FOURTH EDITION DEVELOPMENT MACROECONOMICS. Pierre-Richard Agenor. Peter J. Montiel. Princeton University Press Princeton and Oxford

Transcription

1 FOURTH EDITION DEVELOPMENT MACROECONOMICS Pierre-Richard Agenor Peter J. Montiel Princeton University Press Princeton and Oxford

2 Contents Preface to the Fourth Edition xix Introduction axid Overview 1 Part I: Macroeconomic Accounts, Market Structure, and Behavioral Functions ^31 Economic Structure and Aggregate Accounts 12 1 Economic Structure and Macroeconomics Opennessto Trade in Goods and Assets Exchange-Rate Management Domestic Financial Markets The Government Budget Aggregate Supply and the Labor Market Stability ofpolicy Regimes Macroeconomic Volatility and Fluctuations Income Inequality 25 2 A General Accounting Framework The Nonfinancial Private Sector The Public Sector The Nonfinancial Public Sector The Central Bank The Consolidated Public Sector The Commercial Banking System Aggregate Relationships 31 3 Production Structure in an Open Economy The Mundell-Fleming Model The "Dependent Economy" Model A Model with Three Goods 39 4 The Structure of Labor Markets Functioning of Labor Markets Open and Disguised Unemployment Indexation and Wage Rigidity Labor Market Segmentation 47 vii

3 viii Contents K8 Behavioral Functions 52 1 Consumption and Saving Consumption Smoothing Planning Horizon and Liquidity Constraints Liquidity Constraints and Asymmetrie Effects Effects oflnterest Rate Changes on Savings Public and Private Consumption 64 2 Private Investment Conventional Determinants Reformulation oftheories Natureofthe Financial System Imported Goods Debt Overhang Effects Role of Public Capital Macroeconomic Instability and Uncertainty Uncertainty and Irreversibility Effects 69 3 The Demand for Money Conventional Models Currency Substitution and Dollarization 75 Part II: Financial Policies The Government Budget and Fiscal Management 1 The Government Budget Constraint 79 2 The Measurement of Fiscal Deficits 81 3 Contingent Liabilities 83 4 Seigniorage and Inflationary Finance The Optimal Inflation Tax Collection Lags and the Olivera-Tanzi Effect Collection Costs and Tax System EfEciency Financial Repression and the Inflation Tax 93 5 Policy Consistency and Solvency The Intertemporal Solvency Constraint Financing Constraints and Policy Consistency Fiscal Rules and Fiscal Discipline Fiscal Rules, Public Investment, and Growth 104 Appendix: Fiscal Effects of Privatization 106

4 Contents ix Q Macroeconomic Effects of Fiscal Policy Ricardian Equivalence Dcficits, Inflation, and the "Tight Money" Paradox The Analytical Framework Constant Primary Deficit Constant Conventional Deficit Deficits, Interest Rates, and Crowding Out Expectations, Deficits, and Real Interest Rates Deficits, Investment, and Crowding Out Budget Deficits and the Current Account Expansionary Fiscal Contractions Fiscal Adjustment and the Labor Market The Model The Formal Economy The Informal Sector Consumption and Wealth Market for Informal Sector Goods The Informal Labor Market Government Dynamic Structure Steady-State Solution Government Spending Cut 141 Q Financial Markets and the Monetary Transmission Mechanism Financial Structure and the Role of Banks Asymmetrie Information and Credit The Stiglitz-Weiss Model of Credit Rationing Costly State Verification Models Bank Credit and the Supply Side The Cost offunds-contractual Interest Rate Curve Intermediation Costs, Employment, and Output Net Worth and Borrowing Constraints The Monetary Transmission Mechanism: Overview The Pass-Throughof Policy Rates to Market Rates Interest Rate Effects Exchange-Rate Effects Asset Prices and Balance Sheet Effects Net Worth and the Finance Premium The Financial Accelerator 173

5 X Contents 3.5 Credit Availability Effects Expectations Dollarization Determinants of Dollarization Persistence of Dollarization Dollarization and Macroeconomic Management Macroprudential and Monetary Policies 180 Q A Framework for Monetary Policy Analysis The Basic Model: Fixed Exchange Rates Structure of the Model Household Portfolio Allocation Commercial Banks Central Bank Price Level and the Real Sector Model Solution Policy and Exogenous Shocks Increase in the Refinance Rate Central Bank Auctions Increase in the Required Reserve Ratio Shifts in the Risk Premium and Contract Enforcement Costs Changes in Public Expenditure and World Interest Rates Flexible Exchange Rates Model Structure Solution Policy and Exogenous Shocks Increase in the Refinance Rate Central Bank Auctions Increase in the Required Reserve Ratio Shifts in the Risk Premium and Contract Enforcement Costs Changes in Public Expenditure and World Interest Rates Extensions Sterilization Working-Capital Needs Dynamics of Prices and Interest Rates 222

