Pierre-Olivier Gourinchas

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bibtex file of my publications. Updated August 2017

Current Research

Dominant Currency Paradigm (August 2017)

with Camila Casas and Federico Diez and Gita Gopinath. Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a 'dominant currency paradigm' for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency rel- ative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency uctuations, in addition to the in ation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm. Also available as NBER WP 22943

Monetary Policy Transmission in Emerging Markets: An Application to Chile (July 2017, prepared for the Nov. 2016 Annual Conference of the Banco Central de Chile)

This paper discusses the role of financial spillovers in the transmission of U.S. and domestic monetary policy to emerging market economies. With weak financial spillovers, a U.S. monetary tightening is expansionary. With moderate financial spillovers, a U.S. monetary tightening is contractionary. With strong financial spillovers, a domestic monetary tightening becomes expansionary. Implications for the role of the exchange rate regime and the trilemma/dilemma debate are discussed. The model is adapted and estimated using Chilean data. Results indicate that financial spillovers are intermediate, suggesting that monetary impulses transmit positively from the U.S. to Chile and that a floating exchange rate remains a key plank of the policy response.

Global Imbalances and Currency Wars at the ZLB (March 2016),

with Ricardo Caballero and Emmanuel Farhi. This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets, and nominal rigidities. In this context, we establish five main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap—a phenomenon we dub the “reserve currency paradox;” (iii) Beggar-thy-neighbor exchange rate devaluations stimulate the domestic domestic economy at the expense of other economies; (iv) While more price and wage flexibility exacerbates the risk of a deflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (v) (Safe) Public debt issuances and increases in government spending anywhere are expansionary everywhere, and more so when there is some degree of price or wage flexibility. We use our model to shed light on the evolution of global imbalances, interest rates, and exchange rates since the beginning of the global financial crisis.
[Media coverage: Vox-EU column]

Global Safe Assets (June 2012), prepared for the 11th BIS Annual Conference

with Olivier Jeanne. Will the world run out of `safe assets' and what would be the consequences on global financial stability? We argue that in a world with competing private stores of value, the global economic system tends to favor the riskiest ones. Privately produced stores of value cannot provide sufficient insurance against global shocks. Only public safe assets may, if appropriately supported by monetary policy. We draw some implications for the global financial system.
Also available as BIS working paper 399.
[Media coverage: Financial Times, Jan. 8, 2013]

Exorbitant Privilege and Exorbitant Duty (June 2010)

with Hélène Rey. We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an “exorbitant privilege” that significantly weakens its external constraint. In exchange for this “exorbitant privilege” we document that the US provides insurance to the rest of the world, especially in times of global stress. This “exorbitant duty” is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.

Capital Mobility and Reform (October 2005)
(Preliminary and incomplete version. If you tend to read papers only once, don't read this draft!)

with Olivier Jeanne. Financial globalization is commonly viewed as a powerful force in constraining or disciplining domestic policies. This paper presents a model that captures various ways in which international capital mobility affects domestic policy incentives. Capital mobility supports reform in two ways: 1) capital inflows enhance the benefits of good policies; 2) liberalizing capital outflows may lock in political support for reforms. On the downside, capital mobility makes possible self-fulfilling capital flight that destroys the domestic investor basis and the political support for reform. More generally, individual investment decisions do not internalize their impact on policy incentives, opening some scope for second-best public intervention.

