Overvalued and undervalued exchange rates in an equilibrium optimizing model

Intertemporal equilibrium optimizing models have recently become the standard framework for analyzing such macroeconomic issues as terms of trade, fiscal or trade policy, international transfers, supply shocks, and technological progress. In the model Lizondo presents, sustainable fiscal policies produce an equilibrium real exchange rates, and unsustainable policies produce misaligned exchange rates. When the exchange rate is overvalued, maintaining present fiscal policies means the present value of lifetime public sector spending would be higher than the present value of taxes. For Lizondo's model to be used to obtain welfare conclusions about the use of overvalued or undervalued exchange rates, it would be necessary to assign some social value to public sector expenditure. Other fruitful modifications of the model would be to incorporate investment activity as well as money - the latter of which would allow for discussion of the effects of monetary policy, exchange rate arrangements, and nominal exchange rate policy.Economic Stabilization,Economic Theory&Research,Macroeconomic Management,Environmental Economics&Policies,Achieving Shared Growth

Roc Chabàs, historiador medievalista.

Rodrigo Lizondo, Mateu - [email protected]

Leading indicators of currency crises

The authors examine the empirical evidence on currency crises and propose a specific early-warning system. This system involves monitoring the evolution of several indicators that tend to exhibit unusual behavior in the periods preceding a crisis. An indicator exceeding a certain threshold value should be interpreted as a warning"signal"that a currency crisis may take place within the following 24 months. The threshold values are calculated to strike a balance between the risk of having many false signals and the risk of missing many crises. Within this approach, the variables with the best track record include exports, deviations of the real exchange rate from trend, the ratio of broad money to gross international reserves, output, and equity prices. The evidence does not support some of the other indicators that were considered, including imports, bank deposits,the difference between foreign and domestic real deposit interest rates, and the ratio of lending to deposit interest rates.Payment Systems&Infrastructure,Economic Theory&Research,Fiscal&Monetary Policy,Environmental Economics&Policies,Labor Policies,Economic Theory&Research,Macroeconomic Management,Economic Stabilization,Environmental Economics&Policies,Financial Economics