Speculative attacks on debts and optimum currency area: a welfare analysis

Traditionally the issue of an optimum currency area is based on the theoretical underpinnings developed in the 1960s by McKinnon [13], Kenen [12] and mainly Mundell [14], who is concerned with the benefits of lowering transaction costs vis-à- vis adjustments to asymmetrical shocks. Recently, this theme has been reappraised with new aspects included in the analysis, such as: incomplete markets, credibility of monetary policy and seigniorage, among others. For instance, Neumeyer [15] develops a general equilibrium model with incomplete asset markets and shows that a monetary union is desirable when the welfare gains of eliminating the exchange rate volatility are greater than the cost of reducing the number of currencies to hedge against risks. In this paper, we also resort to a general equilibrium model to evaluate financial aspects of an optimum currency area. Our focus is to appraise the welfare of a country heavily dependent on foreign capital that may suffer a speculative attack on its public debt. The welfare analysis uses as reference the self-fulfilling debt crisis model of Cole and Kehoe ([6], [7] and [8]), which is employed here to represent dollarization. Under this regime, the national government has no control over its monetary policy, the total public debt is denominated in dollars and it is in the hands of international bankers. To describe a country that is a member of a currency union, we modify the original Cole-Kehoe model by including public debt denominated in common currency, only purchased by national consumers. According to this rule, the member countries regain some influence over the monetary policy decision, which is, however, dependent on majority voting. We show that for specific levels of dollar debt, to create inflation tax on common-currency debt in order to avoid an external default is more desirable than to suspend its payment, which is the only choice available for a dollarized economy when foreign creditors decide not to renew their loans.

Speculative attacks on debts, dollarization and optimum currency areas

The purpose of this article is to contribute to the discussion of the financial aspects of dollarization and optimum currency areas. Based on the model of self-fulfilling debt crisis developed by Cole and Kehoe [4], it is possible to evaluate the comparative welfare of economies, which either keep their local currency and an independent monetary policy, join a monetary union or adopt dollarization. In the two former monetary regimes, governments can issue debt denominated, respectively, in local and common currencies, which is completely purchased by national consumers. Given this ability, governments may decide to impose an inflation tax on these assets and use the revenues so collected to avoid an external debt crises. While the country that issues its own currency takes this decision independently, a country belonging to a monetary union depends on the joint decision of all member countries about the common monetary policy. In this way, an external debt crises may be avoided under the local and common currency regimes, if, respectively, the national and the union central banks have the ability to do monetary policy, represented by the reduction in the real return on the bonds denominated in these currencies. This resource is not available under dollarization. In a dollarized economy, the loss of control over national monetary policy does not allow adjustments for exogenous shocks that asymmetrically affect the client and the anchor countries, but credibility is strengthened. On the other hand, given the ability to inflate the local currency, the central bank may be subject to the political influence of a government not so strongly concerned with fiscal discipline, which reduces the welfare of the economy. In a similar fashion, under a common currency regime, the union central bank may also be under the influence of a group of countries to inflate the common currency, even though they do not face external restrictions. Therefore, the local and common currencies could be viewed as a way to provide welfare enhancing bankruptcy, if it is not abused. With these peculiarities of monetary regimes in mind, we simulate the levels of economic welfare for each, employing recent data for the Brazilian economy.

Apresentação 10: “Inflation Targeting”, “Currency Regimes with Defaultable Debts” e Sistema Tributário na Presença de Informalidade e Evasão Fiscal…A disseminação internacional das pesquisas aplicadas relacionadas a agenda brasileira

