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Joshua Aizenman

Bio: Joshua Aizenman is an academic researcher from University of Southern California. The author has contributed to research in topics: Exchange rate & Emerging markets. The author has an hindex of 65, co-authored 594 publications receiving 16545 citations. Previous affiliations of Joshua Aizenman include National University of Singapore & University of California, Santa Cruz.


Papers
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TL;DR: In this article, the importance of mercantilist and precautionary motives in accounting for the hoarding of international reserves by developing countries, and a model that quantifies the welfare gains from optimal management of international reserve is provided.
Abstract: This paper tests the importance of precautionary and mercantilist motives in accounting for the hoarding of international reserves by developing countries, and provides a model that quantifies the welfare gains from optimal management of international reserves. While the variables associated with the mercantilist motive are statistically significant, their economic importance in accounting for reserve hoarding is close to zero and is dwarfed by other variables. Overall, the empirical results are in line with the precautionary demand. The effects of financial crises have been localized, increasing reserve hoarding in the aftermath of crises mostly in countries located in the affected region, but not in other regions. We also investigate the micro foundation of precautionary demand, extending Diamond and Dybvig (1983)’s model to an open, emerging market economy where banks finance long-term projects with short-term deposits. We identify circumstances that lead to large precautionary demand for international reserves, providing self-insurance against the adverse output effects of sudden stop and capital flight shocks. This would be the case if premature liquidation of long-term projects is costly, and the economy is de-facto integrated with the global financial system, hence sudden stops and capital flight may reduce deposits sharply. We show that the welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude.

571 citations

Journal ArticleDOI
TL;DR: In this article, the authors compared the importance of precautionary and mercantilist motives in the hoarding of international reserves by developing countries and found that the welfare gain from the optimal management of international reserve is of a first-order magnitude, reducing the welfare cost of liquidity shocks.
Abstract: This paper compares the importance of precautionary and mercantilist motives in the hoarding of international reserves by developing countries. Overall, empirical results support precautionary motives; in particular, a more liberal capital account regime increases international reserves. Theoretically, large precautionary demand for international reserves arises as a self-insurance to avoid costly liquidation of long-term projects when the economy is susceptible to sudden stops. The welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude.

453 citations

Journal ArticleDOI
TL;DR: In this paper, the authors uncover a significant negative correlation between various volatility measures and private investment in developing countries, even when adding the standard control variables, and find that public investment spending is positively correlated with some ineasures of volatility.
Abstract: We uncover a significant negative correlation between various volatility measures and private investment in developing countries, even when adding the standard control variables. No such correlation is uncovered when the investment measure is the sum of private and public investment spending. Indeed, public investment spending is positively correlated with some ineasures of volatility. These findings suggest that the detrimental impact of volatility on investment may be easier to detect using disaggregated data. We provide several possible interpretations for our findings. Nonlinearities in preferences or budget constraints can cause volatility to have first-order negative effects on private investment.

366 citations

Posted Content
TL;DR: In this paper, the authors estimate the pricing of sovereign risk for sixty countries based on fiscal space (debt/tax;deficits/tax) and other economic fundamentals over 2005-10.
Abstract: We estimate the pricing of sovereign risk for sixty countries based on fiscal space (debt/tax;deficits/tax) and other economic fundamentals over 2005-10. We measure how accurately themodel predicts sovereign credit default swap (CDS) spreads, focusing in particular on the fivecountries in the South-West Eurozone Periphery (Greece, Ireland, Italy, Portugal, and Spain).Dynamic panel estimates of the model suggest that fiscal space and other macroeconomic factorsare statistically significant and economically important determinants of market-based sovereignrisk. Although the explanatory power of fiscal space measures drop during the crisis, the TEDspread, trade openness, external debt and inflation play a larger role. As expectations of marketvolatility jumped during the crisis, the weakly concavity of creditors’ payoff probably accountsfor the emergence of TED spread as a key pricing factor. However, risk-pricing of the South-West Eurozone Periphery countries is not predicted accurately by the model either in-sample orout-of-sample: unpredicted high spreads are evident during global crisis period, especially in2010 when the sovereign debt crisis swept over the periphery area. We “match†the peripherygroup with five middle income countries outside Europe that were closest in terms of fiscal spaceduring the European fiscal crisis. We find that Eurozone periphery default risk is priced muchhigher than the “matched†countries in 2010, even allowing for differences in fundamentals. Oneinterpretation is that the market has mispriced risk in the Eurozone periphery. An alternativeinterpretation is that the market is pricing not on current fundamentals but future fundamentals,expecting the periphery fiscal space to deteriorate markedly and posing a high risk of debtrestructuring. Adjustment challenges of the Eurozone periphery may be perceived aseconomically and politically more difficult than the matched group of middle income countriesbecause of exchange rate and monetary constraints.

