Distributional Effects of Boom-Bust Cycles in Developing Countries with Financial Frictions

Transcription

1 Disribuional Effcs of Boom-Bus Ccls in Dvloping Counris wih Financial Fricions Absrac his papr shds ligh on h disribuional implicaions of h xchang ra basd sabilizaions wih financial imprfcions whn a counr is populad b hrognous agns wih rspc o hir sourc of incom. his papr shows ha boom-bus ccls in dvloping counris lad o incom rdisribuion from radabl o nonradabl scors. Sinc h shar of radabl scors in aggrga GDP incrass abov is usual shar wih h dvaluaion of h currnc, h individuals in radabl scors pa mor ax han wha h rciv as capial inflow in h xpansion phas of h conom. h opposi holds for h individuals in nonradabl scors who gain mor from h capial inflow as compard o wha h los from axaion. K words: Disribuional Effcs, Boom-Bus Ccls, Financial Fricions, JEL Classificaions: F41, F34, G15 Ahm Faruk Asan Boğaziçi Univrsi Dp. of Economics 3434 Bbk, Isanbul, urk Phon: Fax: ahm.asan@boun.du.r

2 Disribuional Effcs of Boom-Bus Ccls in Dvloping Counris wih Financial Fricions 1. Inroducion Inflaion sabilizaion programs appard o b on of h idnifing faurs of dvloping counris in rcn dcads. hs programs ar iniiad wih h innion o rduc inflaion and bring long run conomic sabili. Howvr xprincs of man dvloping counris suggs a parn of boom-bus ccls associad wih h sabilizaion programs. Counris implmning various sors of sabilizaion programs ar characrizd b conomic boom and susaind ral apprciaion, bu lar in sabilizaion pisods conomic conracion aks plac and programs com o h nd wih a suddn-sop associad wih crisis. Exprincs of Souhrn Con Lain Amrica (Argnina, Chil, Urugua) in 1970s and arl 1980s xacl fi o his common parn, which is lar in 1990s rpad b Mxican Pso Crisis and rcnl b urkish and Argnin criss. h cnral objciv of his papr is o unravl h disribuional consquncs of hs boom-bus ccls inhrn in man sabilizaion pisods. Hnc, his papr provids a modl o show ha boom-bus ccls in dvloping counris lad o incom rdisribuion from radabl () o Nonradabl (N) scors. h xising liraur on sabilizaion programs is mor concrnd wih xplaining h rasons bhind obsrvd boom-bus ccls. Howvr much lss anion is givn o h qusion of whhr h sabilizaion programs hav disribuional implicaions as wll. hr ar som mpirical sudis xplaining h disribuional consquncs of sabilizaion policis. Howvr hr ar no man horical modls o addrss his issu. Hnc his papr conribus o h liraur b showing ha mporar xchang ra sabilizaion programs can hav zro cos for h counr, bu individuals in h counr can b affcd asmmricall dpnding on hir sourc of incom. his papr also shows ha h spd of capial ouflow from h counr affcs h disribuional consquncs of h mporar xchang ra basd sabilizaion programs. Morovr, his papr shds ligh on h qusion of wh h sabilizaion programs ar adopd a h firs plac and lar 1

3 coninud vn hough h ar blivd o b mporar in conncion wih Asan (006). Asan (006) shows ha vn hough xchang ra ralignmns ar rcognizd o b mporar and infficin, counr ma sill implmn hm, bcaus i allows rdisribuion of incom among various groups. Hr in his papr, w jus modl how slizd facs of boom-bus ccls in dvloping counris can gnra rdisribuion from o N scors. Whn individuals in N scors ar poliicall mor powrful han h individuals in scors, adopion of infficin policis in favor of N scors can b a poliical oucom. h nx issu is ha if on of h rasons o adop mporar policis is o rdisribu incom, wh don counris implmn rdisribuions dircl in a mor fficin mannr? On possibl answr is ha b allowing infficin policis poliicians can hid rdisribuional aspcs of nw programs iniiall and win h public suppor whn h policis ar adopd a h bginning. In our modl rdisribuion is ralizd ovr im. Iniiall, vron bnfis from h polic chang bu lar h cos of prviousl adopd policis falls mor on crain groups. Hnc, if h individuals ar no wll informd abou h consquncs of nw policis, infficin mporar programs can hlp hid h incom rdisribuion ovr im. In our modl, w bnfi from mporarinss hpohsis and financial fricions o modl rdisribuion. mporarinss hpohsis hlps us accoun for boom-bus ccls and incrasing N o oupu raio bfor criss. On h ohr hand, financial fricions in h form of financial consrains and bailous ar mplod o gnra rdisribuional consquncs of mporar policis. Sabilizaion programs ar dsignd diffrnl dpnding on h counr characrisics, choic of polic insrumns, and combind wih srucural rforms lik privaizaion, financial mark rforms. Howvr, h xchang ra basd sabilizaion programs sm o b mor widsprad mchanism mplod o sabiliz h conom. An xaminaion of xchang ra basd sabilizaion programs suggss h following rgulariis: (i) A boom in conomic acivi, consumpion, invsmn and GDP followd b a lar slowdown

