Alan Sutherland

Fiscal crises and aggregate demand: can high public debt reverse the effects of fiscal policy?

This paper shows how the power of fiscal policy to affect consumption can vary depending on the level of public debt. At moderate levels of debt fiscal policy has the traditional Keynesian effects. Current generations of consumers discount future taxes because they may not be alive when taxes are raised (or there will be a larger population available to pay the taxes). But when debt reaches extreme values, current generations of consumers know there is a high probability that they will have to pay extra taxes. An increase in the fiscal deficit has a contractionary effect in these situations.

Financial Market Integration and Macroeconomic Volatility

The process of financial market integration is modeled in an intertemporal general equilibrium framework as the elimination of trading frictions between financial markets in different countries. Goods markets are assumed to be imperfectly competitive and goods prices are subject to sluggish adjustment. Simulation experiments show that increasing financial market integration increases the volatility of a number of variables when shocks originate from the money market but decreases the volatility of most variables when shocks originate from real demand or supply. Copyright 1996 by The editors of the Scandinavian Journal of Economics.

Policy Measures to Avoid a Currency Crisis

This paper considers a number of policy measures that may be used to preserve a fixed exchange rate. These are analyzed in a model where a switch of exchange-rate regime is triggered by an optimizing policymaker in response to extreme economic conditions. It is shown how a number of policy measures can be used to alter the balance between the costs and benefits of switching between regimes. These policy measures have both a direct effect on the policymakers choice of regime switching point and an indirect effect through private-sector expectations of a regime switch. Copyright 1995 by Royal Economic Society.

Solving for Country Portfolios in Open Economy Macro Models

This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. the method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.

Country Portfolio Dynamics

This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. the method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.

Monetary union and labor market reform

Abstract Policy makers’ incentives to undertake costly labor market reform depend on the international monetary system. A regime of noncooperative monetary policy is compared with monetary union. We find that noncooperative policy leads to more reform of factors that affect the inflation bias. Which regime leads to more reform of factors affecting labor market flexibility depends on the size of monetary policy spillovers and the degree of correlation of supply shocks. We show that monetary union produces higher expected inflation, but a lower variance of inflation. Welfare can be higher or lower with monetary union.

A Portfolio Model of Capital Flows to Emerging Markets

Since the crises of the late 1990s, most emerging market economies have built up substantial positive holdings of US dollar treasury bills, while at the same time experiencing a boom in FDI capital inflows. This paper develops a DSGE model of the interaction between an emerging market economy and an advanced economy which incorporates two-way capital flows between the economies. The novel aspect of the paper is to make use of new methods for analyzing portfolio choice in DSGE models. We compare a range of alternative financial market structures, in each case computing equilibrium portfolios. We find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital (FDI) can achieve a considerable degree of international risk-sharing. This risk-sharing can be enhanced by a more stable monetary policy in the advanced economy.

A currency crisis model with an optimising policymaker

Abstract A model is presented in which the abandonment of a fixed exchange rate regime is triggered by an optimising policymaker who wants to loosen monetary policy and boost aggregate demand. Agents in the foreign exchange market know the policymakers objective function and build expectations of a regime switch into interest differentials. The resulting rise in interest rates affects the policymakers decision to switch regime. It is shown that a rational expectations equilibrium exists where the fixed rate is abandoned in response to adverse demand shocks. In some circumstances multiple equilibria arise which may lead to self-fulfilling crises.

Cost-push shocks and monetary policy in open economies

This paper analyses the implications of cost-push shocks for the optimal choice of monetary policy target in a two-country sticky-price model. In addition to cost-push shocks, each country is subject to labour-supply and money-demand shocks. It is shown that the fully optimal coordinated policy can be supported by independent national monetary authorities following a policy of flexible inflation targeting. A number of simple (but non-optimal) targeting rules are compared. Strict producer-price targeting is found to be the best simple rule when the variance of cost-push shocks is small. Strict consumer-price targeting is best for intermediate levels of the variance of cost-push shocks. And nominal-income targeting is best when the variance of cost-push shocks is high. In general, money-supply targeting and fixed nominal exchange rates are found to yield less welfare than these other regimes. Copyright 2005, Oxford University Press.

Target Zone Models with Price Inertia: Solutions and Testable Implications

Many recent papers suggest that the basic flex-price target zone model does not perform well empirically. This paper investigates the testable implications of a sticky-price target zone model and finds that, to a limited extent, it has a better empirical performance than the simplest flex-price model. However, in terms of nominal variables, the sticky-price model is found to be observationally equivalent to the flex-price model when the latter is extended to include intramarginal intervention and realignments. Copyright 1994 by Royal Economic Society.