Joshua Aizenman

Volatility and Investment: Interpreting Evidence from Developing Countries

The authors uncover a significant negative correlation between various volatility measures and private investment in developing countries, even when adding the standard control variables. No such correlation is uncovered when the investment measure is the sum of private and public investment spending. Indeed, public investment spending is positively correlated with some measures of volatility. These findings suggest that the detrimental impact of volatility on investment may be easier to detect using disaggregated data. The authors provide several possible interpretations for their findings. Nonlinearities in preferences or budget constraints can cause volatility to have first-order negative effects on private investment. Copyright 1999 by The London School of Economics and Political Science

International Reserve Holdings with Sovereign Risk and Costly Tax Collection

We derive a precautionary demand for international reserves in the presence of sovereign risk and show that political-economy considerations modify the optimal level of reserve holdings. A greater chance of opportunistic behavior by future policy makers and political corruption reduce the demand for international reserves and increase external borrowing. We provide evidence to support these findings. Consequently, the debt-to-reserves ratio may be less useful as a vulnerability indicator. A version of the Lucas Critique suggests that if a high debt-to-reserves ratio is a symptom of opportunistic behavior, a policy recommendation to increase international reserve holdings may be welfare-reducing.

Financial Versus Monetary Mercantilism; Long-Run View of Large International Reserves Hoarding

The sizable hoarding of international reserves by several East Asian countries has been frequently attributed to a modern version of monetary mercantilism -- hoarding international reserves in order to improve competitiveness. From a long-run perspective, manufacturing exporters in East Asia adopted financial mercantilism -- subsidizing the cost of capital -- during decades of high growth. They switched to hoarding large international reserves when growth faltered, making it harder to disentangle the monetary mercantilism from precautionary response to the heritage of past financial mercantilism. Monetary mercantilism also lowers the cost of hoarding, but may be associated with negative externalities leading to competitive hoarding.

FDI and trade—Two-way linkages?

Abstract We investigate the intertemporal linkages between foreign direct investment and disaggregated measures of international trade. We outline a model exemplifying these linkages, describe methods for investigating two-way feedbacks between various categories of trade, and apply them to recent data. We find that the strongest feedback between the sub-accounts is between FDI and manufacturing trade. For the first time, we decompose causality using Gewekes [Geweke, J. (1982). Measurement of linear dependence and feedback between multiple time series. Journal of the American Statistical Association 77 (378), 304–313] decomposition method. We find that most of the linear feedback between trade and FDI can be accounted for by Granger-causality from FDI gross flows to trade openness (50%) and from trade to FDI (31%).

Military expenditure, threats, and growth

This paper clarifies one of the puzzling results of the economic growth literature: the impact of military expenditure is frequently found to be non-significant or negative, yet most countries spend a large fraction of their GDP on defense and the military. We start by empirical evaluation of the non-linear interactions between military expenditure, external threats, corruption, and other relevant controls. While growth falls with higher levels of military spending, given the values of the other independent variables, we show that military expenditure in the presence of threats increases growth. We explain the presence of these non-linearities in an extended version of Barro and Sala-i-Martin (1995), allowing the dependence of growth on the severity of external threats, and on the effective military expenditure associated with these threats.

Contagion and Volatility with Imperfect Credit Markets

This paper interprets contagion effects as an increase in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from working capital needs) borrow at a premium from domestic banks. Higher volatility of producers’ productivity shocks increases both domestic and foreign financial spreads and the producers’ cost of capital, resulting in lower employment and higher incidence of default. Welfare effects are nonlinearly related to the degree of international financial integration.

International Reserves Management and Capital Mobility in a Volatile World: Policy Considerations and a Case Study of Korea

This paper characterizes the precautionary demand for international reserves driven by the attempt to reduce the incidence of costly output decline induced by sudden reversal of short-term capital flows. It validates the main predictions of the precautionary approach by investigating changes in the patterns of international reserves in Korea in the aftermath of the 1997-8 crisis. This crisis provides an interesting case study, especially because of the rapid rise in Korea’s financial integration in the aftermath of the East- Asian crisis, where foreigners’ shareholding has increased to 40% of total Korean market capitalization. We show that the crisis led to structural change in the hoarding of international reserves, and that the Korean monetary authority gives much greater attention to a broader notion of ‘hot money,’ inclusive of short-term debt and foreigners’ shareholding.

Macroeconomic uncertainty and private investment

Abstract This paper provides empirical support for a link between macroeconomic uncertainty and private investment in developing countries. Cross-section regressions with constructed measures of uncertainty confirm that for developing countries uncertainty is negatively correlated with private investment.

Macroeconomic Adjustment with Segmented Labor Markets

This paper analyzes the macroeconomic effects of fiscal and labor market policies in developing countries. The basic framework considers a small open economy with a large informal production sector and a heterogeneous work force. The labor market is segmented as a result of efficiency considerations and minimum wage laws. The basic model is then extended to account for unemployment benefits, income taxation, and imperfect labor mobility across sectors. The analysis indicates, among other results, that a reduction in unemployement benefits has a positive effect on output of tradable goods by lowering both the level of efficiency wages and the relative rent captured by skilled workers.

Managing economic volatility and crises : a practitioner's guide

Contributors Acknowledgements Foreword Overview Joshua Aizenman and Brian Pinto Part I. What Is Volatility and Why Does It Matter?: 1. Volatility: definitions and consequences Holger Wolf 2. Volatility and growth Viktoria Hnatkovska and Norman Loayza 3. Volatility, income distribution, and poverty Thomas Laursen and Sandeep Mahajan Part II. Commodity Prices and Volatility: 4. Agricultural commodity price volatility Jan Dehn, Christopher Gilbert, and Panos Varangis 5. Managing oil booms and busts in developing countries Julia Devlin and Michael Lewin Part III. Finance and Volatility: 6. Finance and volatility Stijn Claessens 7. Evaluating pricing signals from the bond markets John J. Merrick, Jr Part IV. Managing Crises: 8. Managing macroeconomic crises: policy lessons Jeffrey Frankel and Shang-Jin Wei 9. Lessons from the Russian crisis of 1998 and recovery Brian Pinto, Evsey Gurvich, and Sergei Ulatov 10. Argentinas macroeconomic collapse: causes and lessons Luis Serven and Guillermo Perry 11. Default episodes in the 1980s and 1990s: what have we learned? Punam Chuhan and Federico Sturzenegger Technical appendix Viktoria Hnatkovska Index.