The three chapters of this dissertation investigate how micro level phenomena affect aggregate ou... more The three chapters of this dissertation investigate how micro level phenomena affect aggregate outcomes and challenge basic fiscal and monetary principles. In particular, I analyze how these phenomena affect the transmission mechanisms and outcomes of specific fiscal and monetary policies in emerging markets. In Chapter 1, I investigate the transmission of monetary policy to retail interest rates using a novel transaction-level data set that includes all corporate loans of every commercial bank in Mexico from 2005 to 2010. In particular, I analyze the speed and completeness of the pass-through of the monetary policy rate to bank lending rates, and provide evidence on the importance of bank competition to explain heterogeneity in the way banks react to monetary policy impulses along the business cycle. For this purpose, I develop a simple model of the banking firm and test its implications using dynamic panel data methods. I find that: (1) interest rate pass-through is sluggish and incomplete; (2) the degree of bank competition is positively correlated with the completeness of the interest rate pass-through; iii and (3) interest rate pass-through is asymmetric: lending rates adjust less in the case of monetary policy easing than in the case of tightening. Chapter 2 draws from a district-level database to investigate the local impact on socioeconomic outcomes of mining-related revenue windfalls in Peru, which have grown almost twentyfold in the last two decades. I find evidence that improvements in average living standards are related to the mining activity but independent from fiscal revenue windfalls at the district level, where inefficiencies in the use of public funds may be accounting for the disconnect between fiscal revenues and socioeconomic outcomes. In Chapter 3, I investigate how the fiscal institutional framework has given rise to deficit and procyclical biases in the case of Mexico, and evaluate how the use of alternative fiscal rules may affect these biases. For the latter, I conduct a series of simulations using an unrestricted VAR model that allows me to evaluate the effect on fiscal outcomes of a constellation of shocks calibrated to match Mexican historical macro-data. I find that Mexico´s fiscal framework allows the conduct of a countercyclical fiscal policy during economic recessions; however, it does not contemplate a mechanism to generate buffers during economic expansions. Thus, fiscal policy is oftentimes procyclical and has a built-in deficit bias. Moreover, I find that a budget balance rule with an expenditure cap is able to mimic the results of a rule based on a cyclically adjusted balance in terms of reducing the procyclical and deficit biases, with the advantage of not having to rely on an autonomous fiscal agency, which is usually absent under weak institutional frameworks. iv The dissertation of Alfredo Mier y Teran is approved.
When financial markets freeze in fear, borrowing costs for solvent governments may fall towards z... more When financial markets freeze in fear, borrowing costs for solvent governments may fall towards zero in a flight to quality-but credit-worthy private borrowers can be starved of external funding. In Kiyotaki and Moore (2008), where liquidity crisis is captured by the effective rationing of private credit, tightening credit constraints have direct effects on investment. If prices are sticky, the effects on aggregate demand can be pronounced-as reported by FRBNY for the US economy using a calibrated DSGE-style framework modified to include such frictions. In such an environment, two factors stand out. First the recycling of credit flows by central banks can dramatically ease credit-rationing faced by private investors: this is the rationale for Quantitative Easing. Second, revenue-neutral fiscal transfers aimed at would-be investors can have similar effects. We show these features in a stripped-down macro model of inter-temporal optimisation subject to credit constraints.
In models in which asset prices are determined by expectations, the general possibility of '... more In models in which asset prices are determined by expectations, the general possibility of 'rational bubbles' emerges. According to one specification, along a bubble path expectations about the future asset price are always fulfilled - but only if there is an ever-widening divergence of ...
is grateful for the opportunity provided by a Houblon Norman Fellowship to work on this topic at ... more is grateful for the opportunity provided by a Houblon Norman Fellowship to work on this topic at the Bank of England; Han Hao Li and Ashwin Moheeput are thanked for research assistance. The views expressed are those of the authors, however, and not necessarily those of the Bank of England or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
We examine whether Brazilian sovereign spreads of over 20% in 2002 could be due to contagion from... more We examine whether Brazilian sovereign spreads of over 20% in 2002 could be due to contagion from Argentina or to domestic politics, or both. Treating unilateral debt restructuring as a policy variable gives rise to the possibility of self-fulfilling crisis, which can be triggered by contagion. We explore an alternative political-economy explanation of panic in financial markets inspired by Alesina
In response to severe financial crises in 1997, several Asian governments-backed by bilateral and... more In response to severe financial crises in 1997, several Asian governments-backed by bilateral and multilateral lenders-provided enormous amounts of support to ailing domestic banks, and issued sweeping guarantees of private financial liabilities (needing funding of up to 30 percent of GDP). In this paper, we examine how the provision of financial sector bailouts affects private capital markets. At the heart of our analysis is a key commitment problem: to avoid financial collapse during a crisis, governments tend not to allow banks to fail, regardless of previous promises. Our analysis shows that expectations of financial sector support in the event of a systemic crisis can lead to over-borrowing, invested in risky inefficient projects, setting the stage for systemic crisis. Ironically, this outcome is more likely, the stronger the financial position of the government. Thus, without prudential regulation, Asian financial systems were especially prone to crisis.
