Papers by Carmen Reinhart
Administrative Science Quarterly, 2010
522/ASQ, September 2010 In the 1990s, in both the popular press and the economic literature, peop... more 522/ASQ, September 2010 In the 1990s, in both the popular press and the economic literature, people seriously claimed that the business cycle was history. The so-called New Economy had arrived. This New Economy, many argued, was associated with a fundamental change in the structure of the economy that would eliminate depression and recession. The miracle bringing this about was information and communication technology . The argument was that in the virtual world created by the Internet, the effi ciency and effectiveness of real economic transacting had taken a quantum leap to unprecedented heights. This was the time when Enron could move energy around by clicking a mouse, in the process virtually creating billions of dollars. Back then, deal makers on the New York Stock Exchange highly appreciated the multi-billion-dollar acquisition of the “brick” company Time Warner by the “click” enterprise America Online (AOL). Early in 1999, the AOL Time Warner stock price peaked at about $180 a share; by 2002, the share’s value had plummeted to $20. In 2003, AOL was removed from the company’s name. Clearly, after this euphoric period, the collapse of the Internet economy dealt a particularly hard blow to these former New Economy wizards. Since then, the New Economy has been buried in the archives of crazy economics. Instead, we now have New Cycling, New Cooking, and New Driving, but these are more innocent “innovations.”
Lucas (1990) argued that it was a paradox that more capital does not flow from rich countries to ... more Lucas (1990) argued that it was a paradox that more capital does not flow from rich countries to poor countries. He rejected the standard explanation of expropriation risk and argued that paucity of capital flows to poor countries must instead be rooted in externalities in human capital formation favoring further investment in already capital rich countries. In this paper, we review the various explanations offered for this "paradox." There is no doubt that there are many reasons why capital does not flow from rich to poor nations-yet the evidence we present suggests some explanations are more relevant than others. In particular, as long as the odds of non repayment are as high as 65 percent for some low income countries, credit risk seems like a far more compelling reason for the paucity of rich-poor capital flows. The true paradox may not be that too little capital flows from the wealthy to the poor nations, but that too much capital (especially debt) is channeled to "debt intolerant" serial defaulters.
Sovereign credit ratings play an important part in determining countries' access to international... more Sovereign credit ratings play an important part in determining countries' access to international capital markets and the terms of that access. In principle, there is no reason to expect that sovereign credit ratings should systematically predict currency crises. In practice, however, in emerging market economies there is a strong link between currency crises and default. Hence if credit ratings are forward-looking and currency crises in emerging market economies are linked to defaults, it follows that downgrades in credit ratings should systematically precede currency crises. This article presents results suggesting that sovereign credit ratings systematically fail to predict currency crises but do considerably better in predicting defaults. Downgrades in credit ratings usually follow currency crises, possibly suggesting that currency instability increases the risk of default.
for helpful comments. The views expressed herein are those of the author(s) and do not necessaril... more for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Of course, since European monetary union, the G-3 currencies cover at least thirteen countries-th... more Of course, since European monetary union, the G-3 currencies cover at least thirteen countries-the United States, Japan, and the eleven nations that have adopted the euro. In what follows, we splice together the pre-single-currency data on the deutsche mark with the post-1999 data on the exchange value of the euro.
This is a Working Paper and the author would welcome any comments on the present text. Citations ... more This is a Working Paper and the author would welcome any comments on the present text. Citations should refer to a Working Paper of the International Monetary Fund, mentioning tbe author, and the date of issuance. The views expressed are those of the author and do not necessarily represent those of the Fund.
Signals from some variables are better than others in of Currency Crises predicting a currencycis... more Signals from some variables are better than others in of Currency Crises predicting a currencycisis The variables with the best track record include exports,
Over the last 20 years, some financial events, such as devaluations or defaults, have triggered a... more Over the last 20 years, some financial events, such as devaluations or defaults, have triggered an immediate adverse chain reaction in other countries-which we call fast and furious contagion. Yet, on other occasions, similar events have failed to trigger any immediate international reaction. We argue that fast and furious contagion episodes are characterized by "the unholy trinity": (i) they follow a large surge in capital flows; (ii) they come as a surprise; and (iii) they involve a leveraged common creditor. In contrast, when similar events have elicited little international reaction, they were widely anticipated and took place at a time when capital flows had already subsided.
