International Robust Disagreement

By Riccardo Colacito and Mariano M. Croce

American Economic Review, May 2012

We characterize the equilibrium of a two-country, two-good economy in which agents have opposite preference bias toward one of the two consumption goods and fear model misspecification. We document that disagreement about endowments' growth prospects is a...

Heterogeneous Beliefs, Wealth Distribution, and Asset Markets with Risk of Default

By Viktor Tsyrennikov

American Economic Review, May 2012

We study asset markets and wealth dynamics in the economy with heterogeneous beliefs and risk of default. Agents can trade a full set of Arrow securities but are allowed to default on their delivery promises. Financial markets rationally subject agents to...

Estimating Sovereign Default Risk

By Huixin Bi and Nora Traum

American Economic Review, May 2012

This paper uses Bayesian methods to estimate the sovereign default probability for Greece and Italy in the post-EMU period. We build a real business cycle model that allows for interactions among fiscal policy instruments, sovereign default risk, and a "f...

Evolving Monetary/Fiscal Policy Mix in the United States

By Francesco Bianchi

American Economic Review, May 2012

A micro-founded model that allows for changes in the monetary/fiscal policy mix and in the volatility of structural shocks is fit to US post-WWII data. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of mo...

Monetary-Fiscal Policy Interactions and Indeterminacy in Postwar US Data

By Saroj Bhattarai, Jae Won Lee, and Woong Yong Park

American Economic Review, May 2012

Using a micro-founded model and a likelihood-based inference method, we show that while a passive monetary and passive fiscal policy regime prevailed in the U.S. before Paul Volcker's chairmanship at the Federal Reserve, an active monetary and passive fis...

Real Exchange Rate Adjustment in and out of the Eurozone

By Martin Berka, Michael B. Devereux, and Charles Engel

American Economic Review, May 2012

It is often suggested that currency unions unduly inhibit the efficient adjustment of real exchange rates. Recently, this has been seen as a key failure of the Eurozone. This paper presents evidence that throws doubt on this conclusion. Our evidence sugge...

Fiscal Consolidation in an Open Economy

By Christopher J. Erceg and Jesper Lindé

American Economic Review, May 2012

his paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We sho...

Managing Currency Pegs

By Stephanie Schmitt-Grohé and Martín Uribe

American Economic Review, May 2012

The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alte...

Can Asia Overcome the IMF Stigma?

By Takatoshi Ito

American Economic Review, May 2012

Asian countries still have the IMF stigma, which originates from the experiences of the Asian crisis of 1997-98. The feeling of being unfairly treated grew even stronger afterward. The Asian countries built large foreign reserves, carried out structural r...

Capital Flow Management

By Olivier Jeanne

American Economic Review, May 2012

There is a wide variety in the capital account policies of emerging markets and developing economies. Some countries, such as Brazil, have recently experimented with prudential controls on capital inflows, whereas others, such as China, have continued to ...

International Liquidity in a Multipolar World

By Barry Eichengreen

American Economic Review, May 2012

Today's global monetary and financial system, to a remarkable extent, continues to rely on the U.S. dollar for international liquidity. This reflects the currency's historic role, the liquidity of American financial markets, and the absence of alternativ...

Follow the Money: Quantifying Domestic Effects of Foreign Bank Shocks in the Great Recession

By Nicola Cetorelli and Linda S. Goldberg

American Economic Review, May 2012

Foreign banks pulled significant funding from their US branches during the Great Recession. We estimate that the average-sized branch experienced a twelve percent net internal fund "withdrawal," with the fund transfer disproportionately bigger for larger ...

Flight Home, Flight Abroad, and International Credit Cycles

By Mariassunta Giannetti and Luc Laeven

American Economic Review, May 2012

This paper shows that banks exhibit a weaker (stronger) home bias in the extension of new loans when funding conditions in their home country improve (deteriorate). We refer to these changes in home bias as flight abroad and flight home effects, respectiv...

From Financial Crisis to Great Recession: The Role of Globalized Banks

By Shekhar Aiyar

American Economic Review, May 2012

This paper provides evidence of the role of globalized banks in transmitting financial stresses to the real economy during the global financial crisis. A novel dataset is constructed from quarterly balance sheet reports provided by all UK-resident banks t...

International Shock Transmission after the Lehman Brothers Collapse: Evidence from Syndicated Lending

By Ralph De Haas and Neeltje Van Horen

American Economic Review, May 2012

After Lehman Brothers filed for bankruptcy in September 2008, cross-border bank lending contracted sharply. To explain the severity and variation in this contraction, we analyze detailed data on cross-border syndicated lending by 75 banks to 59 countries....

Moving to Higher Ground: Migration Response to Natural Disasters in the Early Twentieth Century

By Leah Platt Boustan, Matthew E. Kahn, and Paul W. Rhode

American Economic Review, May 2012

Areas differ in their propensity to experience natural disasters. Exposure to disaster risks can be reduced either through migration (i.e., self-protection) or through public infrastructure investment (e.g., building seawalls). Using migration data from t...

Nature versus Nurture: The Environment's Persistent Influence through the Modernization of American Agriculture

By Richard Hornbeck

American Economic Review, May 2012

Technological innovation in agriculture was substantial during the 20th century. Is "modern" technological control of the environment replacing a "primitive" dependency on natural advantages and disadvantages, or has agricultural production remained pers...

Adaptation to Climate Change in Preindustrial Iceland

By Matthew A. Turner, Jeffrey S. Rosenthal, Jian Chen, and Chunyan Hao

American Economic Review, May 2012

We investigate the effect of climate change on population growth in 18th and 19th century Iceland. We find that annual temperature changes help determine the population growth rate in pre-industrial Iceland: a year 1 degree Celsius cooler than average dri...

Race and Gender Differences under Federal Sentencing Guidelines

By Todd Sorensen, Supriya Sarnikar, and Ronald L. Oaxaca

American Economic Review, May 2012

Using data from the United States Sentencing Commission, we examine how judicial biases may have influenced sentences during the era of the Federal criminal sentencing guidelines. Our utility maximization model of judicial sentencing preferences leads to ...

Terrorism and Patriotism: On the Earnings of US Veterans following September 11, 2001

By Alberto Dávila and Marie T. Mora

American Economic Review, May 2012

Using data from the 2000 census and the 2001-08 American Community Surveys, this paper examines the impact of 9/11 on the earnings of US veteran men. Our hypothesis is that the surge in patriotism after 9/11 improved their relative earnings, but this earn...