Aaron Tornell

Bio: Aaron Tornell is an academic researcher from University of California, Los Angeles. The author has contributed to research in topics: Exchange rate & Liberalization. The author has an hindex of 46, co-authored 139 publications receiving 10575 citations. Previous affiliations of Aaron Tornell include Columbia University & Center for Economic Studies.

The Voracity Effect

Abstract: We analyze an economy that lacks a strong legal-political institutional infrastructure and is populated by multiple powerful groups. Powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock. In equilibrium, this leads to slow economic growth and a “voracity effect,” by which a shock, such as a terms of trade windfall, perversely generates a more-than-proportionate increase in fiscal redistribution and reduces growth. We also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks. (JEL F43, O10, O23, O40)

Financial Crises in Emerging Markets: The Lessons from 1995

Abstract: In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.

Financial Crises in Emerging Markets: The Lessons from 1995

Abstract: In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.

Power, Growth, and the Voracity Effect

Abstract: Why is it that resource-rich countries tend to have lower growth rates than resource-poor countries? And why is it that many countries that enjoy terms-of-trade windfalls end up with lower growth rates? To explain these puzzles, we extend the neoclassical growth model by replacing the representative agent with multiple powerful groups and by introducing a new concept, the voracity effect—a more than proportional increase in redistribution in response to an increase in the raw rate of return. We show that, in an economy with powerful groups and weak institutions, the voracity effect operates if the elasticity of intertemporal substitution is high enough. That is, there exists a negative relationship between the growth rate and the raw rate of return, which is positively related to the terms of trade. We provide some empirical evidence in support of the mechanism we propose.

Balance Sheet Effects, Bailout Guarantees and Financial Crises

Abstract: Several recent twin' currency and banking crises were preceded by lending booms during which the banking system financed rapid growth of the nontradable (N) sector by borrowing in foreign currency. They were followed by recessions during which a sharp decline in credit especially hurt the N-sector. This paper presents a model that accounts for these stylized facts. A crucial element is that we model a banking system that is simultaneously subject to two distortions typical of international credit markets: bailout guarantees and the imperfect enforceability of contracts. The interaction of these distortions produces unusually fast N-sector growth, together with a real appreciation, during the boom. However, it is also responsible for self-fulfilling twin crises, which have persistent adverse effects on N-sector output.

Africa's Growth Tragedy: Policies and Ethnic Divisions

Abstract: Explaining cross-country differences in growth rates requires not only an understanding of the link between growth and public policies, but also an understanding of why countries choose different public policies. This paper shows that ethnic diversity helps explain cross-country differences in public policies and other economic indicators. In the case of Sub-Saharan Africa, economic growth is associated with low schooling, political instability, underdeveloped financial systems, distorted foreign exchange markets, high government deficits, and insufficient infrastructure. Africa's high ethnic fragmentation explains a significant part of most of these characteristics.

Greed and Grievance in Civil War

Abstract: Of the 27 major armed conflicts that occurred in 1999, all but two took place within national boundaries. As an impediment to development, internal rebellion especially hurts the world's poorest countries. What motivates civil wars? Greed or grievance? Collier and Hoeffler compare two contrasting motivations for rebellion: greed and grievance. Most rebellions are ostensibly in pursuit of a cause, supported by a narrative of grievance. But since grievance assuagement through rebellion is a public good that a government will not supply, economists predict such rebellions would be rare. Empirically, many rebellions appear to be linked to the capture of resources (such as diamonds in Angola and Sierra Leone, drugs in Colombia, and timber in Cambodia). Collier and Hoeffler set up a simple rational choice model of greed-rebellion and contrast its predictions with those of a simple grievance model. Some countries return to conflict repeatedly. Are they conflict-prone or is there a feedback effect whereby conflict generates grievance, which in turn generates further conflict? The authors show why such a feedback effect might be present in both greed-motivated and grievance rebellions. The authors' results contrast with conventional beliefs about the causes of conflict. A stylized version of conventional beliefs would be that grievance begets conflict, which begets grievance, which begets further conflict. With such a model, the only point at which to intervene is to reduce the level of objective grievance. Collier and Hoeffler's model suggests that what actually happens is that opportunities for predation (controlling primary commodity exports) cause conflict and the grievances this generates induce dias-poras to finance further conflict. The point of policy intervention here is to reduce the absolute and relative attraction of primary commodity predation and to reduce the ability of diasporas to fund rebel movements. This paper - a product of the Development Research Group - is part of a larger effort in the group to study civil war and criminal violence. For more on this effort, go to www.worldbank.org/research/conflict. Paul Collier may be contacted at pcollier@worldbank.org.

General Diagnostic Tests for Cross Section Dependence in Panels

Abstract: This paper proposes simple tests of error cross section dependence which are applicable to a variety of panel data models, including stationary and unit root dynamic heterogeneous panels with short T and large N. The proposed tests are based on average of pair-wise correlation coefficients of the OLS residuals from the individual regressions in the panel, and can be used to test for cross section dependence of any fixed order p, as well as the case where no a priori ordering of the cross section units is assumed, referred to as CD(p) and CD tests, respectively. Asymptotic distribution of these tests are derived and their power function analyzed under different alternatives. It is shown that these tests are correctly centred for fixed N and T, and are robust to single or multiple breaks in the slope coefficients and/or error variances. The small sample properties of the tests are investigated and compared to the Lagrange multiplier test of Breusch and Pagan using Monte Carlo experiments. It is shown that the tests have the correct size in very small samples and satisfactory power, and as predicted by the theory, quite robust to the presence of unit roots and structural breaks. The use of the CD test is illustrated by applying it to study the degree of dependence in per capita output innovations across countries within a given region and across countries in different regions. The results show significant evidence of cross dependence in output innovations across many countries and regions in the World.

Institutions and economic performance: cross‐country tests using alternative institutional measures

Abstract: This paper compares more direct measures of the institutional environment with both the instability proxies used by Barro (1991) and the Gastil indices, by comparing their effects both on growth and private investment. The results provide substantial support for the position that the institutional roots of growth and convergence are significant. The marked improvement that these new variables represent over existing proxies also suggests that there are substantial returns to future research into variables that reflect the security of property rights and the efficiency with which states determine economic policies and allocate public goods.

Economic Reform and the Process of Global Integration

Abstract: WHEN T H E BROOKINGS Panel on Economic Activity began in 1970, the world economy roughly accorded with the idea of three distinct economic systems: a capitalist first world, a socialist second world, and a developing third world which aimed for a middle way between the first two. The third world was characterized not only by its low levels of per capita GDP, but also by a distinctive economic system that assigned the state sector the predominant role in industrialization, although not the monopoly on industrial ownership as in the socialist economies. The years between 1970 and 1995, and especially the last decade, have witnessed the most remarkable institutional harmonization and economic integration among nations in world history. While economic integration was increasing throughout the 1970s and 1980s, the extent of integration has come sharply into focus only since the collapse of communism in 1989. In 1995 one dominant global economic system is emerging. The common set of institutions is exemplified by the new World Trade Organization (WTO), which was established by agreement of more than 120 economies, with almost all the rest eager to join as rapidly as possible. Part of the new trade agreement involves a codification of basic principles governing trade in goods and services. Similarly, the International Monetary Fund (IMF) now boasts nearly universal membership, with member countries pledged to basic principles of currency convertibility. Most programs of economic reform now underway in the developing world and in the post-communist world have as their strategic aim the