International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This...

We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand....

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However,...

The paper analyzes some key policy trade-offs involved in the implementation of the Stability and Growth Pact. Greater procedural flexibility in the Pact`s implementation may improve welfare. Procedural flexibility designates the enforcer`s room to apply judgment on underlying policies and to...

How do oil price movements affect sovereign spreads in an oil-dependent economy? I develop a stochastic general equilibrium model of an economy exposed to co-moving oil price and output processes, with endogenous sovereign default risk. The model explains a large proportion of business cycle...

This paper develops a new approach for exploring the effectiveness of foreign currency intervention, focusing on real exchange cycles. Using band spectrum regression methods, it examines the role of macroeconomic fundamentals in determining the equilibrium real exchange rate at short-, medium-,...