Coordenadora: Goret P. Paulo

The Permanent Income Hypothesis: A Test on Czech Privatisation

Since the late eighties, economists have been regarding the transition from command to market economies in Central and Eastern Europe with intense interest. In addition to studying the transition per se, they have begun using the region as a testing ground on which to investigate the validity of certain classic economic propositions. In his research, comprising three articles written in English and totalling 40 pages, Mr. Hanousek uses the so-called "Czech national experiment" (voucher privatisation scheme) to test the permanent income hypothesis (PIH). He took as his inspiration Kreinin's recommendation: "Since data concerning the behaviour of windfall income recipients is relatively scanty, and since such data can constitute an important test of the permanent income hypothesis, it is of interest to bring to bear on the hypothesis whatever information is available". Mr. Hanousek argues that, since the transfer of property to Czech citizens from 1992 to 1994 through the voucher scheme was not anticipated, it can be regarded as windfall income. The average size of the windfall was more than three month's salary and over 60 percent of the Czech population received this unexpected income. Furthermore, there are other reasons for conducting such an analysis in the Czech Republic. Firstly, the privatisation process took place quickly. Secondly, both the economy and consumer behaviour have been very stable. Thirdly, out of a total population of 10 million Czech citizens, an astonishing 6 million, that is, virtually every household, participated in the scheme. Thus Czech voucher privatisation provides a sample for testing the PIH almost equivalent to a full population, thus avoiding problems with the distribution of windfalls. Compare this, for instance with the fact that only 4% of the Israeli urban population received personal restitution from Germany, while the number of veterans who received the National Service Life Insurance Dividends amounted to less than 9% of the US population and were concentrated in certain age groups. But to begin with, Mr. Hanousek considers the question of whether the public percieves the transfer from the state to individual as an increase in net wealth. It can be argued that the state is only divesting itself of assets that would otherwise provide a future source of transfers. According to this argument, assigning these assets to individuals creates an offsetting change in the present value of potential future transfers so that individuals are no better off after the transfer. Mr. Hanousek disagrees with this approach. He points out that a change in the ownership of inefficient state-owned enterprises should lead to higher efficiency, which alone increases the value of enterprises and creates a windfall increase in citizens' portfolios. More importantly, the state and individuals had very different preferences during the transition. Despite government propaganda, it is doubtful that citizens of former communist countries viewed government-owned enterprises as being operated in the citizens' best interest. Moreover, it is unlikely that the public fully comprehended the sophisticated links between the state budget, state-owned enterprises, and transfers to individuals. Finally, the transfers were not equal across the population. Mr. Hanousek conducted a survey on 1263 individuals, dividing them into four monthly earnings categories. After determining whether the respondent had participated in the voucher process, he asked those who had how much of what they received from voucher privatisation had been (a) spent on goods and services, (b) invested elsewhere, (c) transferred to newly emerging pension funds, (d) given to a family member, and (e) retained in their original form as an investment. Both the mean and the variance of the windfall rise with income. He obtained similar results with respect to education, where the mean (median) windfall for those with a basic school education was 13,600 Czech Crowns (CZK), a figure that increased to 15,000 CZK for those with a high school education without exams, 19,900 CZK for high school graduates with exams, and 24,600 CZK for university graduates. Mr. Hanousek concludes that it can be argued that higher income (and better educated) groups allocated their vouchers or timed the disposition of their shares better. He turns next to an analysis of how respondents reported using their windfalls. The key result is that only a relatively small number of individuals reported spending on goods. Overall, the results provide strong support for the permanent income hypothesis, the only apparent deviation being the fact that both men and women aged 26 to 35 apparently consume more than they should if the windfall were annuitised. This finding is still fully consistent with the PIH, however, if this group is at a stage in their life-cycle where, without the windfall, they would be borrowing to finance consumption associated with family formation etc. Indeed, the PIH predicts that individuals who would otherwise borrow to finance consumption would consume the windfall up to the level equal to the annuitised fraction of the increase in lifetime income plus the full amount of the previously planned borrowing for consumption. Greater consumption would then be financed, not from investing the windfall, but from avoidance of future repayment obligations for debts that would have been incurred without the windfall.

National debts : partly read before the British Association, at Liverpool, Sept. 1870

by R. Dudley Baxter

A statement of the monies which have been paid, & of the debts which are still due to Thomas Adams formerly College Butler. 15 April 1794

Statement with list of creditors paid with cash from the student accounts.

A statement of the bills due to Thomas Adams, late Butler of Harvard College and the amount of their appropriations to discharge his debts, 1794

Statement with list of creditors owed funds. Verso is dated 1797, and includes list of cash paid out to creditors.