International finance and macroeconomics.

Rose, Andrew K.

It has been three years since the NBER's Program in International Finance and Macroeconomics was last reviewed in the NBER Reporter. During this period, many researchers have continued to tackle the traditional problems of international finance, including: 1) the large and persistent apparent deviations from uncovered interest parity; 2) insufficient global diversification of risk; and 3) the slow convergence of real exchange rates to equilibrium levels. But many researchers have been attracted by more contemporary problems. Most notably, in the wake of the dramatic events in Europe and Latin America, there has been a resurgence of interest in the analysis of speculative attacks on fixed exchange rates and open economy monetary policy. A common goal of much of this research has been to understand better the nature of international capital flows.

This report does not attempt to be comprehensive. Many researchers in the IFM program work in overlapping fields, and much of their work is covered most appropriately in other program reports. For this reason, and for the sake of brevity, this report omits four recent "hot" areas of IFM-related research: international aspects of long-run growth; political economy; regional trading blocks; and international aspects of fiscal policy.

Real Exchange Rates

One of the recent areas of resurgent research in open economy macro-economics has been the examination of real exchange rates. Much of this work is distinguished by the use of innovative datasets. The new datasets are long (in terms of time span), wide (in terms of the number of economic factors, commodities, or countries examined simultaneously), or clever (they involve the prices of Big Macs[R] or The Economist).

Perhaps three years ago a loose consensus had developed that deviations from purchasing power parity (PPP) have a half-life of around four years, as demonstrated by Froot and Rogoff.(1) Not only did they find convergence to PPP, but it seemed remarkably stable across different regimes, as exemplified by a dataset stretching back almost 700 years!(2) Parsley, Wei, Frankel and others have confirmed this using panels of data covering many countries in the postwar period, while Cumby shows even faster convergence using an imaginative panel of Big Mac[R] prices.(3) However, Engel shows that the statistical evidence for convergence to PPP is weaker than it seems, while Taylor argues that the evidence seems to depend on the era considered.(4)

Since PPP can be expected to hold only in narrow circumstances, it is not surprising that the long-run determinants of real exchange rates continue to be a subject of great interest. In a pure accounting sense, Engel shows that real American exchange rate changes are accounted for almost completely by changes in nominal exchange rates; prices (even the relative price of nontradables) account for almost none of the variance, even at low frequencies.(5) Chinn and Johnston find that government spending and productivity trends help in the analysis of real exchange rates; their finding is confirmed by Canzoneri, Cumby, and Diba; and by De Gregorio and Wolf.(6) On the other hand, Clarida and Gali find little evidence of important sup-ply-side determinants.(7)

International pricing per se remains a subject of interest to IFM researchers. Engel and Rogers show that price disparities within countries or regions are much more closely linked and likely to converge than price disparities across countries. This finding is confirmed by Parsley and Wei, while Ghosh and Wolf document the importance of price stickiness and menu costs using a dataset consisting of prices for The Economist magazine.(8)

The renewed interest in empirical analysis of real exchange rates has not been matched by a comparable interest in nominal exchange rates.(9) However, the promising examination of market microstructure in the foreign exchanges begun by Lyons, Goldberg and others continues, albeit at a somewhat slower clip.(10)

The intertemporal approach to macroeconomic fluctuations in the open economy also continues to be an area of interest to IFM researchers. Obstfeld and Rogoff are most closely identified with this area, which forms an integral part of their new book; Razin and Milesi-Ferretti have provided related empirical analysis.(11)

International Financial Markets

Perhaps the most important continuing mystery of international finance is the "forward discount premium puzzle"; countries with high interest rates tend to have appreciating rather than depreciating currencies. Thus investors who receive a high interest rate return also tend to experience capital gains from currency appreciation, a deviation from the uncovered interest parity condition. Backus, Foresi, and Telmer show just how hard it is to rationalize this in models based on the absence of arbitrage and a reasonable risk premium. On the other hand, Elliott and Ito argue that the profits apparently available from investments in high interest rate countries are small and variable.(12) Marston looks at a number of parity conditions jointly, while Lyons and I examine them during currency crises.(13) Flood and I find that interest differentials are linked more closely to exchange rate changes for fixed exchange rate regimes than flexible ones; Favero, Giavazzi, and Spaventa analyze European interest rate differentials directly.(14) This area has been surveyed separately by both Engel and Lewis.(15)

