Mario I. Blejer

Central Banks Use of Derivatives and Other Contingent Liabilities: Analytical Issues and Policy Implications

Whereas some central bank derivatives and other contingent liabilities arise from anomalous circumstances, there are a number of positive reasons that explain their popularity. After analyzing the rationale for these operations, we stress that most of these operations, being off-balance sheet, increase the risk and reduce the transparency of central bank accounts. This in turn makes more difficult the assessment of the financial position of the monetary authority and, by implication, of the macroeconomic conditions of the country. To deal with this issue, we suggest a comprehensive portfolio approach that values, in an economic sense, all assets and liabilities of the central bank.

Public Debt and Fiscal Policy in Developing Countries

This paper discusses the interrelationships between fiscal deficits and public debt. It analyzes the sources of growth of domestic and foreign public debt, and deals with the fiscal policy constraints imposed by a high level of indebtedness. It also discusses the macro-economic effects of public debt, concentrating on the external sector and monetary policy implications as well as the effects on key prices throughout the economy. The empirical section presents some stylized facts about the evolution of foreign debt in a selected group of developing countries and estimates its sources of growth as well as the factors affecting interest rates in debtor countries.

Exogenous Shocks, Deposit Runs and Bank Soundness; A Macroeconomic Framework

In a model where all banks are initially solvent, an exogenous shock affects confidence, causing a flight from deposits into domestic and foreign currency. Real interest rates increase unexpectedly, affecting firms and raising the share of the banks` nonperforming assets. This increase causes genuine solvency problems and accelerates the bank run. Policy simulations show that compensatory monetary policy (increasing currency supply when deposits fall) mitigates the bank run but causes inflation and external imbalances. Combining compensatory monetary policy with tight fiscal policies also slows the bank run and mitigates insolvency, but at a lower macroeconomic cost. A devaluation is shown to have little positive impact.