A Sovereign Debt Model with Trade Credit and Reserves

This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance.

The macroeconomics of delayed exchange-rate unification : theory and evidence from Tanzania

Parallel exchange-rate markets have often been dismissed by authorities as a nuisance or as the domain of a small group of economic saboteurs. Using Tanzania as a case study, the authors argue instead that these markets played a central macroeconomicrole in the 1970s and 1980s. They provide a rigorous macroeconomic analysis of the parallel foreign-exchange market and its fiscal implications. First, they investigate the evolution of that market in Tanzania from the mid-1960s to 1990. That period stretched from the adoption of exchange controls to macroeconomic collapse and then to subsequent reforms in the mid- to late 1980s. A reduced -form econometric equation (of a Dornbusch stock-flow model type) indicates that both trade and financial portfolio factors were important in determining the parallel premium, with trade determinants the parallel premium, with trade determinants dominating in the long run, as theory suggests. Then they investigate the fiscal impact of the parallel exchange-rate premium, an issue emphasized in the literature on exchange-rate unification. They construct a counterfactual simulation of fiscal and balance-of-payments flows under alternative assumptions about the indexing of those flows to the parallel and official exchange rate. They find that a more aggressive move toward exchange-rate unification would have already delivered a fiscal bonus by the mid-1980s. Accordingly, unification of the exchange rate would have reduced monetary growth and inflationary pressures. So, contrary to conventional advice often given in Africa and elsewhere, the case of Tanzania suggests that from a fiscal viewpoint there was no economic rationale for gradualism in exchange-rate unification and delay of a move toward convertibility.Economic Theory&Research,Banks&Banking Reform,Fiscal&Monetary Policy,Payment Systems&Infrastructure,Environmental Economics&Policies,Economic Theory&Research,Macroeconomic Management,Fiscal&Monetary Policy,Environmental Economics&Policies,Economic Stabilization

Aid versus trade revisited

This paper examines the (non) equivalance between aid flows and trade preferences as alternative forms of donor assistance in the presence of learning-by-doing externalities in recipient country export production. Using a two-period model based on vanWijnbergen (1985), in which the productivity externality consistitues the only (inter-temporal) distortion, we show that switching donor support on the margin from aid to trade preferences can increase recipient country welfare. To evaluate the size of this potential welfare gain to small African economies we simulate donor policy reforms using a dynamic CGE model where the productivity externality may also interact with private capital accumulation. We show that for reasonable values of key behavioural parameters, the potential growth and welfare gains from a (donor) revenue neutral re-orientation of assistance to developing countries could be substantial. The paper concludes by considering why these potential dynamic gains appear to be unexpoited by both donors and recipients.Foreign Aid, Trade Preferences, Africa.

Direct CP Violation in B±→ρ±π+π−B^\pm\to\rho^\pm\pi^+\pi^- in the ρ0\rho^0-ω\omega Interference Region

We study direct CP violation in $B^\pm \to \rho^\pm\rho^0(\omega) \to \rho^\pm\pi^+\pi^-$ and focus specifically on the rate asymmetry in the $\rho^0$-$\omega$ interference region. Here the strong phase is dominated by isospin violation, so that it can be essentially determined by $e^+e^- \to \rho^0 (\omega) \to \pi^+\pi^-$ data. We find the CP-violating asymmetry to be of the order of 20% at the $\omega$ invariant mass. Moreover, it is robust with respect to the estimable strong-phase uncertainties, permitting the extraction of $\sin\alpha$ from this channel.Comment: 4 pages, LaTeX, aipproc.sty, talk presented at CIPANP97, Big Sky, M

Single-equation estimation of the equilibrium real exchange rate

Estimating the degree of exchange-rate misalignment remains one of the most challenging empirical problems in an open economy. The basic problem is that the value of the real exchange rate is not observable. Standard theory tells us, however, that the equilibrium real exchange rate is a function of observable macroeconomic variables and that the actual real exchange rate approaches the equilibrium rate over time. A recent strand of the empirical literature exploits these observations to develop a single-equation approach to estimating the equilibrium real exchange rate. Drawing on that earlier work, the authors outline an econometric methodology for estimating both the equilibrium real exchange rate and the degree of exchange-rate misalignment. They illustrate the methodology using annual data from Cote d'Ivoire and Burkina Faso.Fiscal&Monetary Policy,Economic Theory&Research,Environmental Economics&Policies,ICT Policy and Strategies,Scientific Research&Science Parks,Economic Stabilization,Macroeconomic Management,Economic Theory&Research,Environmental Economics&Policies,Achieving Shared Growth

The Risk Tolerance of International Investors

Investor confidence and risk tolerance are important concepts that investors are constantly trying to gauge. Yet these concepts are notoriously hard to measure in practice. Most attempts rely on price or return data, but these run into trouble when trying to disentangle whether an observed price change is attributable to a shift in investor confidence or a change in fundamental value. In this paper, we take an alternative approach by looking at the world-wide holdings and trading of risky assets. We model global capital markets as the interaction between large global institutional investors and smaller domestic investors from each country. This permits separation of global price changes into two components, one that reflects changes in demand and fundamentals perceived by all investors, and a second that reflects changes in the relative risk tolerance of institutional investors over and above that of domestics. The latter component, changes in relative risk tolerance of global institutions, is driven by the willingness of these investors to acquire additional assets in each country in proportion to their current holdings. Using our model, we show how data on asset holdings and flows across countries can be used to identify changes in risk tolerance. We then apply this identification scheme to recent data on the global portfolio holdings of institutional investors. The resulting measure of risk tolerance impressionistically accords well with periods of market turbulence and quiescence. It also accounts for a considerable portion of the variation in portfolio holdings and is informative about future returns.