Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth

The Economic Effects of Constitutions. By Torsten Persson and Guido Tabellini. Cambridge, MA: The MIT Press, 2003. 320p. $35.00.Torsten Persson and Guido Tabellini have produced the most ambitious study yet that attempts to identify and estimate the effects of constitutional design on economic outcomes. They draw on data from more than 80 countries and control for demographic, historical, regional, and economic characteristics. The purpose is to determine whether the shape of political institutions has measurable impact on economic policies (e.g., fiscal balance, social welfare spending), on government performance (e.g., corruption indices, protection of property rights), and on direct measures of economic performance (e.g., productivity of capital and labor). The political institutions that draw the most attention are constitutional regime type and the method of electing legislators.

The Economic Effects of Constitutions

The historical frequency of banking crises is quite similar in high- and middle-to-low-income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark's financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States.Banking crises dramatically weaken fiscal positions in both groups, with government revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86 percent. Thus the fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. Our new dataset includes housing price data for emerging markets; these allow us to show that the real estate price cycles around banking crises are similar in duration and amplitude to those in advanced economies, with the busts averaging four to six years. Corroborating earlier work, we find that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w14587.pdf?abstractid=1320833&rulid=90009&mirid=3

Banking Crises: An Equal Opportunity Menace

The rapid growth of international reserves, a development concentrated in the emerging markets, remains a puzzle. In this paper, we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.

/pdf/financial-stability-the-trilemma-and-international-reserves-hlqmkcvrhe.pdf

Financial Stability, the Trilemma, and International Reserves

This paper offers a "panoramic" analysis of the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults and restructurings in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that "this time is different" among policymakers and investors. A recent example of the "this time is different" syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.

/pdf/this-time-is-different-a-panoramic-view-of-eight-centuries-lc49ti4moo.pdf

This Time is Different: A Panoramic View of Eight Centuries of Financial Crises

1. Introduction Gerardo della Paolera and Alan M. Taylor 2. Between independence and the golden age: the early Argentine economy Ricardo D. Salvatore and Carlos Newland 3. Passing the buck: monetary and fiscal policies Gerardo della Paolera, Maria Alejandra Irigoin and Carlos G. Bozzoli 4. Economic cycles Adolfo Sturzenegger and Ramiro Moya 5. The labor market Sebastian Galiani and Pablo Gerchunoff 6. Capital accumulation Alan M. Taylor 7. International trade and commercial policy Julio Berlinski 8. Agriculture Yair Mundlak and Marcelo Regunaga 9. Industry Maria Ines Barbero and Fernando Rocchi 10. Banking and finance, 1900-35 Leonard I. Nakamura and Carlos E. J. M. Zarazaga 11. Business, government and law Sergio Berensztein and Horacio Spector 12. Epilogue: the Argentine puzzle Gerardo della Paolera and Ezequiel Gallo 13. Statistical appendix Gerardo della Paolera, Alan M. Taylor and Carlos G. Bozzoli.

A new economic history of Argentina

Introduction to "Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935"

The "Argentine disappointment" - why Argentina persistently failed to achieve sustained economic stability during the 20th century - is an issue that has mystified scholars for decades. In "Straining at the Anchor", Gerardo della Paolera and Alan M. Taylor provide many of the missing links that help explain this important historical episode. Organized chronologically, this book follows the various fluctuations of the Argentine economy from its postrevolutionary volatility to a period of unprecedented prosperity to a dramatic decline from which the country has never fully recovered. The authors examine in depth the solutions that Argentina has tried to implement, such as the "Caja de Conversion", the nation's first currency board, which favoured a strict gold-standard monetary regime, the forerunner of the convertibility plan the nation has recently adopted. With many countries now using - or seriously contemplating -monetary arrangements similar to Argentina's, this important and persuasive study maps out one of history's most interesting monetary experiments to show what works and what doesn't.

Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935

The long-run economic performance of Argentina since World War One has been relatively disappointing until recently. Yet, in the interior period, signs of future retardation and recurring crises were not so obvious. It is often claimed that an unmitigated success was the remarkably rapid growth of domestic financial markets. In conventional models, such :financial deepening" would help accelerate development, especially in an industrializing economy such as Argentina's. Yet the promise of this trend was unfulfilled: first the outbreak of World War One and then the Great Depression proved a setback for the fledgling financial system, and a long-run deterioration set in after 1940. In this paper we trace the course of financial development using historical and international comparisons and we analyze both macro- and microeconomic aspects of financial intermediation.

/pdf/finance-and-development-in-an-emerging-market-argentina-and-5bqtmfw6s1.pdf

Finance and Development in an Emerging Market: Argentina and the Interwar Period

Did macroconomic interventions make any contribution to Argentina's revovery from the Great Depression? Macroeconomic policy deviated from gold-standard orthodoxy after the final suspension of convertibility in 1929. Fiscal policy was conservative. Monetary policy became unorthodox after 1931, when the Caja de conversion began rediscounting to sterilize gold outflows and avoid deflation. This change predated the creation of the central bank in 1935. A wider literature links the interwar depression in the core to flaws in the gold standard, and active monetary policy to escape from defaltion and slump; our work extends this idea to the periphery.

/pdf/economic-recovery-from-the-argentine-great-depression-4w3uyua4yo.pdf

Gerardo della Paolera

Papers

A new economic history of Argentina

Introduction to "Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935"

Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935

Finance and Development in an Emerging Market: Argentina and the Interwar Period

Economic Recovery from the Argentine Great Depression: Institutions, Expectations, and the Change of Macroeconomic Regime