In early 1990, Argentina, Brazil, Peru, Yugoslavia and Poland were experiencing extreme instability or, at least, the early stages of stabilization. Other countries, like Bolivia, had already run the course and stabilized or, like Mexico, had avoided the extreme experience and opted for...

Does inefficiency of financial markets have real consequences? Or does it only result in transfers of wealth from noise traders to arbitrageurs? We study firm business investment to address this question. In our model, benevolent managers of overvalued companies invest in projects with negative...