Title
Copyright
Dedication
Contents
Preface to the Fourth Edition
Introduction and Overview
Part I: Macroeconomic Accounts, Market Structure, and Behavioral Functions
1 Economic Structure and Aggregate Accounts
1 Economic Structure and Macroeconomics
1.1 Openness to Trade in Goods and Assets
1.2 Exchange-Rate Management
1.3 Domestic Financial Markets
1.4 The Government Budget
1.5 Aggregate Supply and the Labor Market
1.6 Stability of Policy Regimes
1.7 Macroeconomic Volatility and Fluctuations
1.8 Income Inequality
2 A General Accounting Framework
2.1 The Nonfinancial Private Sector
2.2 The Public Sector
2.2.1 The Nonfinancial Public Sector
2.2.2 The Central Bank
2.2.3 The Consolidated Public Sector
2.3 The Commercial Banking System
2.4 Aggregate Relationships
3 Production Structure in an Open Economy
3.1 The Mundell-Fleming Model
3.2 The “Dependent Economy” Model
3.3 A Model with Three Goods
4 The Structure of Labor Markets
4.1 Functioning of Labor Markets
4.2 Open and Disguised Unemployment
4.3 Indexation and Wage Rigidity
4.4 Labor Market Segmentation
2 Behavioral Functions
1 Consumption and Saving
1.1 Consumption Smoothing
1.2 Planning Horizon and Liquidity Constraints
1.3 Liquidity Constraints and Asymmetric Effects
1.4 Effects of Interest Rate Changes on Savings
1.5 Public and Private Consumption
2 Private Investment
2.1 Conventional Determinants
2.2 Reformulation of Theories
2.2.1 Nature of the Financial System
2.2.2 Imported Goods
2.2.3 Debt Overhang Effects
2.2.4 Role of Public Capital
2.2.5 Macroeconomic Instability and Uncertainty
2.3 Uncertainty and Irreversibility Effects
3 The Demand for Money
3.1 Conventional Models
3.2 Currency Substitution and Dollarization
Part II: Financial Policies
3 The Government Budget and Fiscal Management
1 The Government Budget Constraint
2 The Measurement of Fiscal Deficits
3 Contingent Liabilities
4 Seigniorage and Inflationary Finance
4.1 The Optimal Inflation Tax
4.2 Collection Lags and the Olivera-Tanzi Effect
4.3 Collection Costs and Tax System Efficiency
4.4 Financial Repression and the Inflation Tax
5 Policy Consistency and Solvency
5.1 The Intertemporal Solvency Constraint
5.2 Financing Constraints and Policy Consistency
6 Fiscal Rules and Fiscal Discipline
7 Fiscal Rules, Public Investment, and Growth
Appendix: Fiscal Effects of Privatization
4 Macroeconomic Effects of Fiscal Policy
1 Ricardian Equivalence
2 Deficits, Inflation, and the “Tight Money” Paradox
2.1 The Analytical Framework
2.2 Constant Primary Deficit
2.3 Constant Conventional Deficit
3 Deficits, Interest Rates, and Crowding Out
3.1 Expectations, Deficits, and Real Interest Rates
3.2 Deficits, Investment, and Crowding Out
4 Budget Deficits and the Current Account
5 Expansionary Fiscal Contractions
6 Fiscal Adjustment and the Labor Market
6.1 The Model
6.1.1 The Formal Economy
6.1.2 The Informal Sector
6.1.3 Consumption and Wealth
6.1.4 Market for Informal Sector Goods
6.1.5 The Informal Labor Market
6.1.6 Government
6.2 Dynamic Structure
6.3 Steady-State Solution
6.4 Government Spending Cut
5 Financial Markets and the Monetary Transmission Mechanism
1 Financial Structure and the Role of Banks
2 Asymmetric Information and Credit
2.1 The Stiglitz-Weiss Model of Credit Rationing
2.2 Costly State Verification Models
2.2.1 Bank Credit and the Supply Side
2.2.2 The Cost of Funds–Contractual Interest Rate Curve
2.2.3 Intermediation Costs, Employment, and Output
2.3 Net Worth and Borrowing Constraints
3 The Monetary Transmission Mechanism: Overview
3.1 The Pass-Through of Policy Rates to Market Rates
3.2 Interest Rate Effects
3.3 Exchange-Rate Effects
