Anton Korinek | University of Virginia (original) (raw)

Papers by Anton Korinek

Abstract A growing literature has investigated optimal policy responses to the externalities that... more Abstract A growing literature has investigated optimal policy responses to the externalities that arise from financial crises. Some have argued in favor of macroprudential regulation to mitigate crisis risk ex-ante, whereas others propose that ex-post stimulus measures are more desirable.

Abstract Capital flows to emerging market economies create externalities that make the affected e... more Abstract Capital flows to emerging market economies create externalities that make the affected economies more vulnerable to financial fragility and crises. Policymakers can make their economies better off by imposing capital controls that regulate and discourage the use of risky forms of external finance such as short-term dollar-denominated debts. Such policies reduce macroeconomic volatility in the economies involved and lead to a global Pareto improvement.

ABSTRACT We study a dynamic model in which the interaction between debt accumulation and asset pr... more ABSTRACT We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare.

Abstract This paper examines the macroeconomic consequences of selecting alternative exchange rat... more Abstract This paper examines the macroeconomic consequences of selecting alternative exchange rate regimes of countries in three regions. In particular, it studies whether Austria, the Netherlands, Canada and New Zealand made the right monetary regime choices between 1970 and 2000.

This paper studies the relationships between foreign currency debt, macroeconomic volatility, and... more This paper studies the relationships between foreign currency debt, macroeconomic volatility, and risk premia in a model of a small open emerging market economy. The external value of the local currency is counter-cyclical, so that foreign currency debt requires larger repayments than local currency debt in bad states of nature. The level of foreign currency-denominated debts, therefore, affects the volatility of aggregate demand and by extension of the exchange rate.

ABSTRACT This paper analyzes prudential controls on capital flows to emerging markets from the pe... more ABSTRACT This paper analyzes prudential controls on capital flows to emerging markets from the perspective of a Pigouvian tax that addresses externalities associated with the deleveraging cycle. It presents a model in which restricting capital inflows during boom times reduces the potential outflows during busts. This mitigates the feedback effects of deleveraging episodes, when tightening financial constraints on borrowers and collapsing prices for collateral assets have mutually reinforcing effects.

Capital flows to emerging markets are controversial territory. This column argues that they creat... more Capital flows to emerging markets are controversial territory. This column argues that they create externalities that make the recipient economies more vulnerable to financial fragility and crises. It adds that policymakers can make their economies better off by regulating and discouraging the use of risky forms of external finance���in particular short-term dollar-denominated debts.

Abstract We study the effects of capital controls in a general equilibrium model of the world eco... more Abstract We study the effects of capital controls in a general equilibrium model of the world economy. We determine under what conditions such controls may be desirable from a global welfare perspective and whether global coordination of capital controls is indicated. We contrast two categories of motives for capital controls. First, if capital controls are imposed to manipulate a country's terms of trade, then they are distortive, ie they have beggar-thy-neighbor effects and reduce global welfare.

Past approaches to correcting for unit nonresponse in sample surveys by re-weighting the data ass... more Past approaches to correcting for unit nonresponse in sample surveys by re-weighting the data assume that the problem is ignorable within arbitrary subgroups of the population. Theory and evidence suggest that this assumption is unlikely to hold, and that household characteristics such as income systematically affect survey compliance. We show that this leaves a bias in the re-weighted data and we propose a method of correcting for this bias.

Abstract This paper provides an introduction to the new economics of prudential capital controls ... more Abstract This paper provides an introduction to the new economics of prudential capital controls in emerging economies. This literature is based on the notion that there are externalities associated with financial crises because individual market participants do not internalize their contribution to aggregate financial instability.

Abstract: This paper analyzes the efficiency of risk-taking decisions in an economy that is prone... more Abstract: This paper analyzes the efficiency of risk-taking decisions in an economy that is prone to systemic risk, captured by financial amplification effects that occur in response to strong adverse shocks. It shows that decentralized agents who have unconstrained access to a complete set of Arrow securities choose to expose themselves to such risk to a socially inefficient extent because of pecuniary externalities that are triggered during financial amplification.

Abstract: This paper shows that real exchange rate undervaluation through the accumulation of for... more Abstract: This paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible.

We show that aggregate investment is generally higher under the party that sets higher tax rates,... more We show that aggregate investment is generally higher under the party that sets higher tax rates, since private firms pay out lower dividends and carry more working capital, leading to higher investment. Furthermore, both parties bias their tax rates upwards (beyond the rates that they would set if they were in power permanently) in an effort to increase investment under their regime. We also discuss how the distortion could be addressed through cooperation between the two parties.

Abstract: This paper provides welfare theoretic foundations for risk-adjusted capital flow regula... more Abstract: This paper provides welfare theoretic foundations for risk-adjusted capital flow regulations based on a standard class of macroeconomic models of financial crises that exhibit financial amplification dynamics.