4 (ii) Slow convrgnc of inflaion o h dvaluaion ra (iii) Ral xchang ra apprciaion associad wih a ris in h rlaiv pric of N goods (iv) Drioraion of rad balanc and currn accoun balanc (v) An ambiguous rspons of ral inrs ras dpnding on h orhodox or hrodox plan (vi) A boom in h ral sa mark (vii) Surg in capial inflows, spciall in h form of bank lnding in arl sags of h plans ha is lar rvrsd wih suddn-sop. Various modls ar offrd in an amp o accoun for hs slizd facs. Sick inflaion du o adapiv xpcaions (Dornbush, 198 and Rodriquz, 198) and mporarinss hpohsis du o lack of crdibili (Calvo, 1986 and Calvo and Vgh, 1993) sill provid significan conribuions o h rsarch on h opn conom macroconomics. Lar, fiscal polic inducd walh ffc proposd b Hlpman and Razin (1987) and Drazn and Hlpman (1988) claims ha rducion in inflaion gnras walh ffc and hus h conomic xpansion. Lar amps o xplain h slizd facs mphasiz h suppl sid ffcs ha ma rsul from rmoving h inflaionar disorion on h labor suppl (Roldos, 1993) or capial accumulaion (Roldos, 1995 and Urib, 1997). Each of hs various approachs has som mris in rvaling h mchanism bhind sabilizaion programs. Howvr as poind ou b Rblo and Vgh (1996), no singl hpohsis is sufficin o accoun for all mpirical rgulariis a qualiaiv lvl. h onl hpohss ha gnra a boom-rcssion ccls ar mporarinss and sick wags and prics hpohss. In an amp o accoun for dispariis bwn horical modls and mpirical rgulariis, Calvo and Drazn (1998) focus on h rol of uncrain and incompl coningn claim marks and illusra gradual consumpion boom. Mor rcnl, Mndoza and Urib (000) us a gnral quilibrium modl of a wo-scor, small opn conom in which agns xpc a dvaluaion and a swich o a highr ra of dprciaion of currnc and h show ha risk of dvaluaion inducs larg disorions on walh and rlaiv prics in incompl insuranc mark sings. hir modl gnras macroconomic dnamics ha mimic imporan faurs of sabilizaion 3

5 programs implmnd in man dvloping counris. hs rcn amps ar rmarkabl imporan conribuions o h liraur bcaus h no onl br accoun for h quaniaiv rgulariis of daa, bu also draw anion o imprfc crdi marks and collaral consrains (Mndoza, 000-a, Caballro and Krishnamurh, 000). Alfaro (00) analzs an ndowmn conom whr mporar ral xchang ra apprciaion gnras walh ffc in favor of h ownrs of nonradabls. His main conclusion on rdisrubuiv ffcs of mporar sabilizaions largl dpnds on h paramr valus of h uili funcion and iniial disribuion of walh. his papr offrs an alrnaiv modl wih mor ralisic rprsnaion of mporar sabilizaions b considring financial fricions as collaral consrains and bailous and govrnmns rspons o criss as an incras in axaion. Du o h rasons sad abov, h papr mplos mporar nominal xchang ra rducion combind wih financial consrains in an amp o modl h disribuional consquncs of xchang ra basd sabilizaion programs for h individuals in and N scors. h voluion of xchang ra basd sabilizaion suggsd b mporarinss hpohsis is h following. h nominal xchang ra is rducd iniiall which is known o b rvrsd lar in h program. hs mporar rducions in nominal xchang ra implis ha ffciv pric of consumpion is lowr now as compard o h fuur in a cash-in-advanc consrain conom. ha inducs highr consumpion of radabls and his highr consumpion of radabls is accompanid b highr consumpion and producion of nonradabls. Highr dmand for h nonradabls incrass h rlaiv pric of nonradabls and lads o xchang ra apprciaion. As h ral xchang ra apprcias ovrim, consumpion and producion of nonradabls fall from is highs lvl graduall. Whn nominal xchang ra is rvrsd, h discr fall in dmand for radabls and nonradabls occurs and nonradabl producion convrgs o is long run lvl ovr im. In Calvo and Vgh (1993) modl, scor is characrizd as ndowmn conom and nonradabls ar producd in a sick prics sing. Furhrmor, invsmn is no xplicil considrd in h modl and hus, financial marks and an imprfcions lik liquidi consrains, collaral consrains, which lar bcom a 4

