By Elhanan Helpman, Efraim Sadka
This ebook comprises fifteen significant essays on overseas economics. The authors examine 5 relevant subject matters: conception and empirics of economic concerns in open economies; financial development; public economies; and political financial system. Written to honor Professor Assaf Razin of Tel Aviv and Cornell Universities at the get together of his 60th birthday, the essays pay shut recognition to coverage matters in addition to formal research. The participants contain popular experts in overseas economics dependent in North the United States, Europe, Israel, and China. This quantity of state of the art examine may be of curiosity to students, coverage makers, and complex scholars alike.
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Extra resources for Economic Policy in the International Economy
On the other hand, attacks arising from self-fulﬁlling expectations as in second-generation models of Obstfeld (1996) and in thirdand fourth-generation models of Krugman (1999, 2001) are in principle ∗ Prepared for the conference on “Economic Policy in the International Economy” in honor of Assaf Razin’s 60th birthday, organized by Elhanan Helpman and Efraim Sadka, at the Pinhas Sapir Center for Development, Tel Aviv University, March 25–26, 2001. I would like to thank Alex Chan, Nai-fu Chen, Leonard Cheng, Alex Cukierman, Sebnem KalemliOzcan, and participants at the Razin conference for useful suggestions and comments.
From the perspective of what has happened since, there are three things worth noting about this analysis. First, the root cause of the crisis is poor government policy. In these models, the source of the upward trend in the shadow exchange rate is the government’s need for seignorage; solve the ﬁscal problem and there would be no crisis. And the speculative target is provided by the government’s pursuit of inconsistent policies: persistent deﬁcits together with an exchange rate peg. So the models basically imply that governments get the crisis they deserve.
At very favorable exchange rates, few ﬁrms would be balance-sheet constrained; so at low eP*/P the direct effect of the exchange rate on aggregate demand would be minor. At very unfavorable real exchange rates, ﬁrms with foreign-currency debt would be unable to invest at all, and therefore the direct exchange-rate effect on demand would be trivial at the margin. But in an intermediate range, the effect might be large enough to outweigh the direct effect on export competitiveness, so that over that range depreciation of the currency would be contractionary rather than expansionary.