Abstract This paper examines the role of bailouts in completing markets as well as in inducing re... more Abstract This paper examines the role of bailouts in completing markets as well as in inducing rent-seeking. When finanical markets are incomplete, contingent transfers can substitute for missing markets and improve welfare. We term this the market completion effect of bailouts. However, when such transfers are linearly dependent with existing markets, then they introduce arbitrage possibilities unless they are offset by insurance premia that precisely reflect the marketable fraction of the transfers.

ABSTRACT We develop a stylized model that captures the phenomena of decoupling and recoupling in ... more ABSTRACT We develop a stylized model that captures the phenomena of decoupling and recoupling in an environment where heterogeneous entrepreneurial sectors face financial constraints in their relationship with a common set of lenders. In response to adverse shocks, a financially constrained sector must reduce its borrowing and cut down on production. In particular, as the constrained sector absorbs less and less capital, the real interest rate in the economy declines.

Abstract We analyze the dynamic political game between two rival parties that have different pref... more Abstract We analyze the dynamic political game between two rival parties that have different preferences over macroeconomic outcomes and thus implement different dividend tax policies when they are in power. Macroeconomic outcomes are driven by the behavior of private firms, which in turn depends on current and expected future tax rates: Payouts are lower and aggregate investment is higher the higher the current party's tax rate compared to the expected future rate under its rival.

Abstract When one region of the world economy experiences a financial crisis, the world-wide avai... more Abstract When one region of the world economy experiences a financial crisis, the world-wide availability of investment opportunities declines. As global investors search for new destinations for their capital, other regions will experience inflows of hot money. However, large capital inflows make the recipient countries more vulnerable to future adverse shocks, creating the risk of serial financial crises. This paper develops a formal model of such flows of hot money and the vulnerability to serial financial crises.

Four years after the global financial crisis of 2008���09, the advanced economies of the United S... more Four years after the global financial crisis of 2008���09, the advanced economies of the United States, Europe and Japan are still in a liquidity trap, where zero nominal interest rates are insufficient to raise output to its potential level. Central bankers have provided ample liquidity to their ailing economies through various forms of monetary easing. Although the target of these actions has been domestic, their effects are felt worldwide.

We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in... more We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state. We find that unanticipated permanent changes in tax rates have only small effects on aggregate investment, since macroeconomic dynamics are dominated by mature firms for which dividend taxation is not distortionary.

Abstract A growing literature has investigated optimal policy responses to the externalities that... more Abstract A growing literature has investigated optimal policy responses to the externalities that arise from financial crises. Some have argued in favor of macroprudential regulation to mitigate crisis risk ex-ante, whereas others propose that ex-post stimulus measures are more desirable.

Abstract Capital flows to emerging market economies create externalities that make the affected e... more Abstract Capital flows to emerging market economies create externalities that make the affected economies more vulnerable to financial fragility and crises. Policymakers can make their economies better off by imposing capital controls that regulate and discourage the use of risky forms of external finance such as short-term dollar-denominated debts. Such policies reduce macroeconomic volatility in the economies involved and lead to a global Pareto improvement.

ABSTRACT We study a dynamic model in which the interaction between debt accumulation and asset pr... more ABSTRACT We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare.

Abstract This paper examines the macroeconomic consequences of selecting alternative exchange rat... more Abstract This paper examines the macroeconomic consequences of selecting alternative exchange rate regimes of countries in three regions. In particular, it studies whether Austria, the Netherlands, Canada and New Zealand made the right monetary regime choices between 1970 and 2000.

This paper studies the relationships between foreign currency debt, macroeconomic volatility, and... more This paper studies the relationships between foreign currency debt, macroeconomic volatility, and risk premia in a model of a small open emerging market economy. The external value of the local currency is counter-cyclical, so that foreign currency debt requires larger repayments than local currency debt in bad states of nature. The level of foreign currency-denominated debts, therefore, affects the volatility of aggregate demand and by extension of the exchange rate.

ABSTRACT This paper analyzes prudential controls on capital flows to emerging markets from the pe... more ABSTRACT This paper analyzes prudential controls on capital flows to emerging markets from the perspective of a Pigouvian tax that addresses externalities associated with the deleveraging cycle. It presents a model in which restricting capital inflows during boom times reduces the potential outflows during busts. This mitigates the feedback effects of deleveraging episodes, when tightening financial constraints on borrowers and collapsing prices for collateral assets have mutually reinforcing effects.

Capital flows to emerging markets are controversial territory. This column argues that they creat... more Capital flows to emerging markets are controversial territory. This column argues that they create externalities that make the recipient economies more vulnerable to financial fragility and crises. It adds that policymakers can make their economies better off by regulating and discouraging the use of risky forms of external finance���in particular short-term dollar-denominated debts.