3.4 Asset Prices and Balance Sheet Effects
3.4.1 Net Worth and the Finance Premium
3.4.2 The Financial Accelerator
3.5 Credit Availability Effects
3.6 Expectations
4 Dollarization
4.1 Determinants of Dollarization
4.2 Persistence of Dollarization
4.3 Dollarization and Macroeconomic Management
5 Macroprudential and Monetary Policies
6 A Framework for Monetary Policy Analysis
1 The Basic Model: Fixed Exchange Rates
1.1 Structure of the Model
1.1.1 Household Portfolio Allocation
1.1.2 Commercial Banks
1.1.3 Central Bank
1.1.4 Price Level and the Real Sector
1.2 Model Solution
1.3 Policy and Exogenous Shocks
1.3.1 Increase in the Refinance Rate
1.3.2 Central Bank Auctions
1.3.3 Increase in the Required Reserve Ratio
1.3.4 Shifts in the Risk Premium and Contract Enforcement Costs
1.3.5 Changes in Public Expenditure and World Interest Rates
2 Flexible Exchange Rates
2.1 Model Structure
2.2 Solution
2.3 Policy and Exogenous Shocks
2.3.1 Increase in the Refinance Rate
2.3.2 Central Bank Auctions
2.3.3 Increase in the Required Reserve Ratio
2.3.4 Shifts in the Risk Premium and Contract Enforcement Costs
2.3.5 Changes in Public Expenditure and World Interest Rates
3 Extensions
3.1 Sterilization
3.2 Working-Capital Needs
3.3 Dynamics of Prices and Interest Rates
7 Inflation Targeting, Macroeconomic Stability, and Financial Stability
1 Basic Framework: Closed Economy
1.1 Strict Inflation Targeting
1.2 Policy Trade-Offs and Flexible Targeting
2 Inflation Targeting in an Open Economy
3 Comparison with Other Regimes
3.1 Monetary Targeting
3.2 Exchange-Rate Targeting
3.3 Nominal Income Targeting
4 Basic Requirements for Inflation Targeting
4.1 Central Bank Independence and Credibility
4.2 Absence of Fiscal Dominance
4.3 Absence of de facto Exchange-Rate Targeting
4.4 Healthy Financial System
4.5 Transparency and Accountability
5 Performance of Inflation Targeting Regimes
6 Inflation Targeting and Financial Stability
7 Some Other Analytical Issues
7.1 Non-Quadratic Policy Preferences
7.2 Uncertainty and Optimal Policy Rules
8 Choosing an Exchange-Rate Regime I: Credibility, Flexibility, and Welfare
1 Basic Typology
2 Evolution of Exchange-Rate Regimes
3 Policy Trade-Offs and Credibility
3.1 Time Inconsistency and Exchange-Rate Policy
3.2 Credibility of a Fixed Exchange Rate
3.3 Reputation, Signaling, and Commitment
4 Credibility vs. Flexibility: Role of Bands
4.1 Rationale for Bands
4.2 Bands and Monetary Policy Credibility
4.3 Experience with Bands
5 Currency Unions
5.1 Credibility Effects of Monetary Unions
5.2 Welfare Effects of Optimum Currency Areas
5.2.1 The Model
5.2.2 Equilibrium
5.2.3 Welfare Effects
Appendix: Krugman’s Target Zone Model
9 Choosing an Exchange-Rate Regime II: The Role of Shocks, Contractionary Effects, and Moral Hazard
1 Role of Shocks
1.1 Model Specification
1.2 Model Solution
2 Contractionary Effects
2.1 Effects on Aggregate Demand
2.1.1 Consumption
2.1.2 Investment
2.1.3 Nominal Interest Rates
2.2 Effects on Aggregate Supply
2.2.1 Effects on the Nominal Wage
2.2.2 Imported Inputs
2.2.3 Effects through Working-Capital Costs
2.2.4 Effects through Balance Sheets
3 An Assessment
Part III: Inflation Stabilization and Applied Models for Monetary Policy Analysis
10 Inflation and Short-Run Dynamics
1 Models of the Inflationary Process
1.1 Inflation, Money, and Fiscal Deficits
1.1.1 Adaptive Expectations
1.1.2 Perfect Foresight
1.2 Food Supply and the Wage-Price Cycle
1.3 A Structuralist-Monetarist Model
2 Dynamics of Alternative Policy Rules
2.1 A One-Good Framework
2.1.1 Households
2.1.2 Government and The Central Bank
2.1.3 Money Market Equilibrium
2.1.4 Dynamic Form
2.1.5 Devaluation Rule
