Marcella Mulino

Explaining Russia's Currency and Financial Crisis

The paper attempts to sketch a framework for understanding Russias August 1998 financial and currency crises with reference to the main theories put forward so far. Our thesis is that, while not fitting easily into any pre-existing framework, the Russian crises shares many features of ‘first-generation’ models inasmuch as it was largely due to inconsistencies among an overvalued peg, tight money, and an evident inability to address the fiscal deficit. In other terms, it derived from the incompatibility between standard IMF stabilisation policies and the difficulties that Russia was facing as a transition economy. On the other hand, by touching both currency markets and the banking sector, the Russian Episode shares also important features of the ‘twin crises’ framework.The analysis considers the role of exchange rate movements and capital flows on Russias rising vulnerability, fiscal problems and the building up of the public debt. It assesses the state of the Russian Banking sector and discusses the contagion effects of the Asian crisis and policy response. It shows how the core of the Russian crises lies in an unsound, IMF-backed, defence of the rouble, which in 1998 had become increasingly unsustainable.

Technological catching up, competitiveness and growth

We build an endogenous growth model for a technologically laggard country and analyse the implications for competitiveness when trade occurs in quality-differentiated products. We find that the conditions for an optimal growth with a balanced current account and no adverse terms-of-trade effects depend on the countrys ability to compete in ‘quality dominated markets’ thanks to a successful technological catching up. We argue that the greater the ability to absorb foreign knowledge and improve upon foreign technologies, the greater the gains in competitiveness, and the benefits to long-run growth. A numerical simulation confirms our findings.

The Macrodynamics of External Overborrowing and Systemic Instability in a Small Open Economy

The paper presents a monetary growth model for a small emerging economy with a currency board arrangement. The integration into global financial markets determines an acceleration of debt-creating capital inflows that boosts growth and the prospect of future profits, and leads to the building-up of large imbalances in the public and private sectors. Financial fragility undermines the state of confidence and determines an endogenous capital reversal. At this stage, the strong commitment to maintain the peg leaves no room for stabilization purposes and leads to systemic instability. We run a continuous-time estimation of the non-linear differential equations system of the model, with reference to Argentina during the years of the currency-board arrangement. We find two steady-state solutions, corresponding to a high-interest rate and a low-interest rate equilibrium, respectively. The local stability and sensitivity analysis show that both equilibria are unstable and that the system is intrinsically fragile. We show that even a tighter fiscal policy, according to the prescriptions of international institutions, results ineffective in improving stability.

CSR in a Model of Heterogeneous Firms, Financial Constraints and Economic Crisis

The paper develops a model considering strategic CSR and vertical product differentiation in the context of heterogeneous firms and monopolistic competition, based on the strand of literature on heterogeneous firms in international trade pioneered by Melitz (2003). We seek to provide some understanding as to which of the features influence corporate CSR performance, factors which motivate firms to engage it and the strategies firms adopt in order to approach it. The results change if we introduce more realistic hypothesis, for example, the financial constraint firms face or the presence of economic cycles. We suggest that it is possible in times of crisis under certain conditions that firms attention for CSR can in fact be strengthened.

Heterogeneous Firms and Corporate Social Responsibility: An Analysis in Times of Crisis

We set out a model that considers the concept of strategic CSR, and focuses on the role of consumers’ demand for CSR products, according to the so called “bottom up pressure”, that is consumers’ initiative in appreciating CSR. We enrich the above approach with the idea that CSR is a specific feature of goods improving their “quality”. In this way, we are able to consider it as a novel type of product differentiation based on the adoption of socially and environmentally responsible practices; as a consequence, our model builds on the literature based on heterogeneous firms in monopolistic competition (starting from the recent “new-new” trade theory pioneered by Melitz, 2003), that incorporates quality product differentiation. In a closed economy with CSR option in production, we analyze the link between heterogeneity in productivity and CSR intensity, by letting the optimal level of ethical standards to be endogenously determined by each firm. We then consider the need for external financing, finding that the latter may lead intra-marginal firms to exit production, as well as to a reduction in the optimal level of CSR of surviving firms. The latter outcome is especially relevant for the study of the relation between CSR and economic crisis. We identify some negative effects: a decline in consumers’ income has a negative impact on the demand of higher CSR intensity goods, whereas a tightening in external financing conditions leads to a decrease in the optimal level of CSR. On the other hand, external investors may attribute a positive value to the CSR effort of firms, as the latter may be seen as a positive reputational signal. We take into account that creditors attribute a specific weight to CSR activities in judging corporate attention for stakeholders, by assuming that firms’ exogenous probability of enforcing the financial contract is deemed to be higher when investors care about firms’ ethical efforts; at the same time, the share of tangible assets CSR firms are required to vow as collateral is assumed to be lower. We thus study the conditions which may make the reputational effect to mitigate the impact of the crisis on firms’ optimal level of CSR.

Heterogeneous Producers’ Cooperatives and Corporate Social Responsibility

Cooperation and CSR have various facets in common since CSR represents an integral part of cooperatives’ values. Indeed, cooperatives have a long tradition in combining economic viability with social responsibility, as their organization generates a more immediate relationship between shareholders and stakeholders thus making it is easier to achieve the necessary balance between their diverse interests. In the paper we set out a model that considers producer cooperatives engaged in strategic CSR. Our focus is on the role of consumers’ demand for CSR products, according to the so called “bottom-up pressure”, that is consumers’ initiative in appreciating CSR. We enrich the above approach with the idea that the adoption of socially and environmentally responsible practices in production is a specific feature of goods improving their “quality” and represents a novel type of product differentiation. Hence, our model builds on the strand of literature about heterogeneous firms in monopolistic competition, developed by the recent “new-new” trade theory, that incorporates quality product differentiation. In a closed economy with CSR option in production, we derive each producer cooperative’s optimal choices with reference both to prices and the level of ethical standards. Albeit cooperatives differ with respect to the productivity of their members/workers, the solutions to both optimization problems are the same for all cooperatives, pointing to heterogeneity in the net income per member. In addition, our analysis confirms the role of consumers’ “bottom-up pressure”, since cooperatives’ optimal level of ethical standards is positively linked to the intensity of the preference of “concerned” consumers for CSR goods.

Predicting Russia's Currency and Financial Crises

Russian Banking considers the rise of commercial market-oriented banks in Russia, their links with government and non-financial companies and their role as intermediaries in the provision of finance for investment. The contributors explore the legacy of the Soviet past and current functions of the Russian banking system, contrasting these with those in other post-communist societies and describing peculiarities such as informal networks and corruption.