6 Contents xi B Inflation Targeting, Macroeconomic Stability, and Financial Stability Basic Framework: Closed Economy Strict Inflation Targeting Policy Trade-Offs and Flexible Targeting Inflation Targeting in an Open Economy Comparison with Other Regimes Monetary Targeting Exchange-Rate Targeting Nominal Income Targeting Basic Requirements for Inflation Targeting Central Bank Independence and Credibility Absence of Fiscal Dominance Absence of de facto Exchange-Rate Targeting Healthy Financial System Transparencyand Accountability Performance of Inflation Targeting Regimes Inflation Targeting and Financial Stability Some Other Analytical Issues Non-Quadratic Policy Preferences Uncertainty and Optimal Policy Rules 258 Choosing an Exchange-Rate Regime I: Credibility, Flexibility, and Weifare Basic Typology Evolution of Exchange-Rate Regimes Policy Trade-Oflfs and Credibility Time Inconsistency and Exchange-Rate Policy Credibility of a Fixed Exchange Rate Reputation, Signaling, and Commitment Credibility vs. Flexibility: Role of Bands Rationale for Bands Bands and Monetary Policy Credibility Experience with Bands Currency Unions Credibility Effects of Monetary Unions Weifare Effects of Optimum Currency Areas The Model Equilibrium Weifare Effects 287 Appendix: Krugman's Target Zone Model 291

7 xii Contents Q Choosing an Exchange-Rate Regime II: The Role of Shocks, Contractionary Effects, and Moral Hazard Role of Shocks Model Specification Model Solution Contractionary Effects Effects on Aggregate Demand Consumption Investment Nominal Interest Rates Effects on Aggregate Supply Effects on the Nominal Wage Imported Inputs Effects through Working-Capital Costs Effects through Balance Sheets An Assessment 327 Part III: Inflation Stabilization and Applied Models for Monetary Policy Analysis Q] Inflation and Short-Run Dynamics Models of the Inflationary Process Inflation, Money, and Fiscal Deficits Adaptive Expectations Perfect Foresight Food Supply and the Wage-Price Cycle A Structuralist-Monetarist Model Dynamics of Alternative Policy Rules A One-Good Framework Households Government and The Central Bank Money Market Equilibrium Dynamic Form Devaluation Rule Credit Growth Rule Dynamics with Alternative F iscal Policy Rules 359

8 Contents xiii 2.2 A Three-Good Model with Flexible Prices Households Output and the Labor Market Central Bank and the Government Market-Clearing Conditions Dynamic Form Policy Experiments Extensions Imported Intermediate Inputs Sticky Prices 374 Appendix: Impact and Steady-State Effects 377 Analytical Issues in Disinflation Programs Topics in Exchange-Rate-Based Programs The Boom-Recession Cycle Expectations, Real Interest Rates, and Output The Temporariness Hypothesis AnAssessment The Behavior of Real Interest Rates Credibility, Nominal Anchors, and Interest Rates Expectations, Fiscal Adjustment, and Interest Rates Disinflation and Real Wages Role of Credibility in Disinflation Programs Sources of Credibility Problems Internal Inconsistency Time Inconsistency Asymmetrie Information Policy Uncertainty and Stochastic Shocks Political Uncertainty Enhancing the Credibility of Disinflation Programs Signaling and Sustainability Price Controls Central Bank Independence External Enforcement and Foreign Assistance Sequencing and Political Support Policy Lessons Disinflation and Nominal Anchors 434 Appendix: Output Effects of Price Controls 437

9 xiv Contents Q Dynamic Stochastic Equilibrium Models with Financial Frictions Main Features of DSGE Models A Basic Model Household Output and Price Formation Government Market-Clearing Conditions Interest Rate Rule The Log-Linearized Form Financial Frictions in DSGE Models Accounting for Financial Frictions Extending the Basic Framework Intermediate Good Producers Capital Good Producer Commercial Bank Central Bank Government Calibration and Estimation Extensions Heterogeneous Agents and Expectations Open-Economy Considerations Macroprudential Regulation 472 Part IV: Financial Openness, Capital Flows, and Financial Crises gq Financial Integration and Capital Flows Benefits and Costs of Financial Integration Potential Benefits Consumption Smoothing Domestic Investment and Growth Enhanced Macroeconomic Discipline Banking System Efficiency and Financial Stability Potential Costs Concentration of Capital Flows and Lack of Access Domestic Misallocation of Capital Flows Loss of Macroeconomic Stability 484