6 subjc for xnsiv rsarch, ar ignord in hir modl. his papr mphasizs h rol plad b financial consrains o xplain how mporar sabilizaion programs can hav disribuional consquncs for h conom. In our modl, rlaxaion of financial consrains associad wih rising valu of nonradabl producion gnras a boom in capial inflow for h counr in h arl sags of sabilizaion pisods. Financial consrains ak wo forms. Rlaxaion of inrnaional liquidi consrain scalas h capial inflow ino h counr. Inrnaional invsors do no dircl invs in domsic firms. Banks mrg as inrmdiar mchanism o channl h inrnaional capial inflows o h individuals in h counr. Similar o h inrnaional liquidi consrain, h banks us domsic liquidi rquirmns as a mchanism o scrn h borrowrs. Furhrmor, govrnmn guarans h loans of h inrnaional invsors o domsic banks and rpas hir db in cas of ssmaic banking criss. In ohr words, sa bails ou h banks o avoid h collaps of h banking ssm. In our modl, ral xchang ra apprciaion-ris in rlaiv pric of nonradabls- incrass h collaral valu of h counr and inducs h inrnaional invsors o invs mor o h counr. A h sam im, h domsic banks hav a similar liquidi consrain cririon o lnd mon o h prospciv borrowrs. h individuals wih highr collaral in h form of highr incom borrow mor. h shars of nonradabls and radabls in aggrga GDP pla a crucial rol in h disribuion of inrnaional capial inflow. Wih h inroducion of xchang ra basd sabilizaion, h shar of nonradabls producion in aggrga GDP incrass du o surg in h nonradabl producion and prics of nonradabls. his furhr implis ha a h pak of conomic boom, N scors incras hir shar of collaral valu in oal collaral of h counr whil h shar of collaral valu of scors dclins. Hnc, N scors incras hir shar of borrowing in domsic financial marks during h xpansion of conom. hrfor, iming of h inrnaional capial inflow is crucial for h asmmric progrss of and N scors. In our modl, h capial inflow aks plac during h conomic xpansion saring wih a discr jump. his incras in capial inflow is lar rvrsd o a capial ouflow whn inrnaional collaral consrain binds again a h boom of conracion causd b h rvrsal of xchang ra basd 5

7 sabilizaion program. Wih h announcmn of h ris in nominal xchang ra (rvrsal of polic), w assum ha all h banks collaps and h sa bails ou h banks b rpaing hir loans. h govrnmn financs h bail ou b imposing a fla incom ax a h boom of conomic conracion. Howvr, whn fla incom ax is lvid, h shar of incom from N scors in aggrga GDP is lss han h shar of N scors in aggrga GDP a h im whn h capial inflow is carrid ou. Hnc, N scors njo h bnfi of xpansion mor han h suffr from h burdn of axaion. On h ohr hand, scors also bnfi from h sabilizaion program during h xpansion of conom b rciving a fracion of oal capial inflow, bu in h conracion pisod, scors los mor han h gain in h conomic xpansion. As a consqunc, h xchang ra basd sabilizaion polic can hav a rdisribuiv ffc from o N scors undr financial fricions. h xpansion in N scors xcds h magniud of lar conracion. On h conrar, h n ffc of boom-bus ccl on scors bcoms ngaiv a h nd. his framwork suggss rdisribuion from and N scors whr h mporar sabilizaions ar a work. In Calvo and Vgh modl (1993), h cos of mporar sabilizaion program coms in h form of non-smoohing of h consumpion. Ohr han consumpion volaili, hr is no cos for h conom, whil oupu xpands and conracs smmricall. In our modl, ovrall for h counr, h cos of mporar xchang ra basd sabilizaion can b zro bu individuals in h counr can b affcd asmmricall dpnding on hir sourc of incom. h oulin of h papr is as follows: h nx scion firs prsns h bnchmark modl of mporarinss hpohsis of Calvo and Vgh (1993) and lar, h bnchmark modl is xndd b including h inrnaional and domsic financial imprfcions o poin ou h disribuional aspcs of h mporar plans for and N scors; Scion 3 concluds.. h Modl his scion builds on a cash in advanc, saggrd prics modl combind wih mporar xchang ra rducion and financial consrains boh in inrnaional and 6

