This paper analyzes quantitatively the extent to which there is overborrowing (i.e., inefficient borrowing) in a business cycle model for emerging market economies with production and an occasionally binding credit constraint. The main finding of the analysis is that overborrowing is not a...

Stochastic general equilibrium models of small open economies with occasionally binding financial frictions are capable of mimicking both the business cycles and the crisis events associated with the sudden stop in access to credit markets (Mendoza, 2010). In this paper we study the...

In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of...

In response to the global financial crisis a new policy paradigm emerged in which capital controls and other quantitative restrictions on credit flows have become part of the standard crisis prevention policy toolkit. A new strand of theoretical literature studies the use of capital controls in...

The paper studies the causes of the current financial crisis and considers proposals for mitigation and prevention of future crises. The crisis is was the product of a ‘perfect storm’ bringing together a number of microeconomic and macroeconomic pathologies. Among the microeconomic systemic...

The traditional current account can be an inaccurate measure of the change in the net foreign asset (NFA) position. Using gross asset and liability positions at the country level, a number of 'valuation effects' have been identified which contribute to changes in NFA but do not enter the...

Capital formation is a key driver of the growth of potential output. With continuing widespread capital controls and persistently small inward FDI the volume of capital formation in India is constrained by domestic saving. The national saving rate in India (the sum of the saving rates of...

Most interpretations of the Exchange Rate Mechanism crisis of 1992/3 ignore the key role played by structural policy spillovers among European countries, and overlook the effects of coordination (or lack thereof) of monetary and exchange rate policies among the countries making up the periphery...

The paper reviews and evaluates in a non-technical manner the economic and political arguments for and against the two fiscal convergence criteria written into the Treaty of Maastricht and its Protocols. In order to qualify for full membership in Economic and Monetary Union (EMU), net general...