10 Contents xv Procyclicality of Short-Term Flows Herding, Contagion, and Volatility of Capital Flows Risk of Entry by Foreign Banks Assessing the Evidence Determinants of Capital Inflows "Pull" Factors "Push" Factors Assessing the Evidence Managing Capital Inflows: Policy Options Restrictions on Gross Inflows Encouragement of Gross Outflows Trade Liberalization Exchange-Rate Flexibility Sterilization Policies to Influence the Money Multiplier Fiscal Contraction Macroprudential Regulation 508 Appendix: Measuring the Degree of Financial Integration 510 (Q Exchange-Rate Crises and Sudden Stops Currency Crises: Conventional Approach The Basic Model Extensions to the Basic Framework Sterilization Alternative Post-Collapse Regimes Real Effects of an Anticipated Collapse Borrowing, Capital Controls, and Crisis Postponement Interest Rate Defense Other Directions Policy Trade-Offs and Self-Fulfilling Crises Example Based on Output-Inflation Trade-Offs Public Debt and Self-Fulfilling Crises Role of Credibility and Reputation Other Sourcesof Policy Trade-Offs A "Cross-Generation" Framework Third-Generation Models Sudden Stops Alternative Models Models with Multiple Equilibrin A Sudden Stop as a Unique Equilibrium The Role of Reserves and Policy Responses 548

11 xvi Contents jßgg Banking Crises and Twin Crises Banks asmaturity Transformers The Diamond-Dybvig Framework Business Cycles and Banking Crises Twin Crises A Basic Model with Close Linkages The Chang-Velasco Framework The Flood-Marion Joint Distribution Approach Asymmetrie Information and Opportunism Determinants of Banking Crises: Evidence Episodic Cross-Country Evidence Signaling Approach Econometric Investigations 569 Sovereign Debt Crises Fiscal Sustainability and Fiscal Solvency The Algebra of Fiscal Solvency Implications for Fiscal Policy Empirical Tests of Fiscal Sustainability Deterministic Tests Sustainable Debt The Sustainable Primary Surplus Time-Series Tests Hamilton and Flavin (1986) Trehan and Walsh (1991) Fiscal Reaction Functions Tests of Fiscal Vulnerability Value at Risk Mendoza and Oviedo (2004) Fiscal Solvency and Debt Repayment Costs of Default Default and Domestic Debt Default and Real Output Debt Overhangs Effects on International Trade Signaling Sovereign Debt Crises and Banking Crises Sovereign Debt Crises and Currency Crises 594 Appendix: Determinants of Sovereign Debt Crises: The Evidence 597

12 Contents xvii Part V: Growth, Structural Reforms, and Political Economy Bl Macroeconomic Policies and Growth The Neoclassical Growth Model The AK Model ofendogenous Growth Human Capital, Knowledge, and Growth The Production of Human Capital The Production of Knowledge Government Spending, Taxes, and Growth The Barro Model Infrastructure, Health, and Growth Production Household Preferences Production of Health Services Government The Decentralized Equilibrium Optimal Policies A Stock Approach Financial Intermediation and Growth Effects on the Saving Rate Effects on the Allocation of Capital Intermediation Costs and EfEciency Inflation and Growth Macroeconomic Volatility and Growth Middle-Income Growth Traps A Methodological Note 638 Trade Liberalization, Financial-Sector Reforms, and Sequencing Trade Reform Analytical Framework Output, Turnover Costs, and Wages Consumption and the Market for Nontraded Goods Government Labor Market Adjustment TarifFs, Real Wages, and Employment Steady-State Effects Short-Run Dynamics 654

13 xviii Contents 2 Financial Liberalization Deregulation of Interest Rates Broader Aspects of Financial Liberalization Role of Regulation and Supervision SequencingofReforms Stabilization, Financial Reform, and Capital Account Opening Capital and Current Account Liberalization Macroeconomic Stabilization and Trade Reform Adjustment Costs, Credibility, and Speed of Reform 672 The Political Economy of Adjustment Politics, Economic Policy, and Adjustment The Political Economy of Reform Political Instability, Inflation, and Fiscal Deficits Conflicts of Interest and Economic Reforms The Uncertain-Benefits Approach The Distributional Conflict Approach Political Stabilization Cycles Opportunistic Models Elections, Inflation, and Unemployment Elections and Devaluation Cycles Models with Informational Asymmetries The Political Economy of Fiscal Rules 694 Epilogue 697 References 701 Index ofnames 741 Index of Subjects 751