Refereed Publications

The Safe Assets Shortage Conundrum (Journal of Economic Perspectives, Summer 2017).
available from AEAWeb

with Ricardo Caballero and Emmanuel Farhi. A safe asset is a simple debt instrument that is expected to preserve its value during adverse systemic events. The supply of safe assets, private and public, has historically been concentrated in a small number of advanced economies, most prominently the United States. Over the last few decades, with minor cyclical interruptions, the supply of safe assets has not kept up with global demand. The reason is straightforward: the collective growth rate of the advanced economies that produce safe assets has been lower than the world's growth rate, which has been driven disproportionately by the high growth rate of high-saving emerging economies such as China. The signature of this growing shortage is a steady increase in the price of safe assets; equivalently, global safe interest rates must decline, as has been the case since the 1980s. The early literature, brought to light by Ben Bernanke's famous "savings glut" speech of 2005, focused on a general shortage of assets without isolating its safe asset component. The distinction, however, has become increasingly important over time, particularly in the aftermath of the subprime mortgage crisis and its sequels. We begin by describing the main facts and macroeconomic implications of safe asset shortages. Faced with such a structural conundrum, what are the likely short- to medium-term escape valves? We analyze four of them, each with its own macroeconomic and financial trade-offs.

When Bonds Matter: Home Bias in Goods and Assets (Journal of Monetary Economics, September 2016, 82, pp119-137).
available from ScienceDirect
Copyright © 2016 Elsevier B.V., All rights reserved.

with Nicolas Coeurdacier. This paper presents a model of international portfolios with real exchange rate and non-financial risks that account for observed levels of equity home bias. Bonds matter: in equilibrium, investors structure their bond portfolio to hedge real exchange rate risks. Equity home bias arises when non-financial income risk is negatively correlated with equity returns, after controlling for bond returns. Our framework allows us to derive equilibrium bond and equity portfolios in terms of directly measurable hedge ratios. An empirical application to G-7 countries finds strong empirical support for the theory. We are able to account for a significant share of the equity home bias and obtain an aggregate currency exposure of bond portfolios comparable to the data..
Older versions: NBER WP 17560 and CEPR DP 8649,NBER WP 17560.

Capital Flows to Developing Countries: The Allocation Puzzle (Review of Economic Studies, October 2013, 80(4), pp1422-1458).
available from Oxford Journals
Copyright © 2013 Oxford University Press, All rights reserved.

with Olivier Jeanne. The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital does not flow more to countries that invest and grow more. We call this puzzle the Òallocation puzzleÓ. Using a wedge analysis, we find that the pattern of capital flows is driven by national saving: the allocation puzzle is a saving puzzle. Further disaggregation of capital flows reveals that the allocation puzzle is also related to the pattern of accumulation of international reserves. The solution to the Òallocation puzzleÓ, thus, lies at the nexus between growth, saving, and international reserve accumulation. We conclude with a discussion of some possible avenues for research. Older versions: CEPR DP 6561, NBER WP 13602.
[Online Appendix: available here (pdf).]
[Data Appendix: available here (zip file).]

The Financial Crisis and The Geography of Wealth Transfers, (Journal of International Economics, November 2012, 88(2), pp266-283)
available from ScienceDirect
Copyright © 2012 Elsevier B.V. All rights reserved.

with Hélène Rey and Kai Truempler. This paper studies the geography of wealth transfers between 2007Q4 and 2008Q4, at the height of the global financial crisis. We construct valuation changes on bilateral external positions in equity, direct investment and portfolio debt to measure who benefited and who lost on their external exposure. We find a very diverse set of fortunes governed by the structure of countries' external portfolios. In particular, we are able to relate the gains and losses on debt portfolios to the country's exposure to ABS, ABCP conduits and the extent of dollar shortage.
Also available as NBER WP 17353 and CEPR DP 8567.
[Appendix: Online appendix here. The datafile is available here in ".xlsx" format. The heatmaps are also available here: Total, Portfolio Equity, Portfolio Debt, Direct Investment, Currency.]

