall economic activity is far larger than in previous downturns. Information on quantities and prices of both domestic absorption an...

Recent international macroeconomics literature on sudden stops faces a puzzling ambiguity. Using essentially the same basic small, open economy model with collateral constraints, some studies successfully predict the empirically observed link between sudden stops and output drops, while others get the opposite result where sudden stops lead to increases in output. In this paper we resolve this ...