This paper reviews the ""Austrian"" theory of the business cycle first proposed by Friedrich Hayek in the 1920s. His theory claimed that credit creation by monetary authorities would push investment beyond society''s long-term willingness to save, creating a mismatch between supply and demand...

This paper examines the link between lending booms, asset price cycles, and financial crises across East Asian countries. Both theoretical arguments and empirical evidence support a strong relationship between bank lending and asset price inflation, especially in the real estate market. While...

Assessing the magnitude of the output gap is critical to achieving an optimal policy mix. Unfortunately, the gap is an unobservable variable, which, in practice, has been estimated in a variety of ways, depending on the preferences of the modeler. This model selection problem leads to a...

Real GDP growth and real effective exchange rate (REER) appreciation appear cointegrated with the current and financial accounts of the U.S. balance of payments. On this basis, we estimate reduced form equations showing that expected changes and shocks to real GDP, the REER, energy prices, and...

This paper uses a general equilibrium model to examine the central role played by commercial banks in intermediating and amplifying the capital flow shocks to the local economy in the 1997 Asia financial crisis. It finds that a sudden stop of capital inflows affects the equilibrium credit supply...

The May 2011 Regional Economic Outlook: Europe anticipates that recovery in the region will solidify, with recoveries in advanced and emerging Europe likely to be mutually reinforcing. Advanced Europe continues to absorb most of emerging Europe's exports, while the role of emerging Europe as a...

In the context of the U.K. government’s EMU entry condition of cyclical convergence, this paper (i) provides further evidence suggesting that historically the U.K.’s business cycle has been more volatile than, and relatively independent of, the cycles in the euro-area countries; and (ii)...

We study the impact of a minimum wage on business cycle volatility, depending upon its coverage and adjustment mechanism. As with other small open economies, Hong Kong SAR is vulnerable to external shocks, with its exchange rate regime precluding active monetary policy. Adjustment to past shocks...

There is a widespread view that bank capital requirements should be loosened during recessions and tightened during expansions to avoid excessive credit and output swings. This view is based on a partial analysis that ignores the effects of capital requirement policies on the saving decisions of...

This paper presents a practical guide to public debt dynamics, fiscal sustainability, and cyclical adjustment of budgetary aggregates. The paper discusses fiscal formulas, which may be of practical use in fiscal analysis. The paper derives, respectively, the formulas for debt dynamics, and...