Stories of the Twentieth Century for the Twenty-First (American Economic Journal: Macroeconomics, January 2012, 4(1), pp.226-265.), available from American Economic Journal: Macroeconomics
Copyright © 2012 by the American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted

with Maury Obstfeld. A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century's first global crisis. A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and significant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis.
Also available as NBER and CEPR working papers.
[Online Appendix: dataset and online appendix available here.]
[Media coverage: Vox-EU column]

International Prices, Cost and Markup Differences (American Economic Review, 101(6), pp.2450-86, October 2011), available from American Economic Association
Copyright © 2011 by the American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted

with Gita Gopinath, Chang-Tai Hsieh and Nick Li. Relative cross-border retail prices, in a common currency, comoves closely with the nominal exchange rate. Using a data set with product level retail prices and wholesale costs for a large grocery chain operating in the U.S. and Canada, we decompose this variation into relative wholesale costs and relative markup components. We find that the correlation of the nominal exchange rate with the real exchange rate is mainly driven by changes in relative wholesale costs, arguably the most tradable component of a retailer's costs. We then measure the extent to which national borders impose additional costs that segment markets across countries. We show that retail prices respond to changes in wholesale costs in neighboring stores within the same country but not to changes in wholesale costs in a neighboring store located across the border. In addition, we find a median discontinuous change in retail and wholesale prices of 24 percent at the international border. By contrast, the median discontinuity is 0 percent for state and provincial boundaries.

An earlier version of this paper circulated under the title "Estimating the Border Effect: Some New Evidence", CEPR DP 7281, NBER WP 14938.
[Appendix: Map of our retailer's distribution centers , also available as a google map.]

An Equilibrium Model of `Global Imbalances' and Low Interest Rates (American Economic Review, 98(1), March 2008.) available from American Economic Association
Copyright © 2008 by the American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted

with Ricardo Caballero and Emmanuel Farhi. Three of the most important recent facts in global macroeconomics --- the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolios --- appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome stemming from the heterogenity in different regions of the world in their capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Beyond the specific sequence of events that motivate our analysis, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. CEPR DP 5573, NBER WP 11996.

[Media coverage: Economic Principals, The Economist]

International Financial Adjustment (Journal of Political Economy, 115(4), August 2007.)
available from University of Chicago Press
Copyright © 2007 The University of Chicago. All rights reserved.

with Hélène Rey. We explore the implications of a country's external constraint for the dynamics of net foreign assets, returns and exchange rates. Deteriorations in external accounts imply future trade surpluses (trade channel) or excess returns on the net foreign portfolio (valuation channel). Using a new dataset on US gross external positions, we find that stabilizing valuation effects contribute 27% of the cyclical external adjustment. Our approach has asset pricing implications: external imbalances predict net foreign portfolio returns one-quarter to two-years ahead and net export growth at longer horizons. The exchange rate is forecastable in and out-of-sample at one quarter and beyond. CEPR DP 4923, NBER WP 11155.

[Online Appendix: available here. Longer and more detailed working paper version available here]
[Media coverage: Financial Times, Il Sole 24 Ore, Handelsblatt, Le Monde, Reuters]
[Data: Gross positions and total nominal returns by asset class, flows, NXA are available here.]

The Elusive Gains from International Financial Integration (Review of Economic Studies, 73(3), July 2006)
available from Blackwell Publishing
Copyright © 2006 The Review of Economic Studies Limited.

with Olivier Jeanne. Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of convergence. We show in a calibrated neoclassical model that conventionally measured welfare gains from this type of convergence appear relatively limited for the typical emerging market country. The welfare gain from switching from financial autarky to perfect capital mobility is roughly equivalent to a 1% permanent increase in domestic consumption for the typical non-OECD country. This is negligible relative to the welfare gain from a take-off in domestic productivity of the magnitude observed in some of these countries. CEPR DP 3902, NBER WP 9684.

Exchange Rate Puzzles and Distorted Beliefs (Journal of International Economics, 64(2), December 2004)
available from ScienceDirect
Copyright © 2004 Elsevier B.V. All rights reserved.

with Aaron Tornell. This paper proposes a new explanation for the foreign exchange forward-premium and delayed-overshooting puzzles. It shows that both puzzles arise from a systematic distortion in investors' beliefs about the interest rate process. Accordingly, the forward premium is always a biased predictor of future depreciation; the bias can be so severe as to lead to negative coefficients in the 'Fama' regression. Delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of misperception. We document empirically the extent of this distortion using survey data for G-7 countries against the U.S. and find that it is strong enough to account for these irregularities.