2.1.6 Credit Growth Rule
2.1.7 Dynamics with Alternative Fiscal Policy Rules
2.2 A Three-Good Model with Flexible Prices
2.2.1 Households
2.2.2 Output and the Labor Market
2.2.3 Central Bank and the Government
2.2.4 Market-Clearing Conditions
2.2.5 Dynamic Form
2.2.6 Policy Experiments
2.3 Extensions
2.3.1 Imported Intermediate Inputs
2.3.2 Sticky Prices
Appendix: Impact and Steady-State Effects
11 Analytical Issues in Disinflation Programs
1 Topics in Exchange-Rate-Based Programs
1.1 The Boom-Recession Cycle
1.1.1 Expectations, Real Interest Rates, and Output
1.1.2 The Temporariness Hypothesis
1.1.3 An Assessment
1.2 The Behavior of Real Interest Rates
1.2.1 Credibility, Nominal Anchors, and Interest Rates
1.2.2 Expectations, Fiscal Adjustment, and Interest Rates
1.3 Disinflation and Real Wages
2 Role of Credibility in Disinflation Programs
2.1 Sources of Credibility Problems
2.1.1 Internal Inconsistency
2.1.2 Time Inconsistency
2.1.3 Asymmetric Information
2.1.4 Policy Uncertainty and Stochastic Shocks
2.1.5 Political Uncertainty
2.2 Enhancing the Credibility of Disinflation Programs
2.2.1 Signaling and Sustainability
2.2.2 Price Controls
2.2.3 Central Bank Independence
2.2.4 External Enforcement and Foreign Assistance
2.2.5 Sequencing and Political Support
2.3 Policy Lessons
3 Disinflation and Nominal Anchors
Appendix: Output Effects of Price Controls
12 Dynamic Stochastic Equilibrium Models with Financial Frictions
1 Main Features of DSGE Models
2 A Basic Model
2.1 Household
2.2 Output and Price Formation
2.3 Government
2.4 Market-Clearing Conditions
2.5 Interest Rate Rule
2.6 The Log-Linearized Form
3 Financial Frictions in DSGE Models
3.1 Accounting for Financial Frictions
3.2 Extending the Basic Framework
3.2.1 Intermediate Good Producers
3.2.2 Capital Good Producer
3.2.3 Commercial Bank
3.2.4 Central Bank
3.2.5 Government
4 Calibration and Estimation
5 Extensions
5.1 Heterogeneous Agents and Expectations
5.2 Open-Economy Considerations
5.3 Macroprudential Regulation
Part IV: Financial Openness, Capital Flows, and Financial Crises
13 Financial Integration and Capital Flows
1 Benefits and Costs of Financial Integration
1.1 Potential Benefits
1.1.1 Consumption Smoothing
1.1.2 Domestic Investment and Growth
1.1.3 Enhanced Macroeconomic Discipline
1.1.4 Banking System Efficiency and Financial Stability
1.2 Potential Costs
1.2.1 Concentration of Capital Flows and Lack of Access
1.2.2 Domestic Misallocation of Capital Flows
1.2.3 Loss of Macroeconomic Stability
1.2.4 Procyclicality of Short-Term Flows
1.2.5 Herding, Contagion, and Volatility of Capital Flows
1.2.6 Risk of Entry by Foreign Banks
1.3 Assessing the Evidence
2 Determinants of Capital Inflows
2.1 “Pull” Factors
2.2 “Push” Factors
2.3 Assessing the Evidence
3 Managing Capital Inflows: Policy Options
3.1 Restrictions on Gross Inflows
3.2 Encouragement of Gross Outflows
3.3 Trade Liberalization
3.4 Exchange-Rate Flexibility
3.5 Sterilization
3.6 Policies to Influence the Money Multiplier
3.7 Fiscal Contraction
3.8 Macroprudential Regulation
Appendix: Measuring the Degree of Financial Integration
14 Exchange-Rate Crises and Sudden Stops
1 Currency Crises: Conventional Approach
1.1 The BasicModel
1.2 Extensions to the Basic Framework
1.2.1 Sterilization
1.2.2 Alternative Post-Collapse Regimes
1.2.3 Real Effects of an Anticipated Collapse
1.2.4 Borrowing, Capital Controls, and Crisis Postponement
1.2.5 Interest Rate Defense
1.2.6 Other Directions
2 Policy Trade-Offs and Self-Fulfilling Crises
2.1 Example Based on Output-Inflation Trade-Offs
2.2 Public Debt and Self-Fulfilling Crises
2.3 Role of Credibility and Reputation