While the forward discount premium puzzle links different financial asset prices, the other great unsolved problem of international finance is "home market bias" in asset stocks. This is the fact that investors tend to hold too many domestic securities for typical portfolios to be well-diversified internationally. Baxter, King, and Jermann show that the existence of nontradables (such as human capital) makes the problem look even worse.(16) But Lewis, Taylor, Baxter and Crucini, show that even though risk appears not to be shared or smoothed adequately internationally, there are a number of reasons why there may be few important deviations from optimum conditions.(17)

Speculative Attacks

After years of relative calm, the international financial system has experienced at least three waves of important speculative attacks of late. The attacks on the European Monetary System (EMS) in 1992 led to a number of devaluations and drove the United Kingdom, Italy, and Sweden from their stabilized exchange rate arrangements; the bands of the EMS were widened from [+ or -]2.25 percent to [+ or -]15 percent in 1993; Mexico devalued and then floated the peso in 1994; and a number of other Latin currencies were attacked in the "Tequila" aftermath. The features of these speculative attacks have led to a renewed research interest, and NBER economists have been at the forefront of this work, ably surveyed by Gather and Svensson.(18)

While some of these attacks were driven by economic fundamentals inconsistent with exchange rate policy, a number of them were not clearly warranted by policy inconsistencies. Hence there was a resurgence of interest in the concept of self-fulfilling exchange crises. Obstfeld has worked on models where attacks shift policy in such a way as to rationalize the attack itself, while Eichengreen, Wyplosz, and I have provided empirical analysis that indirectly supports the notion of self-fulfilling crises in the EMS.(19) Sachs, Tornell, and Velasco argue that the Mexican crisis was self-fulfilling rather than inevitable.(20) On the other hand, Atkeson and Rios-Rull believe that the Mexican crisis resulted from the inevitable collision of domestic considerations and sovereign risk, while Bordo and Schwartz argue that crises historically have resulted almost always from the conflict between external and internal policy commitments.(21)

Another issue that has attracted interest is the way that speculative attacks on one country are associated with attacks on other currencies. Buiter, Corsetti, and Pesenti analyze this relationship in the context of Europe with a model of the center country and its periphery.(22) Eichengreen, Wyplosz, and I provide empirical evidence that attacks on one country tend to spill "contagiously" over to others depending on trade links, while Sachs, Tornell, and Velasco find that macroeconomic policy is the key to understanding contagion during the 1995 "Tequila Effect."(23)

The recent speculative attacks also have led to a host of related developments in the literature. Flood, Garber, and Kramer have extended the standard model to account for the role of sterilized intervention, a highly visible defensive tactic in recent attacks.(24) Flood and Marion have analyzed devaluations in emerging markets with capital controls; Frankel and I provide related empirical evidence.(25) Frankel and Schmukler evaluate the returns on closed-end investment funds, and find some evidence that Mexican residents suspected the pending devaluation before foreign investors.(26)

Transformation in Latin America and Europe

Many Latin American countries (including Argentina, Brazil, Chile, and Peru) have pursued far-reaching stabilization programs in recent years. A number of these stabilizations have been successful, at least thus far, as documented by Rebelo and Vegh.(27) Bruno and Easterly show that debtor countries with high inflation reform themselves more successfully than countries with moderate inflation.(28) Many of the Latin countries used fixed exchange rates as a "nominal anchor" during these stabilization programs, a subject discussed by Flood and Mussa.(29)

What can be fixed can be floated; the most striking feature of fixed exchange rate regimes is that they tend to collapse.(30) Although the behavior of exchange rates in the European Monetary System continues to be a topic of interest to IFM researchers, the field as a whole has rendered a negative verdict on fixed exchange rates.(31) And as fixed exchange rate regimes become increasingly unpopular, researchers have redirected their attention to alternative monetary policies. Lars Svensson has been at the forefront of recent analysts of inflation targeting.(32)

A growing consensus argues that fixed rates may not even be a critical component of a successful stabilization program. Tornell and Velasco show that fiscal policy may be better disciplined if exchange rates float, since lax policy is punished by exchange rate depreciation quickly.(33) This work is confirmed indirectly by Edwards and Losada in the context of Latin America, and more theoretically by Persson and Tabellini.(34) Edwards shows how easy it was for at least some of the Latin Americans to correct their previous fiscal excesses.(35)