8 domsic lvls o accoun for abov mniond slizd facs and morovr o shd ligh on ponial disribuional consquncs of mporar xchang ra policis. h conom is characrizd b wo ps of individuals dpnding on hir sourc of incom. Each agn in h conom rcivs incom ihr from or N scors. W assum crain fixd cos ha prvns h individuals o mov bwn and N scors o illusra h rdisribuion br. h lifim uili of ach individual is givn b: N [ U ( C ) + V ( C )]xp( β) d (1) 0 Whr U and V rprsn h sparabl uili funcions, N C and C dno h consumpion of radabls and nonradabls a im rspcivl and β is h usual discoun facor. h budg consrains of h rprsnaiv individuals in and N scors a im ar: N N / = C / + C + i m rb () N = C / + C + i m rb (3) N and Whr b and m dno h sock of ral asss and mon balancs rspcivl. dno h oupu of nonradabls and radabls rspcivl, indicas h ral xchang ra rlaiv pric of radabls in rms of nonradabls and i is h nominal inrs ra. Individuals ar rquird o hold domsic mon o carr ou consumpion, hrfor h cash in advanc consrain sands as: N α ( C / + C ) m (4) Whr ral monar balancs ar posiiv funcion of consumpion xpndiurs. Du o h posiiv nominal inrs ra, i, individuals prfr o hold minimum monar balancs. B subsiuing quaion (4), quaion () and (3) can b rwrin as: N N / = ( C / + C )(1 + α i ) rb (5) N / = ( C / + C )(1 + α i ) rb (6) 7

9 Individuals maximiz hir uili funcion in (1) wih rspc o hir budg consrains (5) and (6). B assuming r=β h firs ordr condiions of his opimizaions ar: V C ) = λ (1 + α i ) (7) ( 1 V ( C ) / U ( C ) = (8) N Whr λ 1 is h im invarian Lagrang muliplir of budg consrains (5) and (6). h modl incorporas signorag rvnu for h govrnmn from mon craion, which is assumd o b wasd o kp h modl simpl. h nonradabls ar consumd in h counr and h quilibrium in N scors rquirs: C = (10) N N Nominal inrs ra is qual o ral inrs ra r plus dvaluaion ra, ε undr prfc capial mobili assumpion. i = r + ε (11) For h sak of simplici, suppl of radabls is assumd o b xognousl givn and consan. Whil N scor opras undr saggrd pric sing and suppl is dmand drmind. hrfor saggrd prics impl h following: dπ N = Θ( ) Θ > 0 (1) d which indicas ha h ra chang in inflaion, π, is a dcrasing funcion of xcss dmand, N. Equaion (1) assrs ha h highr h xcss dmand a im, h sharpr will b h drop in h inflaion ra afr. Equaion (8) indicas ha consumpion of nonradabls is a posiiv funcion of boh ral xchang ra and consumpion of radabls. hrfor w can rwri (1) as: dπ = Θ[ d N (, c )] (13) 8

10 h ral inrs ra is dfind as h rlaiv pric of radabls in rms of EP N nonradabls and hus wrin as = whr P and P ar h prics of radabls N P and nonradabls rspcivl. hrfor voluion of ral xchang ra is h following: d d = ( ε π ) (14) W can now addrss h main issus of h mporarinss hpohsis. mporarinss hpohsis is basd on h lack of crdibili assumpion. h polic makrs announc a prmann rducion in h dvaluaion ra bu h public blivs ha h rducion in dvaluaion ra will las for a crain priod of im. h prsn is rprsnd b im 0. Bwn im 0 and h dvaluaion ra is blivd o b lowr and i will b back o highr ra a im. So h public blivs h following polic: whr > 0 and < ε = ε for 0 (15-a) h ε = ε for (15-b) h ε < ε Equaion (11) implis ha during h ransiion priod from 0 o, h domsic nominal inrs ra, i, is lowr han afr. his inducs highr lvl of consumpion of radabls b firs ordr condiion (7) bwn im 0 and. h incrasd consumpion of radabls is supplid b rad dfici, which is lar compnsad b rad surplus afr im. hrfor, iniiall h currn accoun jumps ino dfici as a rsul of surg in h consumpion of radabls and h balanc is rsord a im wih a discr fall in h consumpion of radabls. A im, h nw sad sa consumpion of radabls mus b lss han h ndowmns of radabls o offs h arlir incras in h consumpion of radabls. h fall in h consumpion of radabls rquirs highr ral xchang ra du o quaion (8). h consumpion of nonradabls is shown o b a posiiv funcion of ral xchang ra and consumpion of radabls (quaion (8)). Sinc h consumpion of radabls jumps up a im 0 and fall a im, h consumpion of nonradabls maks h sam jumps givn ha ral xchang ra is a prdrmind variabl and maks no discr movmns. h apprciaion of ral xchang ra 9

