Pablo E. Guidotti

On the Consequences of Sudden Stops

Our analysis shows a number of interesting empirical regularities. First, when we apply a simple definition of sudden stops, we find that they have been a fairly common occurrence at least since the late 1970s. Second, economic performance after a sudden stop can differ dramatically across countries, depending on certain country characteristics. We show that open economies and those that choose a floating exchange rate regime after a crisis recover fairly quickly from the output contraction that usually comes with the sudden stop, whereas countries with liability dollarization recover more slowly. These characteristics relate to how the economies adjust exports and imports during the aftermath of a sudden stop. Open economies that do not show much liability dollarization tend to show higher export growth and less import contraction than highly dollarized economies. The paper is organized as follows. The next section discusses our definition of sudden stops. We then examine the stylized facts associated with sudden stops, including their regional coverage and evolution over time. A subsequent section proceeds to identify the key factors that explain the nature of the aftermath of a sudden stop in capital flows. If sudden stops remain a recurrent feature of emerging market economies in years to come, the issue of how to ensure a quick return of growth in the aftermath of a crisis will require attention. Policy recommendations focused on improving such ex post performance should go hand in hand with traditional prevention measures designed to avoid the crises. We elaborate on these conclusions in the final section.

Inflation Stabilisation and the Consumption of Durable Goods

Exchange rate-based stabilizations in chronic-inflation countries have often been characterized by an initial consumption boom (which is most evident in the behavior of durable goods) followed by a later contraction. This paper provides an explanation for such a boom-recession cycle based on the timing of purchases of durable goods. The initial fall in inflation results in a wealth effect wich induces many consumers to bring forward their consumption boom. Since most consumers replenish their stock of durable goods at the beginning of the program, a later slowdown follows.

On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax

This paper examines optimal monetary policy under uncertainty in a context in which policy makers are able to make credible policy commitments. We study an optimal taxation problem of minimizing the social cost of financing a stochastic and exogenous level of government transfers. Since, in the basic model, the welfare costs of inflation derive only from expected inflation, the optimal monetary policy is highly responsive to the state of nature. In a benchmark case in which all shocks are transitory, the optimal policy calls for loading all the variability of government transfers on the shoulders of the inflation tax.

The optimal inflation tax when money reduces transactions costs: A reconsideration

Abstract It has been argued that, if money acts as an intermediate good, the optimal inflation tax is zero. This paper reexamines such a claim in the context of a model in which money reduces transactions costs. It is shown that modeling money as an intermediate good does not necessarily imply that the optimal inflation tax is zero. The optimality of a zero inflation tax depends on the properties of the transactions costs technology. In particular, if the transactions costs technology does not exhibit constant returns to scale, it is optimal to resort to the inflation tax.

Optimal Maturity of Nominal Government Debt: An Infinite-Horizon Model

The role of debt maturity is analyzed in a framework that blends tax smoothing with time inconsistency of optimal policy when policymakers have an incentive to use unanticipated inflation to reduce the real value of nominal government liabilities. Three conclusions emerge: (1) nominal debt leads policymakers to resort to inflation even though, in equilibrium, inflation collects no revenue; (2) when under full precommitment the optimal policy calls for complete tax smoothing and a constant debt level, the equilibrium policy without precommitment calls for anticipating tax collection and early debt repayment; and (3) management of debt maturity is an essential component of the equilibrium policy. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Credibility and Nominal Debt: Exploring the Role of Maturity in Managing Inflation

The role of debt maturity in managing the governments incentives to use opportunistic inflation to reduce the ex post real value of its nominal liabilities is explored. The maturity structure of government debt is shown to be a powerful instrument for affecting the time profile of the inflation tax base and, hence, for mitigating the distortions introduced by time inconsistency on taxation policies. The nature of the optimal policy is shown to be heavily dependent on the type of precommitment enjoyed by policymakers.

Domestic public debt of externally indebted countries

This study discusses the evolution of domestic public debt in several indebted countries and its relationship with their external debt and underlying fiscal developments. It examines the links between domestic and external debt, taxes, subsidies, and government spending, and reviews strategies for managing domestic public debt.

Losing Credibility : The Stabilization Blues

In exchange rate-based stabilization programs, credibility often follows a distinct time pattern. At first it rises as the highly visible nominal anchor provides a sense of stability and hopes run high for a permanent solution to the fiscal problems. Later, as the domestic currency appreciates in real terms and the fiscal problems are not fully resolved, the credibility of the program falls, sometimes precipitously. This paper develops a political-economy model that focuses on the evolution of credibility over time, and is consistent with the pattern just described. Inflation inertia and costly budget negotiations play a key role in the model.

Capital Controls, Collection Costs, and Domestic Public Debt

The implications of a large public debt for the implementation of capital controls for an economy where tax revenue collection is costly are examined. Conditions are analyzed under which policymakers will resort to capital controls to reduce the cost of recycling domestic public debt. The linkages between a costly tax collection mechanism, capital controls, am domestic government debt are explored in terms of a two-period m:x1el of optimal taxation. Numerical simulations are provided to illustrate haw capital controls are linked to different domestic public debt levels am to different degrees of efficiency in tax-revenue collection.

Currency Substitution and Financial Innovation

This paper explores the domestic effects as well as the international transmission of financial innovation. The analysis is carried out in a cash-in-advance model with two currencies and tw o goods in which income velocity is variable because of inventory-type considerations in the determination of the demand for money. The discussion emphasizes the role of currency substitution, which occur s through the interaction between the two monies in affecting the tota l amount of time devoted to transaction activities. The role of cross-border transfers of seigniorage in determining the general equilibrium effects of financial innovation is discussed. Copyright 1993 by Ohio State University Press.