While Latin American countries continue on the road to reformation, European countries are preparing for economic and monetary union (EMU). Persson and Tabellini demonstrate the advantages of using monetary policy to target inflation for countries wishing to enter EMU.(36) Eichengreen and von Hagen, and Aizenman examine the role of fiscal policy in currency unions.(37) Ghosh and Wolf have applied mathematical techniques from genetics to determine the optimum scope of currency areas.(38) Frankel and I have analyzed the relationship between international trade patterns and business cycle symmetry in the same context; Alesina and Perotti provide related work on fiscal unions.(39)

Capital Flows and Controls

The resumption of capital flows to Latin America in the early 1990s marked the end of "The Debt Crisis" (of the 1980s). Dooley, Dornbusch, Eaton, Fernandez, and others have taken the opportunity to review the lessons from the 1980s.(40) However, the new capital flows were themselves the source of much intense study, both after the Mexican crisis of 1994-5 and, remarkably, before the Mexico crisis.(41) Cole and Kehoe have shown why sovereign borrowers preserve their reputations by repaying debt in order to be able to borrow in the future.(42) And while most of the work of IFM researchers on empirical markets has focused on Latin America and Southeast Asia, there has also been some work on the economic transformation of Eastern Europe and the former Soviet Union.(43)

Capital controls continue to be an active source of interest for a number of researchers, such as Dooley.(44) Bartolini and Drazen model capital controls as signals of government information, thereby explaining why the removal of controls on outflows actually induces capital inflows.(45) Razin and Yuen show that controls can alter the slope of the Phillips curve.(46) Frankel argues that a "Tobin tax" on foreign exchange transactions has some advantages, though it might be difficult to enforce.(47) Tax policy in the context of countries that compete internationally has been the subject of intensive work.(48)

Conferences and Other Activities

The IFM Program meets for a week of the annual NBER Summer Institute; typically one day's session is shared with the Asset Pricing group. In addition, since 1994 there has been an annual one-day program meeting in late March. But the IFM Program is integrally involved with a large number of other conferences, including the International Seminar on Macroeconomics, the East Asian Seminar on Economics, and the Inter-American Seminar on Economics. In 1996 Robert Hodrick organized the NBER-Universities Research Conference on the "Determination of Exchange Rates".(49)

Finally, no discussion of recent academic work in international economics would be complete without mention of the recently published third volume of the Handbook of International Economics. This was edited by NBER Research Associates Gene M. Grossman and Kenneth S. Rogoff, and includes contributions from a large number of IFM researchers.

1 K. A. Froot and K. S. Rogoff. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Reprint No. 2049, April 1996, and in Handbook of International Economics 3, G. M. Grossman and K. S. Rogoff, eds. Amsterdam: Elsevier-North Holland, 1995.

2 K.A. Froot, M. Kim, and K. S. Rogoff, "The Law of One Price over 700 Years," NBER Working Paper No. 5132, May 1995.

3 S.J. Wei and D. C. Parsley, "Purchasing Power Disparity during the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits," NBER Working Paper No. 5032, February 1995; K. A. Froot, M. Kim, and K. S. Rogoff op. cit.; and R. E. Cumby, "Forecasting Exchange Rates and Relative Prices with the Hamburger Standard: Is What You Want What You Get with McParity?" NBER Working Paper No. 5675, July 1996.

4 C. M. Engel, "Long-Run PPP May Not Hold After All," NBER Working Paper No. 5646, July 1996; and A. M. Taylor, "International Capital Mobility in History: Purchasing-Power Parity in the Long Run," NBER Working Paper No. 5742, September 1996.

5 C. M. Engel, "Accounting for U.S. Real Exchange Rate Changes," NBER Working Paper No. 5394, December 1995.

6 M. D. Chinn and L. Johnston, "Real Exchange Rate Levels, Productivity, and Demand Shocks: Evidence from a Panel of 14 Counties," NBER Working Paper No. 5709, August 1996; M. B. Canzoneri, R. E. Cumby, and B. Diba, "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Paper No. 5676, July 1996; and J. De Gregorio and H. C. Wolf, "Terms of Trade, Productivity, and the Real Exchange Rate," NBER Working Paper No. 4807, July 1994.

7 R. H. Clarida and J. Gali, "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?" in Carnegie-Rochester Conference Series on Public Policy 41 (1995), pp. 1-56.