11 implis a dcras in h consumpion of nonradabls bwn im 0 and. A im consumpion of nonradabls maks a discr fall and graduall incrass as ral xchang ra dprcias. A im 0 and a im h jumps in h consumpion of radabls mus b accompanid b h sam jumps in h consumpion of nonradabls bcaus ral xchang a a poin of im is a prdrmind variabl, consumrs do no wan o chang h consumpion of nonradabls rlaiv o h consumpion of radabls. h domsic ral inrs ra, d r, falls bcaus inflaion of nonradabls dclins b lss han h ra of dvaluaion, ( r d r + ε π ). A im, h ris in i implis a jump = in d r. Figurs in h appndix show h voluion of h rlvan variabls..1. h Modl wih Financial Consrains So far, w inroducd h mporarinss hpohsis o accoun for h main faurs of h sabilizaion xprincs of dvloping counris. Nx, w will includ financial fricions in h form of liquidi consrains ino h modl o show h disribuional aspcs of mporar xchang ra basd sabilizaions. h firs liquidi consrain prvails a h inrnaional lvl. W assum ha in inrnaional financial marks, invsors rgard h aggrga GDP of h counr as cririon o flow hir capial ino h counr and lnd proporional o h GDP of h counr. Givn ha db o GDP raio is sill considrd o b an indicaor of h wll-bing of h conom in man occasions, his inrnaional liquidi consrain is no an unralisic assumpion. Hnc, h inrnaional liquidi consrain is givn as: N ( + ) I criical (16-a) whr I criical dnos h hrshold lvl afr which h counr rcivs capial inflow and blow which h counr rcivs no capial inflow. I criical can b considrd in a following mannr: h counr is alrad indbd and inrnaional invsors do no giv mor crdi unlss h conom opras abov is sad sa lvl. h hrshold I criical is a funcion of sad sa incom of h counr. hrfor, counris wih lowr sad sa incom hav highr hrshold and subsqunl rciv lss capial inflow in hir xpansion phass. If h conom is opraing abov is sad 10

12 sa quilibrium, h counr rcivs capial inflow proporional o is currn oupu. Whn h currn oupu falls shor of sad sa lvl, inrnaional invsors rac b wihdrawing hir capial from h counr. h counr rcivs θ ( + ) (16-b) as an invsmn afr h hrshold lvl is rachd. h abov mniond mporar nominal xchang ra rducion gnras an xpansion in h producion of nonradabls wih h polic announcmn. h oupu of radabls is considrd o b givn as a consan ndowmn and ral xchang ra is a prdrmind variabl. hrfor, inrnaonal liquidi consrain, quaion (16-a) is rlaxd whil N N jumps upwards wih h announcmn of polic chang. his furhr implis ha h counr can borrow now in inrnaional marks. hroughou h papr, w will assum ha b h inroducion of mporar xchang ra rducion, h counr scaps from binding inrnaional liquid consrain. A im, as N jumps downwards, h counr again runs ino inrnaional liquidi consrain. Howvr, bwn im 0 and im, h counr rcivs highr capial inflow Endognous iming of h Dvaluaion W also chang h abov-mniond modl b inroducing ndognous da of rvrsal of mporar xchang ra polic. In our modl, h iming of nominal xchang ra dvaluaion is drmind b h inrnaional liquidi consrain. Whn aggrga oupu of h counr in rms of radabl goods rducs o is pr-sabilizaion lvl h inrnaional liquidi consrain binds again and h inrnaional invsors rcall hir capial. his racion of inrnaional invsors riggrs h criss a im. h inrnaional invsors do no suffr from h dvaluaion a im. h modl incorporas h acual xprincs of h sabilizaion plans such ha inrnaional invsors dposi hir capial ino h banks in rms of radabls and h rpamn is mad again in rms of radabls. Givn ha hr is an xplici or implici govrnmn guaran on h dposis of domsic banks, inrnaional invsors ar immun o dvaluaion risk unlss h govrnmn dfauls. 11

13 .1.. Domsic Financial Consrain h modl assums ha domsic banks pla an inrmdiar rol b borrowing in inrnaional marks and lnding o individuals in h counr wihou an ransacion cos and profi. Howvr h banks mplo a domsic liquidi consrain in hir lnding pracics similar o h inrnaional financial consrain. Each individual is consrain o borrow up o a fracion of hir currn incom, which sms o b an acual pracic of man banks o scrn hir cusomrs. Hnc domsic liquidi consrain aks h following form for h individuals in and N scors rspcivl. N N Φ( ) L, Φ > 0 (17-a) Φ( ) L, Φ > 0 (17-b) N whr L and L indica h loan rcivd b individuals in N and scors rspcivl. Sinc h aggrga oupu of h counr is sufficin o xcd h hrshold lvl such ha h inrnaional liquid consrain dos no bind, h surg in h inrnaional capial inflow CI a im, bwn im 0 and im is givn b: N CI = θ ( + ) (18-a) hus, h counr rcivs h following capial inflow bwn im 0 and im for r=0: N θ ( + ) d = CI (18-b) 0 h capial inflow is ransfrrd o h domsic financial ssm hrough h banks. Sinc h banks us h incom as a scrning mchanism o alloca hir funds o hir cusomrs, h individuals in and N scors rciv his capial inflow, CI, proporional o hir shar in aggrga incom. hus, h following shows how h capial inflow is disribud bwn and N scors a im bwn im 0 and im. 1

