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Emerging economies are characterized by higher consumption and real wage variability relative to output and a strongly countercyclical current account. A real business cycle model of a small open economy that embeds a Mortensen-Pissarides type of search-matching frictions and countercyclical interest rate shocks can jointly account for these regularities. In the face of countercyclical interest rate shocks, search-matching frictions increase future employment uncertainty, improving workers’ incentive to save and generating a greater response of consumption and the current account. Higher consumption response in turn feeds into larger fluctuations in the workers’ bargaining power while the interest rates shocks lead to variations in the firms’ willingness to hire; both of which contribute to a highly variable real wage.
Business & Economics --- Economic Theory --- Business cycles. --- Business forecasting. --- Business --- Business forecasts --- Forecasting, Business --- Economic cycles --- Economic fluctuations --- Forecasting --- Economic forecasting --- Cycles --- Business cycles --- Labor market --- Econometric models --- E-books --- Employees --- Market, Labor --- Supply and demand for labor --- Markets --- Supply and demand --- Labor --- Macroeconomics --- Production and Operations Management --- Open Economy Macroeconomics --- Economic Growth of Open Economies --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Financial Markets and the Macroeconomy --- Demand and Supply of Labor: General --- Wages, Compensation, and Labor Costs: General --- Unemployment: Models, Duration, Incidence, and Job Search --- Macroeconomics: Consumption --- Saving --- Wealth --- Production --- Cost --- Capital and Total Factor Productivity --- Capacity --- Labour --- income economics --- Labor markets --- Consumption --- Total factor productivity --- National accounts --- Economics --- Industrial productivity --- Mexico
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An implication of the "globalization hazard" hypothesis is that sudden stops could be prevented by offering foreign investors price guarantees on emerging markets assets. These guarantees create a tradeoff, however, because they weaken globalization hazard by creating international moral hazard. We study this tradeoff using an equilibrium asset-pricing model. Without guarantees, margin calls and trading costs cause Sudden Stops driven by Fisher's debt-deflation process. Price guarantees prevent this deflation by propping up foreign asset demand, but their effectiveness and welfare implications depend critically on the price elasticity of foreign demand and on making the guarantees contingent on debt levels.
Economic policy. --- Electronic books. -- local. --- Globalization. --- Commerce --- Business & Economics --- International Commerce --- Global cities --- Globalisation --- Internationalization --- Economic nationalism --- Economic planning --- National planning --- State planning --- International relations --- Anti-globalization movement --- Economics --- Planning --- National security --- Social policy --- Exports and Imports --- Finance: General --- Investments: Stocks --- Macroeconomics --- International Investment --- Long-term Capital Movements --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Price Level --- Inflation --- Deflation --- Macroeconomics: Consumption --- Saving --- Wealth --- General Financial Markets: Government Policy and Regulation --- International economics --- Investment & securities --- Finance --- Sudden stops --- Stocks --- Asset prices --- Consumption --- Moral hazard --- Capital movements --- Prices --- Financial risk management --- Mexico
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Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops in the 1990s. The surge in foreign reserves since then is viewed as a New Merchantilism in which reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a framework in which precautionary savings affect foreign assets via business cycle volatility, financial globalization, and endogenous Sudden Stops. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the surge in reserves but cyclical volatility, which has declined in the globalization period, is not.
Business cycles --- Equilibrium (Economics) --- Globalization. --- Mathematical models. --- Global cities --- Globalisation --- Internationalization --- International relations --- Anti-globalization movement --- Exports and Imports --- Macroeconomics --- Globalization --- International Investment --- Long-term Capital Movements --- Macroeconomics: Consumption --- Saving --- Wealth --- Globalization: General --- International economics --- Foreign assets --- Sudden stops --- Precautionary savings --- Consumption --- Balance of payments --- External position --- National accounts --- Investments, Foreign --- Capital movements --- Saving and investment --- Economics --- Mexico
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