Debt, Devaluation, Trade, and More

Those were some of the topics covered at the West Coast Workshop on International Finance and Open Economy Macroeconomics, held last Friday on the beautiful UC-Santa Cruz campus, co-organized by Helen Popper (Santa Clara University), Michael Hutchison (UC Santa Cruz), and Carl Walsh (UC Santa Cruz).

Session 1: Implications of Currency Ties, Chair: Helen Popper, SCU

“Bailouts and Sovereign Defaults in a Monetary Union,” by Pierre-Olivier Gourinchas, UC Berkeley and Philippe Martin, Sciences Po
Discussant: Menzie Chinn, U of Wisconsin, Madison [presentation]

“Currency Unions and Trade: A Post-EMU Mea Culpa,” by Andrew Rose, UC Berkeley, and Reuven Glick, SF Fed
Discussant: Thuy Lan Nguyen, SCU

Session 2: Default Risk, Chair: Carl Walsh, UCSC

“Debt Overhang and Rollover,” by Michal Szkup, UBC
Discussant: Pablo Kurlat, Stanford University

“Envelope Condition Method with an Application to Default Risk Models,” by Cristina Arellano, Minneapolis Fed, Lilia Maliar, Stanford, Serguei Maliar, SCU, and Viktor Tsyrennikov, Cornell
Discussant Grace Gu, UCSC

Session 3: Trade and Business Cycles, Chair, Fernanda Nechio, FRBSF

“The Distributional Consequences of Large Devaluations,” by Javier Cravino, U. Michigan, and Andrei Levchenko, U. Michigan
Discussant: Yu-chin Chen, University of Washington

“Chinese Outwards Mercantilism-The Art and Practice of Bundling,” by Joshua Aizenman, USC, Yothin Jinjarak, Victoria Business School, Huanhuan Zheng, Chinese University of Hong Kong
Discussant Antonio Rodriguez-Lopez, UC Irvine

Panel Discussion: The Future of International Finance, Chair, Michael Hutchison, UCSC

“Reflections on 40 Years in International Finance as Guide to New Developments in the Field”, Michael Dooley, UCSC
Discussant Panel: James Boughton (Centre for International Governance Innovation), Robert Flood, Notre Dame U, Hali Edison, IMF, Aris Protopapadakis, USC

The conference marked the retirement of my former colleague and coauthor on several papers, Mike Dooley. Some of his most recent work is associated with the Revived Bretton Woods thesis, but he’s made lots of contributions in policy and research over the years, starting with his time at the Federal Reserve Board in 1971 (at the end of Bretton Woods) and then the IMF Research Department, before arriving at UCSC.

I can’t do justice to all his remarks, but one key theme is that international financial transactions only take place when there is some sort of implicit or explicit government guarantee; otherwise, the fact that financial contracts cannot be enforced cross-border means that there is too much risk associated with such transactions.

In this vein, the concept of a “safe asset” is problematic, even though we have many models of safe assets. The more appropriate concept is of enforceable contracts on assets; in the absence of that the only transactions that will occur are those that are collateralized. The “global imbalances” can be viewed through this vein, as in Mike’s 2005 Brookings Papers on Economic Activity article, coauthored with Peter Garber.

Many of his papers can be accessed from his homepage, but here are some representative works:

“A Model of Crises in Emerging Markets”, The Economic Journal, Vol. 110, no. 460, January, 2000 pp. 256-272.

“Latin America and East Asia in the Context of an Insurance Model of Currency Crises” Journal of
International Money and Finance
, August 1999. (with Menzie Chinn
and Sona Shrestha).

“Recent Private Capital Inflows to Developing Countries: Is the Debt Crisis History?”, World Bank Economic Review, vol. 10, 1996 pp. 27-50.

“Transactions Taxes and Foreign Exchange: Good Theory, Weak Evidence, Bad Policy”, in The Tobin Tax: Coping with Financial Volatility, Mahbub ul Haq, Inge Kaul and Isabelle Grundberg eds. Oxford University Press,1996,pp.83-108.