Two assertions about exchange rate regimes circulate with some frequency in policy circles. The f... more Two assertions about exchange rate regimes circulate with some frequency in policy circles. The first, the hypothesis of the excluded middle, holds that authorities must either choose perfectly floating exchange rates (preferably anchored by an inflation target for the central bank) or a hard (preferably irrevocable) peg. The second, seemingly unrelated, argues that the inability of emerging market economies to exercise monetary independence owes to the severe mistrust that they are perceived with by global investors because of the economic failures of prior governments. This paper argues that the theories of the excluded middle and original sin are twin and related fallacies that are contrary to theory and evidence. This paper will provide a model in which the government can choose policies consistent with either a pure float anchored by a constant money stock or a pure peg but, under certain circumstances, fail to find exchange rate stability at either corner. The problem is that the potential for regime change implies that the current government's successors may behave less admirably, which will weigh on investors' current behavior. The difficulties imparted by this expectation channel in an otherwise standard model of optimizing agents endowed with rational expectations shows both why looking back to explain credibility problems is looking the wrong way and why the excluded middle is, in fact, so crowded.
This is a Working Paper and the author would welcome any comments on the present text. Gtations s... more This is a Working Paper and the author would welcome any comments on the present text. Gtations should refer to a Working Paper of the International Monetary Fund, mentioning the author, and the date of issuance. The views expressed are those of the author and do not necessarily represent those of the Fund.
IMF Working Papers, 1988
Th~s 1s la worktng paper and the author would welcome any comments on the present lext C~tat~onf ... more Th~s 1s la worktng paper and the author would welcome any comments on the present lext C~tat~onf qhould refer to an unpublished manuscript. menrlnntng the aulhor and the date of ~ssuancc by the Intcmat~on,il Monetary Fund. The views exprewed are thosc of the aurh{>r dnd do nrJt necessar~ly reprcscnt tho= of the Fund INTERNATIONAL MONETARY FUND Research Department Commodity Markets and the International Transmission of Fiscal Shocks Prepared by Carmen M. Reinhart* Authorized for Distribution by Mohsin S.
, and conference participants for helpful comments and suggestions. The views expressed herein ar... more , and conference participants for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of 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.
During the past decade a number of countries imposed capital controls that had two distinguishing... more During the past decade a number of countries imposed capital controls that had two distinguishing features: they were asymmetric, in that they were designed principally to discourage capital inflows, and they were temporary. This paper studies formally the consequences of these policies, calibrates their potential effectiveness, and assesses their welfare implications in an environment in which the level of capital inflows can be suboptimal. In addition, motivated by the fact that these types of controls have often been left in place after the dissipation of the shock that lead to the controls being implemented, the paper evaluates the welfare cost of procrastination in removing these types of controls.
Journal of International Economics, 2002
This note summarizes some of the highlights of my longer paper with Guillermo Calvo"Fear of Float... more This note summarizes some of the highlights of my longer paper with Guillermo Calvo"Fear of Floating." Many emerging market countries have suffered financial crises. One view blames soft pegs for these crises. Adherents to that view suggest that countries move to corner solutions-hard pegs or floating exchange rates. We analyze the behavior of exchange rates, reserves, and interest rates to assess whether there is evidence that country practice is moving toward corner solutions. We focus on whether countries that claim they are floating are indeed doing so. We find that countries that say they allow their exchange rate to float mostly do not-there seems to be an epidemic case of "fear of floating.
BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for... more BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org).
Finance and Development, Jun 1, 2011
Abstract: Periods of high indebtedness have historically been associated with a rising incidence ... more Abstract: Periods of high indebtedness have historically been associated with a rising incidence of default or restructuring of public and private debts. Sometimes the debt restructuring is subtle and takes the form of,“financial repression.” In the heavily regulated financial markets of the Bretton Woods system, a variety of restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. In this paper, we summarize our findings for the post-World War II period for a selected group of countries ...
We develop a novel system of reclassifying historical exchange rate regimes. One difference betwe... more We develop a novel system of reclassifying historical exchange rate regimes. One difference between our study and previous classification efforts is that we employ an extensive data base on market-determined parallel exchange rates. Our "natural" classification algorithm leads to a stark reassessment of the postwar history of exchange rate arrangements. When the official categorization is a form of peg, roughly half the time our classification reveals the true underlying monetary regime to be something radically different, often a variant of a float. Conversely, when official classification is floating, our scheme routinely suggests that the reality was a form of de facto peg. Our new classification scheme points to a complete rethinking of economic performance under alternative exchange rate regimes. Indeed, the breakup of Bretton Woods had a far less dramatic impact on most exchange rate regimes than is popularly believed. Also, contrary to an influential empirical literature, our evidence suggests that exchange rate arraignments may be quite important for growth, trade and inflation. Our newly compiled monthly data set on market-determined exchange rates goes back to 1946 for 153 countries.
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Papers by Carmen Reinhart