8 C. M. Engel and J. H. Rogers, "How Wide is the Border?," NBER Working Paper No. 4829, August 1994; C. M. Engel and J. H. Rogers, "Regional Patterns in the Law of One Price: The Roles of Geography versus Currencies," NBER Working Paper No. 5395, December 1995, and in Regionalization in the World Economy, J. A. Frankel, ed. Chicago: University of Chicago Press, forthcoming; D.C. Parsley and S. J. Wei, "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Paper No. 5654, July 1996; and A. R. Ghosh and H. C. Wolf, "Pricing in International Markets: Lessons from The Economist, "NBER Working Paper No. 4806, July 1994.

9 P. O. Gourinchas and A. Tornell, "Exchange Rate Dynamics and Learning," NBER Working Paper No. 5530, April 1996; and F. Alvarez and A. Atkeson, "Money and Exchange Rates in the Grossman-Weiss-Rotemberg Model," NBER Working Paper No. 5678, July 1996.

10 R. K. Lyons, "Foreign Exchange Volume: Sound and Fury Signifying Nothing?" in The Microstructure of Foreign Exchange Markets, J. A. Frankel, G. Galli, and A. Giovannini, eds. Chicago: University of Chicago Press, 1996, pp. 183-201; and L. S. Goldberg and R. Tenorio, "Strategic Trading in a Two-Sided Foreign Exchange Auction," NBER Working Paper No. 5187, July 1995.

11 M. Obstfeld and K. S. Rogoff "Exchange Rate Dynamics Redux," NBER Reprint No. 203 7, March 1996, and in Journal of Political Economy 102 (June 1995), pp. 624-60; M. Obstfeld and K. S. Rogoff, "The Intertemporal Approach to the Current Account," NBER Reprint No. 2048, April 1996, and in Handbook of International Economics 3; and G. M. Milesi-Ferretti and A. Razin, "Sustain-ability of Persistent Current Account Deficits," NBER Working Paper No. 5467, February 1996.

12 D. Backus, S. Foresi, and C. Telmer, "Affine Models of Currency Pricing," NBER Working Paper No. 5623, June 1996; and G. Elliott and T. Ito, "Heterogeneous Expectations and Tests of Efficiency in the Yen/Dollar Forward Foreign Exchange Rate Market," NBER Working Paper No. 5376, December 1995.

13 R. C. Marston, "Tests of Three Parity Conditions: Distinguishing Risk Premia and Systematic Forecast Errors," NBER Working Paper No. 4923, November 1994; and R. K. Lyons and A. K. Rose, "Explaining Forward Exchange Bias . . . Intraday," Journal of Finance 50, 4 (September 1995), pp. 1321-9.

14 R. P. Flood and A. K. Rose, "Fixes: Of the Forward Discount Puzzle," forthcoming in Review of Economics and Statistics; and C. Favero, F. Giavazzi, and L. Spaventa, "High Yields: The Spread on German Interest Rates," NBER Working Paper No. 5408, January 1996.

15 C. M. Engel, "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Paper No. 5312, October 1995, and Journal of Empirical Finance, forthcoming; and K. K. Lewis, "Puzzles in International Financial Markets," in Handbook of International Economics 3.

16 M. Baxter and U. J. Jermann, "The International Diversification Puzzle is Worse Than You Think," NBER Working Paper No. 5019, February 1995; and M. Baxter, U. J. Jermann, and R. G. King, "Nontraded Goods, Nontraded Factors, and International Non-Diversification," NBER Working Paper No. 5175, July 1995.

17 A. M. Taylor, "Domestic Saving and International Capital Flows Reconsidered," NBER Working Paper No. 4892, October 1994; K. K. Lewis, "What Can Explain the Apparent Lack of International Consumption Risk Sharing?" NBER Working Paper No. 5203, August 1995; and M. Baxter and M. J. Crucini, "Business Cycles and the Asset Structure of Foreign Trade" in International Economic Review, November 1995.

18 P. M Garber and L. E. O. Svensson, "The Operation and Collapse of Fixed Exchange Rate Regimes" in Handbook of International Economics 3.