“Capital Controls, Political Risk, and Deviations from Interest Parity”, Journal of Political Economy, April 1980. (with Peter Isard)

“Capital Flight :A Response to Differences in Financial Risks,” IMF Staff Papers September 1988

“Capital Flight, External Debt and
Domestic Policies,”
FRBSF Economic Review, 1994 (with Ken Kletzer).

3 thoughts on “Debt, Devaluation, Trade, and More

  1. BC

    Trillions of dollars of US and Japanese supranational firms’ FDI to China-Asia since NAFTA/GATT/WTO in the mid-1990s has resulted in a level of “trade” (Anglo-American imperial trade regime as the successor to the British Empire from the 1870s to WW I) and net fossil fuel energy per capita and per GDP that is ecological unsustainable, uneconomic/unprofitable, and socio-culturally and geopolitically destablizing.

    Global “trade” (offshoring, labor arbitrage, etc.) per capita has ceased growing with the post-2007 trend rate of world real GDP per capita at ~0%, coincident with world oil production per capita no higher than in 2004-05, and production per capita of crude plus condensate not much higher than in 2001.

    The larger inference is that the world reached “Limits to Growth” in 2000-05 to 2008 as a result of the peak of availability of the easily accessible, affordable net energy per capita from the primary energy source required for our complex, urban, energy-dense, high-tech, high-entropy global economy and world civilization.

    That the growth of supply of easily accessible, cheap oil is no longer available to extract profitably means that growth of “trade” per capita can no longer occur, which in turn means that growth of real GDP per capita cannot occur.

    Once US extraction of costlier, lower-quality, unprofitable kerogen peaks and begins to decelerate to contraction, the deceleration of global “oil” production per capita will accelerate, reducing availability of net energy per capita and precluding growth of real GDP per capita indefinitely hereafter.

    QEternity, ZIRP, NIRP, and $1 trillion fiscal deficits cannot create cheap, easily accessible, profitable crude and crude oil substitutes to permit sustaining growth of real GDP per capita hereafter, let alone “escape velocity”.

    An entirely radically new set of assumptions, expectations, and policies are required for the post-Peak Oil epoch to avoid collapse of the mass-consumer economy and the institutions that depend upon same. Business as usual will likely accelerate the process of decline and collapse.

    Peak Oil. LTG. EOG. Reset. Start over. Get it. Now.

  2. Alireza Zabardast


    I am Alireza Zabardast. I am a PhD student in Economics.My main trends is econometric. I am looking for a thesis topic.Please guide me in choosing thesis topics. Please suggest if there is an interesting topic In the field of monetary economics and international economics.Let me do my thesis with your guidance.

    Thank You.

    Alireza Zabardast

  3. Bruce Hall

    The implications of national debt has always confused me. There doesn’t seem to be much relationship between debt and economic prosperity. Perhaps someone can enlighten me when debt is bad and when it is good … on a national basis. The best I can come up with is debt is good when the perceived ability to repay is high and bad when the perceived ability to repay is low.

    Pos Country Debt % of GDP
    1 Japan 226
    2 Zimbabwe 202.4
    3 Greece 175
    4 Italy 133
    5 Iceland 130.5
    6 Portugal 127.8
    7 Ireland 124.2
    8 Jamaica 123
    9 Lebanon 120
    10 Cyprus 113
    11 Sudan 111
    12 Grenada 110
    13 Singapore 105.5
    14 Eritrea 104.7
    15 Belgium 102.4

    33 Malta 75
    34 Belize 75
    35 Netherlands 74.3
    36 United States 71.8
    37 Slovenia 71.7
    38 Albania 70.5
    39 Dominica 70

    115 Belarus 31.5
    116 Sierra Leone 31.1
    117 Guatemala 31
    118 Bangladesh 30.9
    119 Uganda 30.7
    120 Qatar 30.6
    121 Chad 30.5
    122 Mali 30.5
    123 Norway 30.1

    155 Tajikistan 6.5
    156 Kuwait 6.4
    157 Estonia 6
    158 Wallis and Futuna 5.6
    159 Libya 4.8
    160 Oman 4.4
    161 Liberia 3.3

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