Leonardo Auernheimer

International Debt and the Price of Domestic Assets

This paper examines the behavior of indebtedness, consumption, and asset prices in a small open economy in which the foreign real interest rate depends not only on an exogenous world interest rate and on indebtedness, but also on the value of the capital stock, viewed as an implicit “collateral,” and hence on the price of capital. The paper finds that the collateral effect magnifies the intensity of shocks to the economy and the duration of their impact. The collateral effect also generates additional distortions that could lead to overborrowing. The paper discusses the policy responses to these distortions.

On the outcome of inconsistent programs under exchange rate and monetary rules: Allowing the market to compensate for government mistakes

Abstract This paper studies the case of ‘inconsistent’ programs of monetary policy — that is, programs incompatible in the long run with a given budget deficit, so that at some point in the future there is an eventual crisis and demise of the program, all of which is from the outset anticipated by the public. The context is one of a small open economy, with perfect foresight, in which two sets of possibilities are analyzed: (i) a ‘monetary’ or an ‘exchange rule’ for the conduct of monetary policy and (ii) presence or absence of capital mobility. It is found that while the choice of the rule is ‘unimportant’, restrictions on capital mobility determine a very different response, for the case of either rule, concerning side effects of the program on non-monetary variables and on the post-crisis level of country indebtedness.

Endogenous capital utilization in a neoclassical growth model

This paper introduces a variable rate of capital utilization and depreciation into a modified Ramsey-type neoclassical growth model via the well-known concept of pure user cost. The optimal utilization rate is found to be determined by the opportunity cost of holding capital or the net real interest rate. As a consequence, this rate may vary in the short run, so total services of capital become a control rather than a state variable. Furthermore, the introduction of a variable utilization rate yields a slower rate of convergence toward the steady state, inducing more persistence in the transitional dynamics. To illustrate how the endogenous choice of utilization acts on the system, some simulations are carried out, including the transition period when there is a temporary fall in the exogenous real interest rate.

Adaptive-regressive expectations and the price level: A reformulation

Abstract In a recent paper, Frenkel (1975) presents an adaptive-regressive scheme of expectations as applied to the inflation rate. While the rationale for the scheme is the presence of expectations concerning the price level, Frenkels construction does not specify such an expected price level, but only a short-run (instantaneous) and a long-run expected inflation rate. It is shown here that, even though such a specification yields reasonable results for certain important kind of policy changes, it is not robust enough so as to yield equally reasonable outcomes for other type of changes. This paper presents a specification of the expected price level (and, consequently, of all future expected inflation rates) which is not subject to those shortcomings and which seems to reflect in a better manner the basic economic idea behind the scheme.

Bad Dreams Under Alternative Anchors: Are the Consequences Different?

Using a simple model, this paper shows how a strict monetary rule exhibits characteristics similar to those of an exchange rate anchor, in terms of a lack of robustness in the presence of adverse expectations (bad dreams). More specifically, as an anticipated devaluation under an exchange rate rule leads to well-known contractionary effects, an anticipated increase in the money stock under a monetary rule, though initially expansionary, becomes contractionary when these expectations are not validated. This suggests that much of the criticism of an exchange rate anchor implicitly considers not another rule but rather, discretion as the alternative.

Stabilization under capital controls

Abstract This paper considers a stabilization program consisting of a fixed exchange rate rule and a delayed fiscal adjustment. In contrast to the existing literature, it is assumed that there is no private capital mobility. The effects of such a program are substantially different than under capital mobility, since the access to international capital markets affects the ability of the private sector to smooth consumption prior to the fiscal component of the program.