Craig Burnside

Prospective deficits and the asian currency crisis

This paper argues that a principal cause of the 1997 Asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems. The expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in Asia. We articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises. We present empirical evidence in support of the key assumptions underlying our interpretation of the crisis.

Production function regressions, returns to scale, and externalities

A number of recent papers have used simple linear regressions in an attempt to identify market structure, the extent of returns to scale, and possible external effects in U.S. manufacturing industries. The results obtained from these regressions have important implications for several branches of modern macroeconomics. As a result, the macro literature frequently cites specific numerical evidence from Caballero and Lyons (1992) and Hall (1990), which suggests that there are quantitatively significant increasing returns to scale, or external effects in U.S. manufacturing. In contrast, it is the argument of this paper that this evidence is not convincing. The most robust evidence suggests that the typical U.S. manufacturing industry displays constant returns with no external effects. On the other hand, there is significant heterogeneity across industries.

Aid, Policies, and Growth: Reply

In Burnside and Dollar (2000) we used standard regression techniques from the growth literature to measure the effect of foreign aid on growth. The main finding in our paper was that the effect of foreign aid on growth depended on the macroeconomic policies of recipient countries. In this issue, William Easterly et al. (2004), challenge the robustness of our result to new data. Before commenting on their findings it is useful to review the basis of our original findings. Our paper focused on three versions of a panel growth regression, estimated using data for 51 countries, and six four-year periods, from 1970 to 1993. These regressions may be summarized as:

Detrending and business cycle facts: A comment

Abstract There is nothing misleading in the fact that different filtering techniques lead to different facts about macroeconomic time series. The fact that economists use a large number of filters to extract the ‘cyclical’ and ‘trend’ components of time series simply means that these concepts do not have unique meaning among them. Alternative filters provide different windows through which economists can examine their models and data. It is an open question as to whether some of these windows are more or less interesting to look through. The fact that some economists restrict themselves to a small set of filters is an issue to the extent that they thereby induce a lack of power. Here, I argue that a commonly used method of testing business cycle models induces no such lack of power.

Solving asset pricing models with Gaussian shocks

This paper provides a closed-form solution for the price-dividend ratio in a standard asset pricing model when the growth rate of the endowment is a first-order Gaussian autoregression. It determines the conditions under which this solution is bounded. The findings are useful in allowing comparisons among numerical methods used to approximate the nontrivial closed-form. The solution method is extended to accommodate multivariate and higher-ordered autoregressive processes.

Hansen–Jagannathan Bounds as Classical Tests of Asset-Pricing Models

In this article, tests of the implications of consumption-based asset-pricing models are developed. Four of these tests are based on variance bounds for intertemporal marginal rates of substitution introduced by L. P. Hansen and R. Jagannathan. The tests provide one means of quantifying the effects of sampling error when the bounds are used as a diagnostic device. The tests are used to construct confidence regions for the parameters of an asset-pricing model using U.S. data. Monte Carlo simulation is used to determine the small-sample properties of the tests.

Small-sample properties of GMM-based wald tests

This article assesses the small-sample properties of generalized-method-of-moments-based Wald statistics by using (a) a vector white-noise process and (b) an equilibrium business-cycle model as the data-generating mechanisms. In many cases, the small-sample size of the Wald tests exceeds its asymptotic size and increases sharply with the number of hypotheses being jointly tested. We argue that this is mostly due to difficulty in estimating the spectral-density matrix of the residuals. Estimators of this matrix that impose restrictions implied by the model or the null hypothesis substantially improve the properties of the Wald statistics.

Carry trade: the gains of diversification

Market participants routinely take advantage of the failure of uncovered interest rate parity to speculate in currency markets. Perhaps the most widely used currency speculation strategy is the carry trade. In this article we take the perspective of an individual currency trader and document the gains to diversifying the carry trade across different currencies. We show that these gains are large. Diversification boosts the typical Sharpe ratio by over 50%.

What Caused the Recent Asian Currency Crises

This paper argues that the recent Asian currency crisis was caused by prospective future deficits associated with implicit bank bailouts.

New Zealand's risk premium

Interest rates in New Zealand are generally higher than in other industrialized economies. Do these higher interest rates imply lower investment and slow growth? I find that high interest rates in New Zealand, through much of the inflation targeting period, appear to have represented compensation for the risk of rare and extreme events, during which the New Zealand dollar was expected to depreciate. Similar factors appear to explain Australias risk premium, yet Australia has had a higher level of investment and stronger growth. Therefore, I attribute the differing economic performance of the two countries to other structural differences.