By Elhanan Helpman, Efraim Sadka

Fifteen significant essays on overseas economics examine 5 crucial topics: idea, and empirics, of economic concerns in open economies; fiscal development; public economies; and political economic system. Written to honor Assaf Razin of Tel Aviv and Cornell Universities at the party of his 60th birthday, the essays pay shut consciousness to coverage concerns and formal research. The participants comprise popular experts in foreign economics dependent in North the USA, Europe, Israel, and China.

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Example text

Even when adopted, they probably would not assume the exact same forms as these two solutions would dictate. We show below, however, that the incentive contract solution is replicable by a more commonly adopted targeting rule [cf. Svensson (1997)]. , ρ 0). Then her/his objective function will be altered as follows: L = E{[α(ε − ε e ) − (u + d )]2 + β(ε − ε)2 | ε e , u}. Upon rearranging terms, we can express it as L = E{[α(ε − εe ) − (u + d )]2 + βε 2 − V(ε, ε) | εe , u}, (7 ) V(ε, ε) = −βε 2 + (2βε)ε.

The optimal devaluation rate is given by ε= α2 α +β (αε e + u + d), (2) 36 Chi-Wa Yuen which implies an actual output level of y = y˜ − ( α2β+β )(αε e + u + d). Hence, the government’s ex post loss is Lflex = [(y − y) ˜ 2 + βε 2 ] = α2 β +β (αεe + u + d)2 . 2 In other words, in the absence of some preventive measures, the government always has the temptation to voluntarily abandon the peg irrespective of its ability (say, in terms of its reserve position) to maintain it. Understanding this, the public will rationally expect such outcome and choose to attack the regime before it is abandoned.

In Krugman (1999b) I ran through the usual answers and found each one wanting: 1. IMF financial support: This provides a country with additional funds to intervene in the exchange market – more dollars to support the baht, won, whatever. Leaving aside monetary policy, however, this is a sterilized intervention; so it is an attempt to use sterilized intervention to move the exchange rate away from the crisis equilibrium. Calling the IMF the international lender of last resort sounds impressive; calling it, more accurately, the “sterilized intervenor of last resort” probably more accurately conveys the limits of what it can accomplish.

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