@workingpaper {16269, title = {Efficient Expropriation: Sustainable Fiscal Policy in a Small Open Economy}, year = {2006}, abstract = {We study a small open economy characterized by two empirically important frictions {\textendash} incomplete financial markets and an inability of the government to commit to\ policy. We characterize the best sustainable fiscal policy and show that it can amplify\ and prolong shocks to output. In particular, even when the government is completely\ benevolent, the government{\textquoteright}s credibility not to expropriate capital endogenously varies\ with the state of the economy and may be {\textquotedblleft}scarcest{\textquotedblright} during recessions. This increased\ threat of expropriation depresses investment, prolonging downturns. It is the incompleteness of financial markets and lack of commitment that generate investment cycles\ even in an environment where first best capital stock is constant.}, author = {Mark Aguiar and Manuel Amador and Gita Gopinath} } @article {16262, title = {Book Review: C. Fred Bergsten and John Williamson, eds., Dollar Adjustment: How Far? Against Whom? (2004) Peterson Institute, Washington, DC}, journal = {Journal of Economic Literature}, volume = {44}, number = {1}, year = {2006}, pages = {155-156}, abstract = {In today{\textquoteright}s times, the single most debated question in international policy circles is the fate of the\ U.S. dollar and the U.S current account. This book\ is a collection of essays on this debate. The papers\ were presented at a conference in Washington,\ D.C., on May 25, 2004, organized by the Institute\ for International Economics. The main questions\ that were asked at the time of the conference were\ the following: (1) How much further does the dollar need to depreciate? (2) Against which currencies does it need to depreciate? The general\ consensus among the authors is that there is a serious misalignment of key national currencies in the\ world. The main conclusion is that the dollar\ needs to decline by an additional 15 percent or so\ and most of this adjustment needs to take place\ against Asian currencies. This will require China\ to revalue its exchange rate against the dollar by\ around 20 percent.}, url = {http://dx.doi.org/10.1257/002205106776162708}, author = {Gita Gopinath} } @article {16258, title = {Defaultable Debt, Interest Rates and the Current Account}, journal = {Journal of International Economics}, volume = {69}, number = {1}, year = {2006}, note = {Matlab code for programs attached.}, pages = {64-83}, abstract = {World capital markets have experienced large scale sovereign defaults on a number of occasions. In this paper we develop a quantitative model of debt and default in a small open\ economy. We use this model to match four empirical regularities regarding emerging markets:\ defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical,\ and interest rates and the current account are positively correlated. We highlight the role of the\ stochastic trend in emerging markets, in an otherwise standard model with endogenous default,\ to match these facts.}, url = {http://dx.doi.org/10.1016/j.jinteco.2005.05.005}, author = {Mark Aguiar and Gita Gopinath} } @conference {16257, title = {Emerging Market Fluctuations: The Role of Interest Rates and Productivity Shocks}, booktitle = {Tenth Annual Conference on the Central Bank of Chile, "Current Account and External Financing"}, year = {2006}, note = {Bibtex}, month = {9-10 Nov 2006}, publisher = {Central Bank of Chile}, organization = {Central Bank of Chile}, address = {Santiago, Chile}, abstract = {In this paper we use a quantitative model to explore the potential frictions that\ distinguish emerging market business cycles from developed small open economies. Following Aguiar and Gopinath (2007) we allow total factor productivity (TFP) to have a\ stationary and an integrated component. We also allow for shocks to the consumption\ and investment Euler Equations that operate through the interest rate. These {\textquotedblleft}wedges{\textquotedblright}\ represent changes in the intertemporal marginal rate of transformation, which may be\ due to changes in observed interest rates, unobserved borrowing constraints, or other\ financial frictions. We estimate the model using data from Mexico and Canada. We\ show that interest rate shocks orthogonal to domestic TFP fail to explain the behavior of emerging markets. We then allow for interest rates to respond to/co-vary with\ productivity shocks. We find that emerging market business cycles appear to be driven\ by large shocks to trend income combined with relatively small transitory shocks that\ co-vary with the interest rate.}, author = {Mark Aguiar and Gita Gopinath} }