This is a much revised version of Exchange Rates Dynamics, Learning and Misperception, also available as CEPR DP 3725, NBER WP 9391.

Consumption over the LifeCycle (Econometrica, 70(1), January 2002)
available from JSTOR
Copyright © 2002 by the Econometric Society. Permission to make digital or hard copies of part or all of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than the Econometric Society must be honored. Abstracting with credit is permitted.

with Jonathan Parker. This paper estimates a structural model of optimal life-cycle consumption expenditures in the presence of realistic labor income uncertainty. We employ synthetic cohort techniques and Consumer Expenditure Survey data to construct average age-profiles of consumption and income over the working lives of typical households across different education and occupation groups. The model fits the profiles quite well. In addition to providing reasonable estimates of the discount rate and risk aversion, we find that consumer behavior changes strikingly over the lifecycle. Young consumers behave as buffer-stock agents. Around age 40, the typical household starts accumulating liquid assets for retirement and its behavior mimics more closely that of a certainty equivalent consumer. Our methodology provides a natural decomposition of saving and wealth into its precautionary and life-cycle components. CEPR DP 2345, NBER WP 7271.
[Data: Final inputs into the estimation program are here (this includes the income and consumption profiles of figures 2-4).]
[Code: Gauss code available here.]

Exchange Rates Do Matter: French Job Reallocation and Exchange Rate Turbulence, 1984-1992 (European Economic Review, 43(7), June 1999)
available from ScienceDirect
Copyright © 2004 Elsevier B.V. All rights reserved.

This paper evaluates the impact of exchange rate fluctuations on inter- and intra-sectoral job reallocation. First, a vintage model of factor reallocation in a small open economy facing real exchange rate fluctuations is developed. Movements in the real exchange rates affect the profitability of production units, and the pattern of entry and exit. The model predicts a ‘bunching' of entry and exit around the peak of predictable appreciation episodes, as less productive firms are cleansed and newcomers adopt more efficient technologies. The paper then investigates empirically the pattern of job creation and destruction in response to real exchange rate movements in France between 1984 and 1992, using disaggregated firm level data. Traded-sector industries are very responsive to real exchange rate movements. In the benchmark estimation, a 1% appreciation of the real exchange rate destroys 0.95% of tradable jobs over the next two years. Further, job creation is more volatile than job destruction. The results indicate the importance of large unanticipated changes in the real exchange rate.

Federal Transfers, Decentralization and the Labor Market (Annales d'Economie et de Statistique, 45, April 1997)

This paper analyzes the case for fiscal federal transfers in a Monetary Union. Looking at the labor market structure, it emphasizes the incentive effect of any federal transfer scheme insuring workers against bad draws. When the wage negotiation process occurs at the national level and the federal government has incomplete information on the bargaining process, workers have an incentive to ask ex-ante for higher wages. This may negatively affect the macroeconomic performance in the federation. The first best solution consists in shifting the wage bargaining process from the national to the federal level. Looking at the issue of fiscal federalism, however, the paper shows that it is always optimal to keep federal transfers. Moreover, decentralized policies are only effective when access to financial markets are imperfect.

Non-Refereed Publications

Rents, Technical Change and Risk Premia (American Economic Review, P&P, May 2017)

with with Ricardo Caballero and Emmanuel Farhi. The secular decline in safe interest rates since the early 1980s has been the subject of considerable attention. In this short paper, we argue that it is important to consider the evolution of safe real rates in conjunction with three other first-order macroeconomic stylized facts: (a) the relative constancy of the real return to productive capital, (b) the decline in the labor share, and (c) the decline and subsequent stabilization of the earnings yield. Through the lens of a simple accounting framework, these four facts offer suggestive insights into the economic forces that might be at work. <-- Also available as CEPR DP 11833, NBER WP 23127

The Fundamental Structure of the International Monetary System, in Rules for International Monetary Stability Michael D. Bordo and John B. Taylor, eds, Hoover Institution Press, 2017.