19 M. Obstfeld, "The Logic of Currency Crises," NBER Reprint No. 1908, September 1994, and in Cahiers economiques et monetaires 43, Paris: Banque de France, 1994, pp. 189-213; M. Obstfeld, "Models of Currency Crises with Self-Fulfilling Features," NBER Working Paper No. 5285, October 1995, and in European Economic Review (May 1996); and B. Eichengreen, A. K. Rose, and C. Wyplosz, "Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System" in Economic Policy, October 1995.

20 J. D. Sachs, A. Tornell, and A. Velasco, "The Collapse of the Mexican Peso: What Have We Learned?" NBER Working Paper No. 5142, June 1995, and "The Mexican Peso Crisis: Sudden Death or Death Foretold?" NBER Working Paper No. 5563, May 1996.

21 A. Atkeson and J. V. Rios-Rull, "How Mexico Lost Its Foreign Exchange Reserves," NBER Working Paper No. 5329, October 1995; and M. D. Bordo and A. J. Schwartz, "The Specie Standard as a Contingent Rule: Some Evidence for Core and Peripheral Countries, 1880-1990" in Historical Perspectives on the Gold Standard, B. Eichengreen and J. B. de Macedo, eds. New York: Routledge, 1996.

22 W. M. Buiter, G. Corsetti, and P. A. Pesenti, "A Center-Periphery Model of Monetary Coordination and Exchange Rate Crises," NBER Working Paper No. 5140, June 1995, and in Financial Markets and International Monetary Cooperation: The Lessons of the 1992-3 ERM Crisis, Cambridge: Cambridge University Press, forthcoming.

23 B. Eichengreen, A. K. Rose, and C. Wyplosz, "Contagious Currency Crises," NBER Working Paper No. 5681, July 1996 and J. D. Sachs, A. Tornell, and A. Velasco, "Financial Crises in Emerging Markets: The Lessons from 1995," NBER Working Paper No. 5576, May 1996.

24 R. P. Flood, P. M. Garber, and C. Kramer, "Collapsing Exchange Rate Regimes: Another Linear Example," NBER Working Paper No. 5318, October 1995.

25 R. P. Flood and N. Marion, "The Size and Timing of Devaluations in Capital-Controlled Developing Countries," NBER Working Paper No. 4957, December 1994; and J. A. Frankel and A. K. Rose, "Currency Crises in Emerging Markets: Empirical Indicators," NBER Working Paper No. 5437, January 1996.

26 J. A. Frankel and S. L. Schmukler, "Country Fund Discounts, Asymmetric Information, and the Mexican Crisis of 1994: Did Local Residents Turn Pessimistic before International Investors?" NBER Working Paper No. 5714, August 1996.

27 S. T. Rebelo and C. A. Vegh, "Real Effects of Exchange Rate-Based Stabilization: An Analysis of Competing Theories" in NBER Macroeconomics Annual 1995, B. S. Bernanke and J. J. Rotemberg, eds. Cambridge: MIT Press, 1995, pp. 125-74.

28 M. Bruno and W. Easterly, "Inflation's Children: Tales of Crises that Beget Reforms," NBER Working Paper No. 5452, February 1996.

29 R. P. Flood and M. L. Mussa, "Issues Concerning Nominal Anchors for Monetary Policy," NBER Working Paper No. 4850, September 1994.

30 M. W. Klein and N. P. Marion, "Explaining the Duration of Exchange-Rate Pegs," in Journal of Development Economics, forthcoming; and A. K. Rose, "After the Deluge: Do Fixed Exchange Rates Allow Intertemporal Volatility Tradeoffs?" in International Journal of Economics, 1995.

31 C. M. Engel and C. S. Hakkio, "The Distribution of Exchange Rates in the EMS" in International Journal of Finance and Economics 1 (1996), pp. 55-67; G. Bekaert and S. F. Gray, "Target Zones and Exchange Rates: An Empirical Investigation," NBER Working Paper No. 5445, January 1996; and M. Obstfeld and K. S. Rogoff, "The Mirage of Fixed Exchange Rates" in Journal of Economic Perspectives 9, 4 (Fall 1995), pp. 73-96. Lewis provides related work in "Stochastic Regime Switching and Stabilizing Policies within Regimes," NBER Working Paper No. 5289, October 1995.