Abstract We study the effects of capital controls in a general equilibrium model of the world eco... more Abstract We study the effects of capital controls in a general equilibrium model of the world economy. We determine under what conditions such controls may be desirable from a global welfare perspective and whether global coordination of capital controls is indicated. We contrast two categories of motives for capital controls. First, if capital controls are imposed to manipulate a country's terms of trade, then they are distortive, ie they have beggar-thy-neighbor effects and reduce global welfare.

Past approaches to correcting for unit nonresponse in sample surveys by re-weighting the data ass... more Past approaches to correcting for unit nonresponse in sample surveys by re-weighting the data assume that the problem is ignorable within arbitrary subgroups of the population. Theory and evidence suggest that this assumption is unlikely to hold, and that household characteristics such as income systematically affect survey compliance. We show that this leaves a bias in the re-weighted data and we propose a method of correcting for this bias.

Abstract This paper provides an introduction to the new economics of prudential capital controls ... more Abstract This paper provides an introduction to the new economics of prudential capital controls in emerging economies. This literature is based on the notion that there are externalities associated with financial crises because individual market participants do not internalize their contribution to aggregate financial instability.

Abstract: This paper analyzes the efficiency of risk-taking decisions in an economy that is prone... more Abstract: This paper analyzes the efficiency of risk-taking decisions in an economy that is prone to systemic risk, captured by financial amplification effects that occur in response to strong adverse shocks. It shows that decentralized agents who have unconstrained access to a complete set of Arrow securities choose to expose themselves to such risk to a socially inefficient extent because of pecuniary externalities that are triggered during financial amplification.

Abstract: This paper shows that real exchange rate undervaluation through the accumulation of for... more Abstract: This paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible.

We show that aggregate investment is generally higher under the party that sets higher tax rates,... more We show that aggregate investment is generally higher under the party that sets higher tax rates, since private firms pay out lower dividends and carry more working capital, leading to higher investment. Furthermore, both parties bias their tax rates upwards (beyond the rates that they would set if they were in power permanently) in an effort to increase investment under their regime. We also discuss how the distortion could be addressed through cooperation between the two parties.

Abstract: This paper provides welfare theoretic foundations for risk-adjusted capital flow regula... more Abstract: This paper provides welfare theoretic foundations for risk-adjusted capital flow regulations based on a standard class of macroeconomic models of financial crises that exhibit financial amplification dynamics.

Abstract This paper examines the role of bailouts in completing markets as well as in inducing re... more Abstract This paper examines the role of bailouts in completing markets as well as in inducing rent-seeking. When finanical markets are incomplete, contingent transfers can substitute for missing markets and improve welfare. We term this the market completion effect of bailouts. However, when such transfers are linearly dependent with existing markets, then they introduce arbitrage possibilities unless they are offset by insurance premia that precisely reflect the marketable fraction of the transfers.

ABSTRACT We develop a stylized model that captures the phenomena of decoupling and recoupling in ... more ABSTRACT We develop a stylized model that captures the phenomena of decoupling and recoupling in an environment where heterogeneous entrepreneurial sectors face financial constraints in their relationship with a common set of lenders. In response to adverse shocks, a financially constrained sector must reduce its borrowing and cut down on production. In particular, as the constrained sector absorbs less and less capital, the real interest rate in the economy declines.

Abstract We analyze the dynamic political game between two rival parties that have different pref... more Abstract We analyze the dynamic political game between two rival parties that have different preferences over macroeconomic outcomes and thus implement different dividend tax policies when they are in power. Macroeconomic outcomes are driven by the behavior of private firms, which in turn depends on current and expected future tax rates: Payouts are lower and aggregate investment is higher the higher the current party's tax rate compared to the expected future rate under its rival.

Abstract When one region of the world economy experiences a financial crisis, the world-wide avai... more Abstract When one region of the world economy experiences a financial crisis, the world-wide availability of investment opportunities declines. As global investors search for new destinations for their capital, other regions will experience inflows of hot money. However, large capital inflows make the recipient countries more vulnerable to future adverse shocks, creating the risk of serial financial crises. This paper develops a formal model of such flows of hot money and the vulnerability to serial financial crises.

Four years after the global financial crisis of 2008���09, the advanced economies of the United S... more Four years after the global financial crisis of 2008���09, the advanced economies of the United States, Europe and Japan are still in a liquidity trap, where zero nominal interest rates are insufficient to raise output to its potential level. Central bankers have provided ample liquidity to their ailing economies through various forms of monetary easing. Although the target of these actions has been domestic, their effects are felt worldwide.

We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in... more We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state. We find that unanticipated permanent changes in tax rates have only small effects on aggregate investment, since macroeconomic dynamics are dominated by mature firms for which dividend taxation is not distortionary.