2.4 Other Sources of Policy Trade-Offs
3 A “Cross-Generation” Framework
4 Third-Generation Models
5 Sudden Stops
5.1 Alternative Models
5.1.1 Models with Multiple Equilibria
5.1.2 A Sudden Stop as a Unique Equilibrium
5.2 The Role of Reserves and Policy Responses
15 Banking Crises and Twin Crises
1 Banks as Maturity Transformers
1.1 The Diamond-Dybvig Framework
1.2 Business Cycles and Banking Crises
2 Twin Crises
2.1 A Basic Model with Close Linkages
2.2 The Chang-Velasco Framework
2.3 The Flood-Marion Joint Distribution Approach
3 Asymmetric Information and Opportunism
4 Determinants of Banking Crises: Evidence
4.1 Episodic Cross-Country Evidence
4.2 Signaling Approach
4.3 Econometric Investigations
16 Sovereign Debt Crises
1 Fiscal Sustainability and Fiscal Solvency
1.1 The Algebra of Fiscal Solvency
1.2 Implications for Fiscal Policy
2 Empirical Tests of Fiscal Sustainability
2.1 Deterministic Tests
2.1.1 Sustainable Debt
2.1.2 The Sustainable Primary Surplus
2.2 Time-Series Tests
2.2.1 Hamilton and Flavin (1986)
2.2.2 Trehan and Walsh (1991)
2.3 Fiscal Reaction Functions
2.4 Tests of Fiscal Vulnerability
2.4.1 Value at Risk
2.4.2 Mendoza and Oviedo (2004)
3 Fiscal Solvency and Debt Repayment
4 Costs of Default
4.1 Default and Domestic Debt
4.2 Default and Real Output
4.2.1 Debt Overhangs
4.2.2 Effects on International Trade
4.2.3 Signaling
5 Sovereign Debt Crises and Banking Crises
6 Sovereign Debt Crises and Currency Crises
Appendix: Determinants of Sovereign Debt Crises: The Evidence
Part V: Growth, Structural Reforms, and Political Economy
17 Macroeconomic Policies and Growth
1 The Neoclassical Growth Model
2 TheAK Model of Endogenous Growth
3 Human Capital, Knowledge, and Growth
3.1 The Production of Human Capital
3.2 The Production of Knowledge
4 Government Spending, Taxes, and Growth
4.1 The Barro Model
4.2 Infrastructure, Health, and Growth
4.2.1 Production
4.2.2 Household Preferences
4.2.3 Production of Health Services
4.2.4 Government
4.3 The Decentralized Equilibrium
4.4 Optimal Policies
4.5 A Stock Approach
5 Financial Intermediation and Growth
5.1 Effects on the Saving Rate
5.2 Effects on the Allocation of Capital
5.3 Intermediation Costs and Efficiency
6 Inflation and Growth
7 Macroeconomic Volatility and Growth
8 Middle-Income Growth Traps
9 A Methodological Note
18 Trade Liberalization, Financial-Sector Reforms, and Sequencing
1 Trade Reform
1.1 Analytical Framework
1.1.1 Output, Turnover Costs, and Wages
1.1.2 Consumption and the Market for Nontraded Goods
1.1.3 Government
1.1.4 Labor Market Adjustment
1.2 Tariffs, Real Wages, and Employment
1.2.1 Steady-State Effects
1.2.2 Short-Run Dynamics
2 Financial Liberalization
2.1 Deregulation of Interest Rates
2.2 Broader Aspects of Financial Liberalization
2.3 Role of Regulation and Supervision
3 Sequencing of Reforms
3.1 Stabilization, Financial Reform, and Capital Account Opening
3.2 Capital and Current Account Liberalization
3.3 Macroeconomic Stabilization and Trade Reform
4 Adjustment Costs, Credibility, and Speed of Reform
19 The Political Economy of Adjustment
1 Politics, Economic Policy, and Adjustment
1.1 The Political Economy of Reform
1.2 Political Instability, Inflation, and Fiscal Deficits
2 Conflicts of Interest and Economic Reforms
2.1 The Uncertain-Benefits Approach
2.2 The Distributional Conflict Approach
3 Political Stabilization Cycles
3.1 Opportunistic Models
3.1.1 Elections, Inflation, and Unemployment
3.1.2 Elections and Devaluation Cycles
3.2 Models with Informational Asymmetries
4 The Political Economy of Fiscal Rules
Epilogue
References
Index of Names
Index of Subjects
