Olivier Jeanne

Conspicuous consumption, snobbism and conformism

Abstract We develop a model in which consumers purchase a conspicuous good in order to signal high income and thereby achieve greater social status. In equilibrium, the signalling value of conspicuous consumption depends, in an identifiable way, on the number of consumers, and consumer behaviour is characterized by either snobbism or conformism. The market demand curve for the conspicuous good may exhibit a positive slope if consumers are conformist. We derive some unconventional policy implications concerning the taxation of luxuries and the voluntary provision of public goods.

Are currency crises self-fulfilling?: A test

Abstract This paper studies the respective roles of the fundamentals and self-fulfilling speculation in currency crises. We first present a model of a fixed exchange rate system in which self-fulfilling speculation can arise following a bifurcation in the fundamentals. We then estimate the model in the case of the 1992–3 crisis of the French franc, and find some evidence that self-fulfilling speculation was at work.

Noise Trading and Exchange Rate Regimes

Both the literature and new empirical evidence show that exchange rate regimes differ primarily by the noisiness of the exchange rate, not by measurable macroeconomic fundamentals. This motivates a theoretical analysis of exchange rate regimes with noise traders. The presence of noise traders can lead to multiple equilibria in the foreign exchange market. The entry of noise traders alters the composition of the market and generates excess exchange rate volatility, since noise traders both create and share the risk associated with exchange rate volatility. In such circumstances, monetary policy can be used to lower exchange rate volatility without altering macroeconomic fundamentals.

Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?

The link between monetary policy and asset price movements has been of perennial interest to policymakers. In this paper, we consider the potential case for preemptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom-bust dynamics in stock and property prices in developed economies. We then discuss the case for a preemptive monetary policy in the context of a stylized model. We find that the optimal policy depends on the economic conditions in a complex, nonlinear way and cannot be summarized by a simple policy rule of the type considered in the inflation-targeting literature.

International Reserves in Emerging Market Countries: Too Much of a Good Thing?

This paper considers whether the recent buildup in emerging market countries’ international reserves can be justified as precautionary insurance against volatility in capital flows. It presents a simple, welfare-based model of the optimal level of reserves to deal with the risk of capital account crises and calibrates the model for emerging market countries. The levels of reserves observed in many countries in the recent period, in particular in Latin America, are found to be within the range of the model’s predictions. However, the reserves buildup in Asian emerging market countries seems difficult to justify on precautionary grounds. A large fraction of their reserves could thus be diversified into less liquid but higher-yielding foreign assets. The paper concludes by discussing the challenges and opportunities associated with the management of large quantities of sovereign assets in emerging market countries.

The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications

We present a model of the optimal level of international reserves for a small open economy that is vulnerable to sudden stops in capital flows. Reserves allow the country to smooth domestic absorption in response to sudden stops, but yield a lower return than the interest rate on the countrys long-term debt. We derive a formula for the optimal level of reserves, and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. However, the recent buildup of reserves in Asia seems in excess of what would be implied by an insurance motive against sudden stops.

On relative wealth effects and the optimality of growth

Abstract We present a model of endogenous growth in which a desire for social status lead individuals to care about their relative wealth. The growth rate of the economy is socially optimal if the status motive is sufficiently important, but the presence of status seeking may also lead to excessive growth.

Why Do Emerging Economies Borrow in Foreign Currency

This paper explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility. I present a model in which firms choose the currency composition of their debts so as to minimize their probability of default. Decreasing monetary credibility can induce firms to dollarize their liabilities, even though this makes them vulnerable to a depreciation of the domestic currency. The channel is different from the channel studied in the earlier literature on sovereign debt, and it applies to both private and public debt. The paper presents some empirical evidence and discusses policy implications.

Status, the Distribution of Wealth, and Growth

We analyze a simple model of endogenous growth in which individuals care about both consumption and their rank in the distribution of wealth. We show that the steady-growth rate of the economy increases with both the strength of the status-seeking motive and the initial equality of the wealth distribution. Contrary to the basic model of endogenous growth, the equilibrium growth rate is not necessarily smaller than in the social optimum, and we identify the circumstances under which the two coincide. Copyright 2001 by The editors of the Scandinavian Journal of Economics.

Sovereign Debt Structure for Crisis Prevention

The debate on government debt in the context of possible reforms of the international financial architecture has thus far focused on crisis resolution. This paper seeks to broaden this debate. It asks how government debt could be structured to pursue other objectives, including crisis prevention, international risk-sharing, and facilitating the adjustment of fiscal variables to changes in domestic economic conditions. To that end, the paper considers recently developed analytical approaches to improving sovereign debt structure using existing instruments, and reviews a number of proposals--including the introduction of explicit seniority and GDP-linked instruments--in the sovereign context.