Volume 18, Issue 2

With 250 million migrants globally, remittances are one of the major sources of income in many developing countries. While there is abundant evidence that remittances facilitate consumption smoothing, the literature has not considered whether this effect varies with the fiscal stance and during fiscal shocks. Our focus is therefore on whether the consumption-smoothing effect changes with fiscal policy phases and whether remittances and government support are substitutes or complements in stabilizing household consumption. We take a holistic approach to investigating this relationship combining cross-country and household-level analysis. We find that remittances help smooth consumption, and hence improve welfare, more during fiscal consolidation episodes, while this impact is insignificant during fiscal expansions. The results also indicate that the effect is more pronounced in countries with greater reliance on remittances.

This paper investigates the effects of the adoption of inflation targeting (IT) on the choice of exchange rate regime in emerging markets (EMs), conditional on certain macroeconomic conditions. Using a large sample of EMs and after dampening the endogeneity of the adoption of IT using a selection on observables, we find that IT countries on average have a relatively more flexible exchange rate regime than other EMs. However, the flexibility of the exchange rate regime shows strong heterogeneity among IT countries. IT countries with low trade and financial openness and with a large share of external debt exhibit a lower exchange rate flexibility than others. Moreover, the marginal effect of IT adoption on the exchange rate flexibility increases with the duration of the IT regime in place, and with the propensity scores to adopt it.

This study develops a small-open-economy version of Benhabib, J., S. Schmitt-Grohé, and M. Uribe. 2001. “Monetary Policy and Multiple Equilibria.” American Economic Review 91: 167–186. We systematically explore the role of international capital mobility and the portfolio balance channel in terms of macroeconomic (in)stability when the government follows a commonly-adopted interest-rate feedback rule. In a one-traded-good model, the steady-state equilibrium, in general, is locally determinate; international capital mobility stabilizes the economy against business cycle fluctuations under a simple interest-rate feedback rule. In a two-good (traded and non-traded goods) model, the relationship between equilibrium (in)determinacy and the aggressiveness of interest rate rules is not monotonic, and crucially depends on households’ portfolio preferences. These results suggest that a unified interest rate rule can end up with very different consequences of macroeconomic (in)stability in an open economy from those in a closed economy.

Why do scarce Indian women pay dowry to secure grooms even as the sex-ratio of offspring is manipulated by parents? We develop a dynamic general equilibrium model of demographic and marriage market outcomes with endogenous gender preference. We find, that under a calibration of parameters suggested by Indian marriage market indicators, any long run steady state equilibrium must have both dowry and a masculine sex ratio. The key assumption that generates this result is the asymmetric marital preferences of men and women regarding own and spouse’s ideal age at marriage.

In this paper we investigate the process of creation and destruction of industries as it stems from productivity increasing innovations and from the induced changes of consumption patterns. In our model industries whose demand increases experience an expansion of the number of intermediate goods and hence of their research effort, while those whose demand declines undergo a cost-cutting restructuring with a corresponding reduction of the number of intermediates. We show that if aggregate consumption is concentrated on high (low) priority goods in the early (later) stages of the economy’s development and spread out more evenly in an intermediate stage, then the diversification of the economy over the development path is inversely U-shaped: a result that is consistent with the empirical evidence in Imbs and Wacziarg 2003 “Stages of Diversification.” American Economic Review 93: 63–86.

We study in a New Keynesian framework the consequences of adaptive learning for the design of robust monetary policy. Compared to rational expectations, the fact that private sector follows adaptive learning gives the central bank an additional intertemporal trade-off between optimal behavior in the present and in later periods thanks to its ability to manipulate future inflation expectations. We show that adaptive learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations but strengthens the argument in favor of a more aggressive monetary policy when the central bank fears for model misspecifications.

Using data on private and public firms, this study documents that profitability follows a hump shape over the lifecycle of a firm. Profitability rises with age for young firms, remains elevated, and then declines slowly for mature firms. A dynamic lifecycle model captures the observed age profile of profitability. Investment in product development generates profitability increases for young firms while wage pressures from more productive entrants lead to profitability declines for mature firms. The model generates the lifecycle behavior of financing and growth documented in the literature, even though it contains no financial frictions. It also implies greater sensitivity of financing and growth to age for young firms, a prediction supported by empirical tests. Taken together, these findings indicate that profitability dynamics influence the financing and growth of firms over the lifecycle.

We develop a two-sector model of physical and human capital accumulation, in which the government may allocate resources to both sectors, thereby enhancing productivity. We analyze the impact of both the level of government spending and its composition on growth and welfare, and derive their respective growth-maximizing levels. We show that both the growth-maximizing and welfare-maximizing rates of allocation of public expenditure are independent of the way infrastructures are defined (flow or stock). This conclusion, however, does not extend to the dynamics of the model where the adjustment to fiscal policy is very different. After a tax cut, for instance, the growth rate of physical and human capital converge to the new equilibrium from opposite directions under the stock specification; whereas they converge from the same direction under the flow specification.

In an experimental monetary general equilibrium economy, we assess two processes of monetary injection: credit expansion vs. lump-sum monetary transfers. In theory, both processes are neutral and exert no real effect on allocation. In the experiment, however, credit expansion leads to substantial distortions of real allocation and relative prices, and exerts a redistributive effect across subjects. By contrast, an increase in money through lump-sum transfers does not distort real allocation.

We propose a comprehensive decomposition of changes in global market shares that accounts for the value-added content. We find that the ongoing globalization process affects market shares directly by shifting production from developed to developing countries. Moreover, apparent improvements in the relative quality of exported goods from most new EU member states and developing countries occur to some extent from higher quality imported inputs. Hence, the process of outsourcing high-quality production from developed countries plays an important role and reduces the contribution of residual non-price factors in explaining market share gains of developing countries.