Department of Economics

56. Hall, George, & Sargent, Thomas (NYU), "Fiscal Discriminations in Three Wars" (2013).

Abstract: In 1790, a U.S. paper dollar was widely held in disrepute (something shoddy was not ‘worth a Continental’). By 1879, a U.S. paper dollar had become ‘as good as gold.’ These outcomes emerged from how the U.S. federal government financed three wars: the American Revolution, the War of 1812, and the Civil War. In the beginning, the U.S. government discriminated greatly in the returns it paid to different classes of creditors; but that pattern of discrimination diminished over time in ways that eventually rehabilitated the reputation of federal paper money as a store of value.

55. Osler, Carol, Savaser, Tanseli (Williams), & Nguyen, Thang Tan (IBS), "Asymetric Information and the Foreign-Exchange Trades of Global Custody Banks" (2012).

Abstract: We analyze currency trading between custody banks and their client funds, a trading situation notable for extreme opacity and ongoing legal disputes about reputedly high markups. We propose a “shrouding” model of liquidity provision in which prices are set relative to the day’s extrema to preserve client uncertainty about execution costs. Using the complete 2006 currency trading record of a custody bank, we support this hypothesis with numerous tests. Our analysis of the client funds indicates that they recognize the high costs of standard custodial trades and raises the possibility that they trade through custodians to shroud execution-cost information from underlying investors. 

54. King, Michael (U of Western Ontario), Osler, Carol & Rime, Dagfinn (Norges Bank), "The Market Microstructure Approach to Foreign Exchange: Looking Back and Looking Forward" (2012).

Abstract: Looking back, 30 years of research on foreign exchange (FX) market microstructure reveals that order flow, heterogeneity among agents, and private information are crucial determinants of short-run exchange rate dynamics. Microstructure researchers have produced empirically-driven models that fit the data surprisingly well. But currency markets are evolving rapidly in response to new electronic trading technologies. Transparency has risen, trading costs have tumbled, and transaction speed has accelerated as new players have entered the market and existing players have modified their behavior. These changes will have profound effects on exchange rate dynamics. Looking forward, we highlight fundamental yet unanswered questions on the nature of private information, the impact on market liquidity, and the changing process of price discovery. We also outline potential microstructure explanations for long-standing exchange rate puzzles.

53. Hilscher, Jens & Raviv, Alon, "Bank stability and market discipline: The effect of contingent capital on risk taking and default probability" (2012).

Abstract: This paper investigates the effects of financial institutions issuing contingent capital, a debt security that automatically converts into equity if assets fall below a predetermined threshold. We analyze a tractable form of contingent convertible bonds ("coco") and provide a closed-form solution for the price. We quantify the reduction in default probability associated with contingent capital as compared to subordinated debt. We then show that appropriate choice of contingent capital parameters (conversion ratio and threshold) can virtually eliminate stockholders' incentives to risk-shift, a motivation that is present when bank liabilities instead include either only equity or subordinated debt. Importantly, risk-taking incentives continue to be weak during times of financial distress. Our findings imply that contingent capital may be an effective tool for stabilizing financial institutions.

52. Emami Namini, Julian (Erasmus), & Lopez, Ricardo, "Factor Price Overshooting with Trade Liberalization: Theory and Evidence" (2012).

Abstract: This paper develops an intra-industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non-exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled worker, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant-level data supports the idea of factor price overshooting with trade liberalization.

51. Alvarez, Roberto (University of Chile), & Lopez, Ricardo, "Financial Development, Exporting and Firm Heterogeneity in Chile" (2012).

Abstract: Using plant-level data from the manufacturing sector of Chile for the period 1990-2000, this paper examines the effect of financial development on the probability of exporting at the plant level, with a special focus on the heterogeneous responses of plants with different characteristics. The main results are that an improvement in financial development increases the probability of exporting of more productive plants and those with foreign ownership operating in manufacturing sectors that are more dependent on external finance. Our estimates also show that financial development does not appear to improve the probability of exporting for relatively smaller and younger plants. This result suggests that, at least for the case of exporting in Chile, smaller and younger plants are not necessarily more likely to benefit than larger and older plants from improvements in access to credit.