International Finance and Macroeconomics

Article excerpt

The NBER's Program on International Finance and Macroeconomics met in Cambridge on October 10. Charles M. Engel, NBER and University of Wisconsin, and Linda Tesar, NBER and University of Michigan, organized this program:

Paul R. Bergin, NBER and University of California, Davis, and Reuven Glick, Federal Reserve Bank of San Francisco, "Endogenous Nontradability and Macroeconomics Implications" Discussant: Paolo Pesenti, Federal Reserve Bank of New York

Anusha Chari, University of Michigan, and Peter Blair Henry, NBER and Stanford University, "Capital Account Liberalization,

Investment, and the Invisible Hand" Discussant: Rui Albuquerque, University of Rochester

Robert P. Flood, International Monetary Fund, and Andrew K. Rose, NBER and University of California, Berkeley, "Equity Integration in Times of Crisis" Discussant: Maria Vassalou, Columbia University

Enrique G. Mendoza, NBER and University of Maryland, and Katherine A. Smith, U.S. Naval Academy, "Margin Calls, Trading Costs, and Asset Prices in Emerging Markets: The Financial Mechanics of the 'Sudden Stop' Phenomenon" Discussant: Fabrizio Perri, New York University

Giancarlo Corsetti, University of Rome; Bernardo Guimares, Yale University; and Nouriel Roubini, NBER and New York University, "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance" Discussant: Olivier Jeanne, International Monetary Fund

Amartya Lahiri, Federal Reserve Bank of New York; Rajesh Singh, Iowa State University; and Carlos A. Vegh, NBER and University of California, Los Angeles, "Segmented Asset Markets and Optimal Exchange Rate Regimes" Discussant." Michael Devereux, University of British Columbia

Bergin and Glick propose a new way of thinking about nontraded goods in an open economy macro model. They develop a simple method for analyzing a continuum of goods with heterogeneous trade costs, and explore how these costs determine the endogenous decision by a seller of whether to trade a good international iv. This way of thinking is appealing in (hat it provides a natural explanation for a prominent puzzle in international macroeconomics: that the relative price of nontraded goods tends to move much less volatilely than the real exchange rate. Because nontradedness is an endogenous decision, the good on the margin forms a linkage between the prices of traded and nontraded goods, preventing the two price indexes from wandering too far apart. Bergin and Glick find that this mechanism has implications for other macroeconomic issues that rely on the presence of nontraded goods.

Using a new dataset of 369 manufacturing firms in developing countries, Chari and Henry present the first firm-level analysis of capital account liberalization and investment. In the three-year period following liberalizations, the growth rate of the typical firm's capital stock exceeds its preliberalization mean by an average of 4.1 to 5.4 percentage points per year. The authors use a simple model of Tobin's q to decompose the firms' post-liberalization changes in investment into: 1) the country-specific change in the risk-free rate; 2) firm-specific changes in equity, premiums; and 3) firm specific changes in expect ed future earnings. Panel data estimations show that an increase in expected future earnings of 1 percentage point predicts a 2.9 to 4.1 percentage point per-year increase in capital stock growth. The country-specific shock to firms' costs of capital predicts a 2.3 percentage point per-year increase in investment, but firm-specific changes in risk premiums are not significant. These results stand in contrast to the view that investment and fundamentals are unrelated during liberalization episodes.

Flood and Rose apply a simple new test for asset integration to two episodes of crisis in financial markets. …