14 N N / / + = S N (19-a) N / + = S = 1 S N (19-b) whr N S and S dno h shars of N and scors in aggrga GDP a im rspcivl. hrfor individuals in and N scors rciv S CI and S N CI a im. h imporan poin hr is ha h shars of and N scors in GDP volv ovr im. Du o h xpansion in N scors wih h announcmn xchang ra plan, h shar of nonradabls jumps up o is pak and dcrass graduall ovr im. hrfor, h N scors rciv mor capial inflow during h ransiion priod (0,) as compard o h cas whn h counr rcivs capial inflow whil opraing a is sad sa or h cas ha h currn incom is no usd as a scrning dvic in h domsic financial marks. Consqunl, h mporar nominal xchang ra rducion plas a rol in h disribuion of inrnaional capial inflow in h counr b changing h shars of and N scors in aggrga oupu. B h rvrsal of xchang ra polic a im, h oupu of nonradabls maks a discr dclin and falls blow o is sad sa and hn incrass graduall as ral xchang ra dprcias ovr im. B im, inrnaional liquidi consrain sars binding again and inrnaional invsors sop lnding and vn rcall hir loans. his riggrs a discr dvaluaion such ha h domsic banks run ino a financial disrss as h cusomrs of hs banks fac difficulis o fulfill hir rpamn obligaions. o simplif h modl, w firs assum ha h banking scor collapss wihou collcing is loans and subsqunl govrnmn coms o bail ou h banks and carris ou h rpamn obligaions of h banks o inrnaional invsors. W will discuss h cas whr h banks collc som of hir loans in h following scion, bu his assumpion dos no chang h main ida of h disribuional consquncs of h modl. A im, h govrnmn lvis a fla incom ax o covr h cos of bail ou of 13

15 h domsic banks. hrfor, h oal ax collcion mus b qual o CI (quaion 18- b) plus h inrs cos. For h simplici, h inrnaional inrs ra is assumd o b 0. h fla incom ax lass from im o im. h duraion of axaion dpnds on h spd of wihdrawal of inrnaional invsmn. If h inrnaional invsmn is rcalld a a poin of im, h govrnmn imposs a ax a ha poin of im o carr ou h db obligaions of h banks. hrfor, h spd of capial ouflow is crucial o drmin h burdn of axaion on and N scors. For xampl, if all h inrnaional db is rcalld a im, whn dvaluaion aks plac, h individuals in N scors pa lss ax han h usual ims bcaus hir shar in aggrga incom is h lows a im as compard o ohr ims as a rsul of discr fall in h producion of nonradabls a im. hus, h ax ra is givn b h following quaion: ax = N CI + d h individuals in N and scors, hrfor, pa h following axs rspcivl: (0) ax N d (1-a) ax d (1-b) Proposiion 1: h ax paid b individuals in N scors bwn im and is lss han h capial inflow h rciv bwn im 0 and im. Similarl h ax paid b individuals in scors bwn im and is grar han wha h borrow bwn im 0 and im. Hnc, h modl gnras incom rdisribuion from o N scors. Proof: h scond par of h proposiion is asir o show bcaus h incom of h individuals in scors is consan. W wan o show ha h following inquali holds: 14

16 CI d ax 0 S d () h LHS of () shows h amoun capial inflow rcivd b individuals in scors bwn im 0 and im. h RHS is qual o h amoun of axaion paid b h individuals in scors bwn im and. Subsiuing (18-a) and (0) in () w can rwri () as: θ d ax d 0 (3) o simplif h proof, h duraion of h capial inflow and h duraion of axaion ar assumd o b qual. hn if ax θ, h individuals in scors pa mor ax han wha h rciv as capial inflow. Upon subsiuing (18-b) ino (0), quaion (0) can b rwrin as: N [ + ] d 0 θ = ax (0-a) N [ + ] d Sinc N N /, bwn im 0 and im, is grar han / bwn im and hus, [ + ] d [ + 0 N N ] d in (0-a) hn h ax θ so h individuals in h scors pa mor ax han wha h rciv as capial inflow. h firs par of h proposiion follows from h scond par of h proposiion. If h individuals in scors pa mor han h rciv, h individuals in N scors rciv mor han h pa givn ha h oal capial inflow is qual o h oal ax collcd. h duraion of ax pamn xaggras h disribuional ffcs h modl. So far w assum ha mporar sabilizaion program lass bwn im 0 and and h ax is also collcd in h sam im lngh. Howvr if h ax is collcd in a shorr im priod, - <, h burdn of axaion falls vn mor on scors. 15

