We consider the nature of the relationship between the real exchange rate and capital formation. We present a model of a small open economy that produces and consumes two goods, one tradable and one not. Domestic residents can borrow and lend aborad, and costly state verification (CSV) is a...

We consider a small open economy where domestic residents combine their own income with credit obtained either at home or abroad in order to finance capital investments. These investments are subject to a costly state verification (CSV) problem. In addition, lenders to domestic residents...

Most monetary growth models have a relatively simple structure. There are two assets, money and capital, and money is held either because it earns the same real return as capital, or because it is ascribed an advantage in transacting that is not explicitly modelled. Financial market institutions...

We evaluate the desirability of having an elastic currency generated by a lender of last resort that prints money and lends it to banks in distress. When banks cannot borrow, the economy has a unique equilibrium that is not Pareto optimal. The introduction of unlimited borrowing at a zero...

We test for the presence of market discipline in the banking sector in early 20th century Mexico. Using a panel of financial data from note-issuing banks between 1905 and 1910, we examine whether bank fundamentals influenced the pattern of withdrawals. If we do not control for exit, our...

We explore the role of domestic financial market frictions in explaining sharp movements in real and nominal exchange rates, capital flows, and output for a small open economy. Financial intermediaries arise endogenously to insulate depositors from the consequences of liquidity shocks and...

We consider the question of how to "best" maintain price level stability in the open economy and evaluate three possible policy choices: (a) a constant money growth rate rule; (b) a fixed rate: and (c) a policy of explicit commitment to a price lavel target. In each case we assume that policy is...

Empirical evidence suggest that real activity, the volume of bank lending activity, and the volume of trading in equity markets are strongly positively correlated. At the same time. inflation and the volume of financial market activity are strongly negatively correlated (in the long-run), as are...