This paper presents a simple model of how a small open economy can undervalue its real exchange rate using its capital account policies. The paper presents several properties of such policies, and proposes a rule of thumb to assess their welfare cost. The model is applied to an analysis of...

We model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much previous literature as intractable. Our model captures many of the principal insights from the existing specialized literature on the precautionary motive,...

Has the US dollar delivered the benefit that the rest of the world is expecting from its holdings of international liquidity? US government debt has been liquid and safe, and it is supplied in sufficient quantity. But it has given a low return to the countries that accumulated the most reserves,...

Most countries emerged from the Second World War with capital accounts that were closed to the rest of the world. Since then, a process of capital account opening has occurred, with the result that all developed and many emerging-market countries now have capital accounts that are both de facto...

This paper analyzes prudential controls on capital flows to emerging markets from the perspective of a Pigouvian tax that addresses externalities associated with the deleveraging cycle. It presents a model in which restricting capital inflows during boom times reduces the potential outflows...

We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We...

The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital seems to flow more to countries...

This paper presents a theory of the maturity of international sovereign debt and derives its implications for the reform of the international financial architecture. It presents a general equilibrium model in which the need to roll over external debt disciplines the policies of debtor countries...

The link between monetary policy and asset price movements has been of perennial interest to policymakers. In this paper, we consider the potential case for preemptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts...

Using a simple model of international lending, we show that as long as the IMF lends at an actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are...