Suchergebnisse

Traditional ways of analyzing the effects of monetary policy shocks via structural vector autoregressions require the use of unrealistic identifying assumptions: they either do not allow for a response of output and prices on impact of the shock, or they exclude contemporaneous values of these variables from the monetary authority's information set. This paper relaxes these incredible restrictions by exploiting a convenient natural setting, namely the fact that we can use data from dollarized countries. The fact that non-monetary US shocks do not seem to be transmitted to these countries, has the additional advantage that it makes the exercise less vulnerable to potential misidentification of the US monetary policy shock. The results obtained in this way suggest that prices fall quite rapidly after a monetary contraction. Consistent with this finding, the effects of monetary policy shocks on output seem to be small.

Abstract
We find that countries able to borrow at spreads that seem low given fundamentals (e.g., because investors are bullish regarding the country's future) are more likely to develop medium-term difficulties. We establish this by regressing spreads on fundamentals. Subsequently deploying first-stage residuals in a second-stage regression suggests that an optimistic sentiment reduces growth in the medium term while increasing odds of fiscal crises. Incorporating information from our mispricing estimate reduces the root-mean-square error of out-of-sample growth forecasts by 15%. This supports theories of sentiment affecting the business cycle and suggests that countries should not solely rely on spreads when setting fiscal policy.

Support for economic reforms has often shown puzzling dynamics: there are many examples of reforms that started off successfully but nevertheless lost public support, and vice versa. We show that learning dynamics can rationalize this apparent paradox, the reason being that the process of revealing reform outcomes is an example of sampling without replacement: every winner revealed reduces the number of unfilled winning places left, thereby making individuals who remain uncertain on their identity (reform winner or loser?) more pessimistic about their chances of benefiting from the reform. Consequently, learning considerations challenge the conventional wisdom that sequencing should be such that favorable reform outcomes are revealed first. Finally, we provide an explanation for why the gradual reform strategy worked well for China, while this is much less so for Latin American and Central and Eastern European countries.