The three chapters of this dissertation investigate how micro level phenomena affect aggregate ou... more The three chapters of this dissertation investigate how micro level phenomena affect aggregate outcomes and challenge basic fiscal and monetary principles. In particular, I analyze how these phenomena affect the transmission mechanisms and outcomes of specific fiscal and monetary policies in emerging markets. In Chapter 1, I investigate the transmission of monetary policy to retail interest rates using a novel transaction-level data set that includes all corporate loans of every commercial bank in Mexico from 2005 to 2010. In particular, I analyze the speed and completeness of the pass-through of the monetary policy rate to bank lending rates, and provide evidence on the importance of bank competition to explain heterogeneity in the way banks react to monetary policy impulses along the business cycle. For this purpose, I develop a simple model of the banking firm and test its implications using dynamic panel data methods. I find that: (1) interest rate pass-through is sluggish and incomplete; (2) the degree of bank competition is positively correlated with the completeness of the interest rate pass-through; iii and (3) interest rate pass-through is asymmetric: lending rates adjust less in the case of monetary policy easing than in the case of tightening. Chapter 2 draws from a district-level database to investigate the local impact on socioeconomic outcomes of mining-related revenue windfalls in Peru, which have grown almost twentyfold in the last two decades. I find evidence that improvements in average living standards are related to the mining activity but independent from fiscal revenue windfalls at the district level, where inefficiencies in the use of public funds may be accounting for the disconnect between fiscal revenues and socioeconomic outcomes. In Chapter 3, I investigate how the fiscal institutional framework has given rise to deficit and procyclical biases in the case of Mexico, and evaluate how the use of alternative fiscal rules may affect these biases. For the latter, I conduct a series of simulations using an unrestricted VAR model that allows me to evaluate the effect on fiscal outcomes of a constellation of shocks calibrated to match Mexican historical macro-data. I find that Mexico´s fiscal framework allows the conduct of a countercyclical fiscal policy during economic recessions; however, it does not contemplate a mechanism to generate buffers during economic expansions. Thus, fiscal policy is oftentimes procyclical and has a built-in deficit bias. Moreover, I find that a budget balance rule with an expenditure cap is able to mimic the results of a rule based on a cyclically adjusted balance in terms of reducing the procyclical and deficit biases, with the advantage of not having to rely on an autonomous fiscal agency, which is usually absent under weak institutional frameworks. iv The dissertation of Alfredo Mier y Teran is approved.
When financial markets freeze in fear, borrowing costs for solvent governments may fall towards z... more When financial markets freeze in fear, borrowing costs for solvent governments may fall towards zero in a flight to quality-but credit-worthy private borrowers can be starved of external funding. In Kiyotaki and Moore (2008), where liquidity crisis is captured by the effective rationing of private credit, tightening credit constraints have direct effects on investment. If prices are sticky, the effects on aggregate demand can be pronounced-as reported by FRBNY for the US economy using a calibrated DSGE-style framework modified to include such frictions. In such an environment, two factors stand out. First the recycling of credit flows by central banks can dramatically ease credit-rationing faced by private investors: this is the rationale for Quantitative Easing. Second, revenue-neutral fiscal transfers aimed at would-be investors can have similar effects. We show these features in a stripped-down macro model of inter-temporal optimisation subject to credit constraints.
In models in which asset prices are determined by expectations, the general possibility of '... more In models in which asset prices are determined by expectations, the general possibility of 'rational bubbles' emerges. According to one specification, along a bubble path expectations about the future asset price are always fulfilled - but only if there is an ever-widening divergence of ...
is grateful for the opportunity provided by a Houblon Norman Fellowship to work on this topic at ... more is grateful for the opportunity provided by a Houblon Norman Fellowship to work on this topic at the Bank of England; Han Hao Li and Ashwin Moheeput are thanked for research assistance. The views expressed are those of the authors, however, and not necessarily those of the Bank of England or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
We examine whether Brazilian sovereign spreads of over 20% in 2002 could be due to contagion from... more We examine whether Brazilian sovereign spreads of over 20% in 2002 could be due to contagion from Argentina or to domestic politics, or both. Treating unilateral debt restructuring as a policy variable gives rise to the possibility of self-fulfilling crisis, which can be triggered by contagion. We explore an alternative political-economy explanation of panic in financial markets inspired by Alesina
In response to severe financial crises in 1997, several Asian governments-backed by bilateral and... more In response to severe financial crises in 1997, several Asian governments-backed by bilateral and multilateral lenders-provided enormous amounts of support to ailing domestic banks, and issued sweeping guarantees of private financial liabilities (needing funding of up to 30 percent of GDP). In this paper, we examine how the provision of financial sector bailouts affects private capital markets. At the heart of our analysis is a key commitment problem: to avoid financial collapse during a crisis, governments tend not to allow banks to fail, regardless of previous promises. Our analysis shows that expectations of financial sector support in the event of a systemic crisis can lead to over-borrowing, invested in risky inefficient projects, setting the stage for systemic crisis. Ironically, this outcome is more likely, the stronger the financial position of the government. Thus, without prudential regulation, Asian financial systems were especially prone to crisis.
Uploads
Papers by Marcus Miller