17 Proposiion : if h ax is collcd in a shorr im priod, - <, h burdn of axaion falls vn mor on scors. Similarl, sinc h axaion a im is qual o h capial ouflow a im, w can rsa h proposiion b h following: if h capial ouflow aks plac in a shorr priod of im hn h burdn of axaion falls vn mor on h individuals in scors. Proof: s h appndix for formal proof. abl 1: im Bfor O Bwn 0 and Bwn and Exchang ra basd sabilizaion sars Exchang ra basd sabilizaion nds Afr h dvaluaion Discr jump in Apprciaion of Discr fall in h Dprciaion of h producion of ral xchang ra shar of ral xchang ra nonradabls nonradabls Nonradabals Producion and Jump in h shar producion shar of of nonradabls dcrss graduall Inrnaional nonradabls scor from is pak liquidi consrain incrsss graduall binds Rlaxaion of Rlaxaion of Individuals bar h financial financial Banking Crisis burdn of ax consrains consrains proporional o Govrnmn bails hir currn ou h banks incom Govrnmn lvis ax o carr ou bail ou xpndiur An Exampl: h shars of and N scors in aggrga GDP N S S N S S N S S N S = ax burdn S = ax burdn N S = ax burdn S = ax burdn %

18 3. Conclusion his sud shds ligh on h disribuional implicaions of h xchang ra basd sabilizaions in a hrognous agns sing wih financial imprfcions. h modl suggss rdisribuion from o N scors. h liraur on h xchang ra basd sabilizaions assums homognous agn conom. As a rsul, h disribuional consquncs of h mporar policis ar no wll addrssd in h liraur. his papr amps o build his gap b considring hrognous agns wih rspc o hir sourc of incom. h hrognous agns assumpion is mor ralisic givn h fac ha individuals rciv hir incom ihr from scors or from N scors. Morovr, h incom shars of and N scors in aggrga GDP volv ovr im. h modl is basd on h slizd facs of h mporar xchang ra basd sabilizaion programs. Wih h inroducion of h mporar program, h shar of N scors in GDP jumps up o is highs lvl and during h xpansion of h conom, h shar of N scors xcds is pr-sabilizaion lvl. Morovr, h counr rcivs capial inflow in is xpansion priod du o h rlaxaion of h inrnaional financial consrains. his inrnaional capial inflow is disribud o h individuals in and N scors proporional o hir currn incom b h domsic banking scor. hrfor, h individuals in N scors incras hir shar in domsic borrowing as compard o h usual ims. Exacl h opposi holds for scors. h iming of h collaps of h xchang ra basd sabilizaion program is drmind b h inrnaional financial consrain whn h aggrga oupu of h counr falls blow a crain hrshold. Afr h dvaluaion of h domsic currnc aks plac, h inrnaional invsors rcall hir capial inflows from h domsic banks. h banks suffr from difficulis o carr ou rpamn obligaions du o h currnc crisis. h govrnmn coms in and bails ou h domsic banks b paing h db of h banking scor o h inrnaional financial marks. h burdn of bail ou xpndiur falls on h individuals in h counr du o h imposiion of h fla incom ax. Sinc h shar of scors in aggrga GDP incrass abov is usual shar wih h dvaluaion of h currnc, h individuals in scors pa mor ax han wha h rciv as capial inflow in h xpansion phas of h conom. On h ohr hand, h opposi holds for h individuals in N scors who gain mor from h capial inflow as compard o wha 17

19 18 h los from axaion. Consqunl, whn individuals rciv hir incom ihr from scors or from N scors, h mporar xchang ra basd sabilizaion wih financial mark imprfcions gnras advrs disribuional consquncs for h individuals in scors. Appndix Proof of proposiion : o show ha h burdn of axaion on h individuals in scors incrass as h im lngh o collc h ax shorns; w nd o prov h following: 0 ) ( d ax (A-1) afr aking drivaiv (A-1) can rwrin as: 0 + ax d ax (A-) and from (0-a) ] ][ } ] [ { ] [ [ 0 N N N d d ax = θ (A-3) hnc (A-) is: } ) ( ) ]{( } ] [ { ] [ [ 0 d d d d N N N N θ (A-4) A d d N N = } ] [ { ] [ θ (A-5) B d d N N = + + ) ( ) {( (A-6)

20 sinc A 0, for (A-1) o b saisfid; B 0 d cancls ach ohr in (A-6),hrfor (A-6) can b rwrin as: N d N d = B (A-7) N dividing (A-7) b { 0}, (A-7) can b rwrin as: [ ] d d = B N [ ] (A-8) N Sinc is consan, is qual o 1. Morovr, N is an incrasing funcion bwn im and im. So N N is lss han 1 bwn im and im. hrfor; N [ ] d d N [ ] in (A- 8) and his implis ha B is grar han 0 which prov (A-1). 19

