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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 country's 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.
Balance of payments. --- Foreign exchange administration. --- Current account balance (International trade) --- International payments, Balance of --- Foreign exchange --- Terms of trade --- Balance of trade --- International liquidity --- Exports and Imports --- Finance: General --- Foreign Exchange --- Macroeconomics --- Banks and Banking --- Current Account Adjustment --- Short-term Capital Movements --- International Investment --- Long-term Capital Movements --- International Lending and Debt Problems --- General Financial Markets: General (includes Measurement and Data) --- Macroeconomics: Consumption --- Saving --- Wealth --- Monetary Policy --- International economics --- Finance --- Currency --- Banking --- Sudden stops --- External debt --- Emerging and frontier financial markets --- Exchange rate arrangements --- Consumption --- Balance of payments --- Reserve positions --- Central banks --- Reserves accumulation --- Financial markets --- Capital movements --- Debts, External --- Financial services industry --- Economics --- Foreign exchange reserves --- Thailand
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The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group's bargaining power is more effective.
Income distribution. --- Income. --- Family income --- Fortunes --- Household income --- Personal income --- Economics --- Finance --- Property --- Wealth --- Gross national product --- Profit --- Purchasing power --- Distribution of income --- Income inequality --- Inequality of income --- Distribution (Economic theory) --- Disposable income --- Financial Risk Management --- Labor --- Macroeconomics --- Aggregate Factor Income Distribution --- Macroeconomics: Consumption --- Saving --- Wages, Compensation, and Labor Costs: General --- Financial Crises --- Labour --- income economics --- Economic & financial crises & disasters --- Income --- Consumption --- Wages --- Financial crises --- Income distribution --- United States
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We study the forecasting power of financial variables for macroeconomic variables for 62 countries between 1980 and 2013. We find that financial variables such as credit growth, stock prices and house prices have considerable predictive power for macroeconomic variables at one to four quarters horizons. A forecasting model with financial variables outperforms the World Economic Outlook (WEO) forecasts in up to 85 percent of our sample countries at the four quarters horizon. We also find that cross-country panel models produce more accurate out-of-sample forecasts than individual country models.
Economic forecasting. --- Economic indicators. --- Credit. --- Borrowing --- Finance --- Money --- Loans --- Business indicators --- Economic indicators --- Indicators, Business --- Indicators, Economic --- Leading indicators --- Economic history --- Quality of life --- Economic forecasting --- Index numbers (Economics) --- Social indicators --- Economics --- Forecasting --- Banks and Banking --- Macroeconomics --- Money and Monetary Policy --- Real Estate --- Investments: Bonds --- Forecasting and Other Model Applications --- Financial Markets and the Macroeconomy --- Money and Interest Rates: Forecasting and Simulation --- Price Level --- Inflation --- Deflation --- Housing Supply and Markets --- Interest Rates: Determination, Term Structure, and Effects --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Macroeconomics: Consumption --- Saving --- Wealth --- General Financial Markets: General (includes Measurement and Data) --- Property & real estate --- Monetary economics --- Investment & securities --- Asset prices --- Housing prices --- Yield curve --- Credit --- Government consumption --- Prices --- Bond yields --- Financial institutions --- National accounts --- Housing --- Interest rates --- Consumption --- Bonds --- United States
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This paper develops a general equilibrium model of location choice with social interactions where mortgage approval rates determine household-specific choice sets that differ across neighborhoods and years in observable and unobservable dimensions. Existence and local uniqueness of city equilibria enable comparative statics estimates of the impact of changes in borrowing constraints on neighborhood-level prices and demographics. Estimation the model using micro data on property transactions, household demographics, neighborhood amenities, mortgage applications, and bank liquidity for the San Francisco Bay area, reveals that the price sensitivity of borrowing constraints explains about two-thirds of the price elasticity of neighborhood demand. General equilibrium estimates of the impact of the relaxation of lending standards on prices and neighborhood demographics bring two out-of-sample predictions for the period 2000-2006: (i) an increase in house prices accompanied by a compression of the price distribution and (ii) a reduction in the isolation of Whites in line with evidence of gentrification in the San Francisco Bay. Both predictions are supported by empirical observation.
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The price-amenity arbitrage is a cornerstone of spatial economics, as the response of land and house prices to shifts in the quality of local amenities and public goods is typically used to reveal households' willingness to pay for amenities. With informational, time, and cash constraints, households' ability to arbitrage across locations with different amenities (demographics, crime, education, housing) depends on their ability to compare locations and to finance the swap of houses. Arbitrageurs with deep pockets and better search and matching technology can take advantage of price dispersions and unexploited trade opportunities. We develop a disaggregated search and matching model of the housing market with endogenously bargained prices, identified on transaction-level data from the universe of deeds for 6,400+ neighborhoods of the Chicago metropolitan area, matched with school-level test scores and geocoded criminal offenses. Price-amenity gradients reflect preferences and the capitalization of trading opportunities, which are arbitraged away in the frictionless limit. Thus the time-variation in hedonic pricing coefficients partly reflects the time variation in search and credit frictions. Our model is able to explain that, between the peak of the housing boom and its trough, the sign of the price-amenity gradient flipped, due to the decline in trading opportunities in lower-amenity neighborhoods and due to the lower capitalization of trading opportunities in house prices.
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