A fundamental function of the International Monetary System is to allocate scarce safe assets across countries. The system is fundamentally asymmetric. Net global safe asset producers are at the center. They enjoy an external premium and face a slack external adjustment constraint. This fundamental characteristic is largely independent of formal exchange rate arrangements (fixed or flexible exchange rates). Global imbalances mutate at the zero lower bound (ZLB) from benign to malign. Away from the ZLB, safe asset scarcity propagates low equilibrium real interest rates via current account surpluses. At the ZLB, safe asset scarcity propagates recessions via current account surpluses. Away from the ZLB, net safe asset suppliers enjoy a premium. At the ZLB, they must absorb a larger share of the global recession. Also available (in shorter version) as NBER Reporter, 2016(1).

Real Interest Rates, Imbalances and the Curse of Regional Safe Asset Providers at the Zero Lower Bound (November 2016), ECB Forum on Central Banking.

Copyright © 2016 European Central Bank. All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. This paper should not be reported as representing the views of the European Central Bank (ECB) or the Eurosystem. The views expressed are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem.

with Hélène Rey. The current environment is characterized by low real rates and by policy rates close to or at their lower bound in all major financial areas. We analyze these unusual economic conditions from a historical perspective and draw some implications for external imbalances, safe asset demand and the process of external adjustment. First, we decompose the fluctuations in the world consumption-to-wealth ratio over long periods of time and show that they anticipate movements of the real rate of interest. Second, our estimates suggest that the world real rate of interest is likely to remain low or negative for an extended period of time. In this context, we argue that there is a renewed Triffin dilemma where safe asset providers face a trade-off in terms of external exposure and real appreciation of their currency. This trade-off is particularly acute for smaller economies. This is the “curse of the regional safe asset provider”. We discuss how this “curse” is playing out for two prominent regional safe asset providers: core EMU and Switzerland. CEPR DP 11503, NBER WP 22618
[Media coverage: Vox-EU column]

The Analytics of the Greek Crisis (2016, NBER Macroeconomics Annual)

with Thomas Philippon and Dimitri Vayanos. We provide an empirical and theoretical analysis of the Greek Crisis of 2010. We first benchmark the crisis against all episodes of sudden stops, sovereign debt crises, and lending boom/busts in emerging and advanced economies since 1980. The decline in Greece’s output, especially investment, is deeper and more persistent than in almost any crisis on record over that period. We then propose a stylized macro-finance model to understand what happened. We find that a severe macroeconomic adjustment was inevitable given the size of the fiscal imbalance; yet a sizable share of the crisis was also the consequence of the sudden stop that started in late 2009. Our model suggests that the size of the initial macro/financial imbalances can account for much of the depth of the crisis. When we simulate an emerging market sudden stop with initial debt levels (govern- ment, private, and external) of an advanced economy, we obtain a Greek crisis. Finally, in recent years, the lack of recovery appears driven by elevated levels of non-performing loans and strong price rigidities in product markets. Also available as CEPR DP 11334, NBER WP 22370
[Media coverage: Vox-EU column]

Safe Asset Scarcity and Aggregate Demand, (American Economic Review, P&P, May 2016) .