344 citations

Journal ArticleDOI
TL;DR: This article investigated how the trilemma policy mix affects economic performance in developing countries and found that greater monetary independence can dampen output volatility, while greater exchange rate stability is associated with greater output volatility.

307 citations


Cited by
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Journal ArticleDOI
TL;DR: Acemoglu, Johnson, and Robinson as discussed by the authors used estimates of potential European settler mortality as an instrument for institutional variation in former European colonies today, and they followed the lead of Curtin who compiled data on the death rates faced by European soldiers in various overseas postings.
Abstract: In Acemoglu, Johnson, and Robinson, henceforth AJR, (2001), we advanced the hypothesis that the mortality rates faced by Europeans in different parts of the world after 1500 affected their willingness to establish settlements and choice of colonization strategy. Places that were relatively healthy (for Europeans) were—when they fell under European control—more likely to receive better economic and political institutions. In contrast, places where European settlers were less likely to go were more likely to have “extractive” institutions imposed. We also posited that this early pattern of institutions has persisted over time and influences the extent and nature of institutions in the modern world. On this basis, we proposed using estimates of potential European settler mortality as an instrument for institutional variation in former European colonies today. Data on settlers themselves are unfortunately patchy—particularly because not many went to places they believed, with good reason, to be most unhealthy. We therefore followed the lead of Curtin (1989 and 1998) who compiled data on the death rates faced by European soldiers in various overseas postings. 1 Curtin’s data were based on pathbreaking data collection and statistical work initiated by the British military in the mid-nineteenth century. These data became part of the foundation of both contemporary thinking about public health (for soldiers and for civilians) and the life insurance industry (as actuaries and executives considered the

6,495 citations

01 Jan 2002
TL;DR: This article investigated whether income inequality affects subsequent growth in a cross-country sample for 1965-90, using the models of Barro (1997), Bleaney and Nishiyama (2002) and Sachs and Warner (1997) with negative results.
Abstract: We investigate whether income inequality affects subsequent growth in a cross-country sample for 1965-90, using the models of Barro (1997), Bleaney and Nishiyama (2002) and Sachs and Warner (1997), with negative results. We then investigate the evolution of income inequality over the same period and its correlation with growth. The dominating feature is inequality convergence across countries. This convergence has been significantly faster amongst developed countries. Growth does not appear to influence the evolution of inequality over time. Outline

3,770 citations

Book ChapterDOI
01 Jan 1991
TL;DR: In this article, the authors define an optimum currency area as a geographical domain having as a general means of payments either a single common currency or several currencies whose exchange values are immutably pegged to one another with unlimited convertibility for both current and capital transactions, but whose exchange rates fluctuate in unison against the rest of the world.
Abstract: An optimum currency area refers to the ‘optimum’ geographical domain having as a general means of payments either a single common currency or several currencies whose exchange values are immutably pegged to one another with unlimited convertibility for both current and capital transactions, but whose exchange rates fluctuate in unison against the rest of the world. ‘Optimum’ is defined in terms of the macroeconomic goal of maintaining internal and external balance. Internal balance is achieved at the optimal trade-off point between inflation and unemployment (if such a trade-off really exists), and external balance involves both intra-area and inter-area balance of payments equilibrium.

2,196 citations