21 0

22 1

23

24 Rfrncs Alfaro, Laura (00), On h Poliical Econom of mporar Sabilizaion Programs, Economics and Poliics, Vol.14, pp Asan, A. F. (006), h Rol of Disribuion of h Incom Shars of Individuals in radabls and Nonradabls on Exchang Ra Flucuaions and Dla of Sabilizaions, Boğaziçi Univrsi, Mimo. Caballro, Ricardo J. and Arvind Krishnamurh, (1999), Emrging Marks Criss: An Ass Marks Prspciv. Mimo, Sloan School of Businss, MI, Cambridg: MA. Calvo, Guillrmo A. (1986), "mporar Sabilizaion: Prdrmind Exchang Ras," Journal of Poliical Econom, v. 94, pp Calvo, Guillrmo A.and Carlos A. Végh, (1999), Inflaion Sabilizaion chapr in Handbook of Macroconomics, did b J.alor and M. Woodford, (Amsrdam, Nhrlands: Norh Holland, 1999). Calvo, Guillrmo A.and Carlos A. Végh, (1993), Exchang-Ra-Basd Sabilisaion undr Imprfc Crdibili, in H. Frisch and A. Worgor ds. Procdings from IEA Confrnc on Opn Econom Macroconomics, England: Macmillan Prss Ld., 3-8. Calvo, Guillrmo A and Allan Drazn, (1998), Uncrain Duraion of Rform: Dnamic Implicaions, Macroconomic Dnamics. Coplman, Marina and Aljandro M. Wrnr. Exchang Ra Polic and h Bank Lnding Channl: Scoral Evidnc from Mxico. Mimo (1996), Division of Inrnaional Financ,Board of Govrnors of h Fdral Rsrv Ssm, Washingon D.C. 3

25 Dornbusch, Rudigr (198), "Sabilizaion Policis in Dvloping Counris: Wha hav w Larnd?" World Dvlopmn, vol. 10, pp Drazn, Allan and Elhanan Hlpman (1987), Sabilizaion wih Exchang Ra Managmn, Quarrl Journal of Economics, v. 11, Drazn, Allan and Elhanan Hlpman(1988), "Sabilizaion wih Exchang Ra Managmn Undr Uncrain," in Economic Effcs of h Govrnmn Budg, d. b E. Hlpman, A. Razin and E. Sadka, MI Prss, Cambridg:MA Goldfajn, Ilan and Valdés, Rodrigo (1995), Balanc-of-Pamns Criss and Capial Flows: h Rol of Liquidi, Mimo, Massachusss Insiu of chnolog. Hlpman, Elhanan and Assaf Razin (1987), "Exchang Ra Managmn: Inrmporal radoffs," Amrican Economic Rviw, vol. 77, pp Kaminsk, Gracila, and Carmn M. Rinhar, (1999), win Criss: h Causs of Banking and Balanc of Pamns Criss, Amrican Economic Rviw. McKinnon, Ronald.I. and Pill, Huw, (1997), Economic Dvlopmn and inrnaional rad: Crdibl conomic Libralizaions and Ovrborrowing AEA paprs and procdings Ma, 1997, pp Mndoza, Enriqu G. (000-a), On h Bnfis of Dollarizaion whn Sabilizaion Polic is no Crdibl and Financial Marks ar Imprfc, mimo, Dparmn of Economics, Duk Univrsi. Mndoza, Enriqu G. (000-b), Crdi, Prics, and Crashs: Suddn Sops Economics in an Equilibrium Framwork, Mimo Dparmn of Economics, Duk Univrsi. 4

26 Mndoza, Enriqu G. and Marin Urib (000), Dvaluaion Risk and h Businss Ccl Implicaions of Exchang Ra Managmn, Carngi-Rochsr Confrnc Sris on Public Polic, vol. 53,forhcoming. Rblo, Srgio and Carlos A. Végh, (1996), "Ral Effcs of Exchang-Ra-Basd Sabilizaion," NBER Macro Annual, Naional Burau of Economic Rsarch, Cambridg: MA. Rinhar Carmn M. and Carlos A. Végh (1995), "Nominal Inrs Ras, Consumpion Booms, and Lack of Crdibili: A Quaniaiv Examinaion," Journal of Dvlopmn Economics, v.46. Rodriguz, Carlos A. (198), "h Argnin Sabilizaion Plan of Dcmbr 0h," World Dvlopmn, vol. 10, pp Roldós, Jorg (1995), "Suppl-Sid Effcs of Disinflaion," IMF Saff Paprs, vol 4, pp ornll, A. and F. Wsrmann (00), Boom-Bus Ccls: Facs and Explanaion, NBER working papr 919. Urib, Marín (1997), "Exchang-Ra-Basd Inflaion Sabilizaion: h Iniial Ral Effcs of Crdibl Plans," Journal of Monar Economics, Jun, 39(),