Copyright © 2001 by the American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted.

with Ricardo Caballero and Emmanuel Farhi. We explore the consequences of safe asset scarcity on aggregate demand in a stylized IS-LM/Mundell Fleming style environment. Acute safe asset scarcity forces the economy into a "safety trap" recession. In the open economy, safe asset scarcity spreads from one country to the other via capital flows, equalizing interest rates. Acute global safe asset scarcity forces the economy into a global safety trap. The exchange rate becomes indeterminate but plays a crucial role in both the distribution and the magnitude of output adjustment across countries. Policies that increase the net supply of safe assets somewhere are output enhancing everywhere. CEPR DP 11170, NBER WP 22044

External Adjustment, Global Imbalances, Valuation Effects, in Handbook of International Economics, vol 4, G. Gopinath, H. Helpman and K. Rogoff eds., chapter 10, 2014, pp585-645
available from ScienceDirect
Copyright © 2014 Elsevier B.V. All rights reserved.

Global Imbalances and Global Liquidity, (in Asia's Role in the Post-Crisis Global Economy, Asian Economic Policy Conference, R. Glick and M. Spiegel eds., Federal Reserve Bank of San Francisco, February 2012)

The financial crisis has entered a dangerous phase. I argue in this article that the retrenchment currently taking place in the European banking sector has broad implications for financial stability. More generally, I argue that the focus should be on "global liquidity imbalances," rather than "global imbalances." Global liquidity imbalances track the liquidity mismatch across countries and over time, which may or may not result in current account deficits and surpluses (that is, global imbalances).

Reforming the International Monetary System (September 2011 CEPR e-Report)

with Emmanuel Farhi and Hélène Rey. Executive Summary: Our proposals for the reform of the international monetary system focus on liquidity provision. They will help to limit the effects of individual and systemic crises and to decrease their frequency. We make four principal recommendations: (1) Develop alternatives to US Treasuries as the dominant reserve asset, thereby accelerating the inevitable transition to a multipolar system. In particular, we recommend the issuance of mutually guaranteed European bonds. Also necessary (though in the more distant future) are opening of the Chinese capital account, convertibility of the yuan, and development of a yuan bond market. (2) Make permanent the temporary swap agreements that were put in place between central banks during the crisis. Establish a star-shaped structure of swap lines centred on the IMF. (3) Strengthen and expand such International Monetary Fund facilities as Flexible Credit Lines (FCLs), Precautionary Credit Lines (PCLs), and the Global Stabilization Mechanism (GSM). Also expand the IMF's existing financing mechanisms --notably, the New Arrangements to Borrow (NAB)-- and allow the IMF to borrow directly on the markets. (4) Establish a foreign exchange reserve pooling mechanism with the IMF that will provide participating countries with more liquidity and, incidentally, allow reserves to be recycled in the financing of productive investments. To limit moral hazard, we propose to set up specific surveillance indicators to monitor 'international funding risks'. In addition, our analysis indicates that (a) an international monetary anchor is neither desirable nor realistic; and (b) transforming special drawing rights (SDRs) into a true international currency would be unlikely to solve the fundamental problems of the international monetary system. Capital flows in emerging markets may be excessive and volatile. Under certain specific and predefined circumstances, we recognize the merits of using temporary capital controls (along with prudential and monetary measures) to ensure the macroeconomic and financial stability of such countries. Under certain limited circumstances, capital flows may yield negative externalities in the rest of the world; hence they should be subject to mutual monitoring. Towards this end, we offer our final recommendation as follows. (5) Extend the mandate of the IMF to the financial account, and strengthen international cooperation in terms of financial regulation.

Also available in French as Réformer le Système Monétaire International, Rapport du CAE, September 2011.
[Media Coverage: vox-column summarizing the report (September 19, 2011); Wall Street Journal.]

