We examine the relationship among a liberal financial-market regime, asset-by-asset supervisory assessment of intermediaries' portfolios, and economic efficiency. We show that, in Boyd and Prescott's (JET 1986) model of financial intermediary coalitions, asset-by-asset supervisory assessment in a liberal regime is inefficient for some, but not all, parameters of the economy.
This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real business cycle model modified to include endogenous agency costs. The chief contribution of the paper is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks?
Foreign exchange transactions are subject to a unique type of settlement risk. This risk ultimately stems from the difficulty of coordinating separate settlements in two different currencies. Settlement of foreign exchange transactions through the proposed CLS Bank has been discussed as a potential solution to this problem. This paper describes the CLS proposal and analyzes the incentives it places on banks engaged in foreign exchange transactions. The analysis shows that while settlement through the CLS Bank may represent an improvement over current arrangements, some important problems associated with foreign exchange settlements will remain.
Our understanding of defense against speculative attacks on fixed exchange rates is incomplete. Though interest rates are often raised to defend a currency, there is almost no formal modeling of interest-rate defense. We present a framework of analysis with special emphasis on signaling when there is incomplete information about the central bank's ability or commitment to defend the fixed exchange rate. The primary focus is on why a high-interest-rate defense may fail even if it raises the cost of speculation and hence temporarily deters speculation. It is shown that the effect of high interest rates under asymmetric information very much depends on the information structure, and hence on the signal that high interest rates send. Depending on what is known, high interest rates may either deter or fuel further speculation. The analysis should be useful in understanding the mixed empirical results on the effectiveness of the interest-rate defense in practice.
What is the mechanism driving the business cycle associated with stabilization policies anchored on managed exchange rates? Perfect-foresight models used extensively to try to answer this question have been unable to explain key quantitative features of the data. To do so it is necessary to consider devaluation risk in an environment of incomplete insurance markets in which stochastic price and wealth distortions operate. Simulations applied to Mexican data show that these distortions are large and socially costly, and that they rationalize several stylized facts. These findings suggest focusing the debate on exchange-rate regimes on the credibility of policymakers and the stance of fiscal policy.
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