Financial Crash, Commodity Prices and Global Imbalances (Brookings Papers on Economic Activity 2008, 2, pp1-55)
(click here for the slides from the Brookings Panel meeting in Washington DC, September 2008)
Copyright © 2008 by Brookings.

with Ricardo Caballero and Emmanuel Farhi. In this paper, we argue that the persistent global imbalances, the sub-prime crisis, and the volatile oil and asset prices that followed it, are tightly interconnected. They all stem from a global environment where sound and liquid financial assets are in scarce supply. Our story goes as follows: Global asset scarcity led to large capital flows toward the U.S. and to the creation of asset bubbles that eventually crashed. The crash in the real estate market was particularly complex from the point of view of asset shortages since it compromised the whole financial sector, and by so doing, closed many of the alternative saving vehicles. Thus, in its first phase, the crisis exacerbated the shortage of assets in the world economy, which triggered a partial recreation of the bubble in commodities and oil markets in particular. The latter led to an increase in petrodollars seeking financial assets in the U.S. Thus, rather than the typical destabilizing role played by capital outflows during financial crises, petrodollar flows became a source of stability for the U.S. The second phase of the crisis is more conventional and began to emerge toward the end of the summer of 2008. It became apparent then that the financial crisis would permeate the real economy and sharply slow down global growth. This slowdown worked to reverse the tight commodity market conditions required for a bubble to develop, ultimately destroying the commodity bubble.

An earlier version of this paper circulated under the catchy title "Financial `Whac-a-Mole': Bubbles, Commodity Prices and Global Imbalances." CEPR DP 7064, NBER WP 14521.

Valuation Effects and External Adjustment: a Review (in "Current Account and External Financing", Kevin Cowan, Sebastian Edwards and Rodrigo Valdes, eds, Series on Central Banking, Analysis and Economic Policy, vol XII, Banco Central de Chile, 2008, pp195-236)

This paper surveys the recent empirical and theoretical literature on valuation effects. The increase in cross-border holdings of financial assets opens the door to significant adjustments in a country's external position in response to fluctuations in asset and currency prices. Access to better data on net and gross international investment positions for a broad range of countries permits careful measurement of these `valuation effects'. We distinguish between predictable and unpredictable valuation effects, and argue that they play separate roles in the adjustment process (for better or for worse). Finally, the paper discusses theoretical conditions under which predictable valuation effects can arise in equilibrium.

From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege (in "G7 Current Account Imbalances: Sustainability and Adjustment", Richard Clarida, editor, The University of Chicago Press, 2007, pp11-55)

with Hélène Rey. We analyze the structure of US external assets and liabilities since 1952 and break-up the "exorbitant privilege" in a return effect and a composition effect. This paper also contains a detailed description of the dataset that we constructed and used in International Financial Adjustment. CEPR DP 5220, NBER WP 11563.
[Media coverage: Bloomberg, Liberation, Le Figaro, Le Monde]
[Data: Gross positions by asset class, flows, and total nominal implicit returns are available here.]

Social Security and Inequality over the Life Cycle (in The Distributional Aspects of Social Security and Social Security Reform, M. Feldstein and J. Liebman, editors, The University of Chicago Press, 2002)

with Angus Deaton and Chris Paxson. This paper examines the consequences of social security reform for the inequality of consumption across individuals. The idea is that inequality is at least in part the result of individual risk in earnings or asset returns, the effects of which accumulate over time to increase inequality within groups of people as they age. Institutions such as social security, that share risk across individuals, will moderate the transmission of individual risk into inequality. We examine how different social security systems, with different degrees of risk sharing, affect consumption inequality. We do so within the framework of the permanent income hypothesis, and also using richer models of consumption that incorporate precautionary saving motives and borrowing restrictions. Our results indicate that systems in which there is less sharing of earnings risk such as systems of individual accounts produce higher consumption inequality both before and after retirement. However, differences across individuals in the rate of return on assets (including social security assets held in individual accounts) produce only modest additional effects on inequality. NBER WP 7570.

The Empirical Importance of Precautionary Saving (American Economic Review, P&P, 91(2), May 2001)
available from JSTOR
Copyright © 2001 by the American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted

with Jonathan Parker. One of the basic motives for saving is the accumulation of wealth to insure future welfare. Both introspection and extant research on consumption insurance find that people face substantial risks that they do not fairly pool. In theory, the consumption and wealth accumulation of price-taking households in an economy without complete markets differs substantially from the behavior of these same households in the equivalent economy with complete-markets. The question we address in this article is whether we find this difference to be large in practice. What is the empirical importance of precautionary saving? We provide a simple decomposition that characterizes the importance of precautionary saving in the U.S. economy.. We use this decomposition as an organizing framework to present four main findings: (a) the concavity of the consumption policy rule, (b) the importance of precautionary saving for life-cycle saving and wealth accumulation, (c) the contribution of changes in risk to fluctuations in aggregate consumption and (d) the significant impact of incomplete markets on aggregate fluctuations in calibrated general equilibrium models. We conclude with directions for future research. CEPR DP 2737, NBER WP 8107.

Lending Booms: Latin America and the World (Economia, 1(2), Spring 2001)
available through ProjectMUSE
Copyright © 2002, 2001, 2000 Latin American and Caribbean Economic Association.

with Rodrigo Valdes and Oscar Landerretche. Many theories of external crisis put lending booms at the root of financial collapses. Yet lending booms may be a natural consequence of economic development and fluctuations. So are lending booms dangerous? In this paper, we investigate empirically this question using a broad sample of lending boom episodes over 40 years, with a special eye for Latin America. Our results indicate that lending booms are often associated with a domestic investment boom; an increase in domestic interest rates; a worsening of the current account; a declines in reserves; a real appreciation; a decline in output growth. `Typical' lending booms, however, do not increase substantially the vulnerability of the banking sector or the balance of payments. Comparing Latin America and the rest of the world, we find that Latin America lending booms make the economy considerably more volatile and vulnerable to financial and balance of payment crisis. CEPR DP 2811, NBER WP 8249.
[Data: data and programs available here. All the data is available in Gauss matrix format (extension *.fmt) and as ASCII file (extension *.ASC). See the Readme.txt file.]
[Media Coverage: NBER Digest, September 2001.]

Exchange Rates and Jobs: What do we Learn from Job Flows (in NBER Macroeconomics Annual 1998, B. Bernanke and J. Rotemberg eds., The MIT Press, 1999)

Currency fluctuations provide a substantial source of movements in relative prices that is largely exogenous to the firm. This paper evaluates empirically and theoretically the importance of exchange rate movements on job reallocation across and within sectors. The objective is (1) to provide accurate estimates of the impact of exchange rate fluctuations and (2) further our understanding of how reallocative shocks propagate through the economy. The empirical results indicate that exchange rates have a significant effect on gross and net job flows in the traded goods sector. Moreover, the paper finds that job creation and destruction co-move positively, following a real exchange rate shock. Appreciations are associated with additional turbulence, and depreciations with a 'chill'. The paper then argues that existing non-representative agent reallocation models have a hard time replicating the salient features of the data. The results indicate a strong tension between the positive co-movements of gross flows in response to reallocative disturbances and the negative co-movement in response to aggregate shocks. NBER WP 6864.
[Appendix: Here is the appendix to the paper. This appendix is included in the NBER working paper version, but not in the final printed version]

Published Comments

comments on Has the Inflation Process Changed?
by Debelle and Cecchetti, Economic Policy 46, April 2006

comments on Is The U.S. Current Account Deficit Sustainable?
by Edwards, Brookings Panel on Economic Activity, 2005:2

comments on Why are Europeans Getting so Tough on Migrants?
by Boeri and Brucker, Economic Policy 44, October 2005

comments on Capital Quality Improvement and the Sources of Growth in the Euro Area
by Sakellaris and Visjelaar, Economic Policy 42, April 2005

comments on Financial Market Integration and Economic Growth in the EU
by Guiso, Japelli, Padula and Pagano, Economic Policy 40, October 2004

comments on Expenditure Switching and Exchange Rate Policy
by Engel, NBER Macroeconomics Annual 2002

comments on Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle?
by Blanchard and Giavazzi, Brookings Panel on Economic Activity, 2002:2