32 L. E. O. Svensson, "Estimating Forward Interest Rates with the Extended Nelson and Siegel Method" in Sveriges Riksbank Quarterly Review (1995:3), pp. 13-26; L. E. O. Svensson, "The Swedish Experience of an Inflation Target" in Inflation Targets, L. Leiderman and L. E. O. Svensson, eds. London: Centre for Economic Policy Research, 1995, pp. 69-89; L. E. O. Svensson, "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Paper No. 5251, September 1995; L. E. O. Svensson, "Price Level Targeting vs. Inflation Targeting: A Free Lunch?" NBER Working Paper No. 5719, August 1996; also see R. H. Clarida and M. Gertler, "How The Bundesbank Conducts Monetary Policy," NBER Working Paper No. 5581, May 1996, and in Reducing Inflation: Motivation and Strategy, C. Romer and D. Romer, eds. Chicago: University of Chicago Press, forthcoming.

33 A. Tornell and A. Velasco, "Fixed versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?" NBER Working Paper No. 5108, May 1995. Also see "Money-Based versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy," NBER Working Paper No. 5300, October 1995.

34 S. Edwards and F. J. Losada, "Fixed Exchange Rates, Inflation, and Macroeconomic Discipline," NBER Working Paper No. 4661, February 1994; and T. Persson and G. Tabellini, "Monetary Cohabitation in Europe," NBER Working Paper No. 5532, April 1996.

35 S. Edwards, "Public Sector Deficits and Macroeconomic Stability in Developing Countries," NBER Working Paper No. 5407, January 1996.

36 T. Persson and G. Tabellini, op. cit.

37 B. Eichengreen and J. von Hagen, "Fiscal Policy and Monetary Union: Is There a Tradeoff between Federalism and Budgetary Restrictions?" NBER Working Paper No. 5517, March 1996; and J. Aizenman, "On the Need for Fiscal Discipline in a Union," NBER Working Paper No. 4656, February, 1994.

38 A. R. Ghosh and H. C. Wolf, "How Many Monies? A Genetic Approach to Finding Optimum Currency Areas," NBER Working Paper No. 4805, July 1994.

39 J. A. Frankel and A. K. Rose, "The Endogeneity of Optimum Currency Area Criteria," NBER Working Paper No. 5700, August 1996; and A. Alesina and R. Perotti, "Economic Risk and Political Risk in Fiscal Union&" NBER Working Paper No. 4992, January 1995.

40 M. P. Dooley and K. M. Kletzer, "Capital Flight, External Debt, and Domestic Policies," NBER Working Paper No. 4793, July 1994; M. P. Dooley, "A Retrospective on the Debt Crisis," NBER Reprint No. 1980, July 1995, and in Understanding Interdependence: The Macroeconomics of the Open Economy, P. B. Kenen, ed. Princeton: Princeton University Press, 1995, pp. 262-88; J. Eaton and R. Fernandez, "Sovereign Debt," in Handbook of International Economics 3, pp. 2032-77; and R. Dornbusch, "Debt and Monetary Policy: The Policy Issues," NBER Working Paper No. 5573, May 1996.

41 For prospective work, see: S. Edwards, "Macroeconomic Stabilization in Latin America: Recent Experience and Some Sequencing Issues," NBER Working Paper No. 4697, April 1994; M. P. Dooley, E. Fernandez-Arias, and K. M. Kletzer, "Recent Private Capital Inflows to Developing Counties: Is the Debt Crisis History?" NBER Working Paper No. 4792, July 1994. For retrospective analysis, see H. L. Cole and P. J. Kehoe, "Reputation Spillover Across Relationships: Reviving Reputation Models of Debt," NBER Working Paper No. 5486, March 1996; and J. A. Frankel and C. Okongwu, "Liberalized Portfolio Capital Inflows in Emerging Capital Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence" in International Journal of Finance and Economics 1, 1 (December 1995), pp. 1-24.

42 H. L. Cole and P. J. Kehoe, op. cit.

43 For example, D. Rodrik, "Getting Interventions Right: How South Korea and Taiwan Grew Rich" in Economic Policy 20 (1995). Of course there are exceptions, for example, J. D. Sachs and A. M. Warner, "Economic Convergence and Economic Policies," NBER Reprint No. 2002, September 1995, and in Brookings Papers on Economic Activity (January 1995), pp. 108-18; and J. D. Sachs, "Reforms in Eastern Europe and the Former Soviet Union in Light of the East Asian Experiences," NBER Working Paper No. 5404, January 1996.

44 M. D. Chinn and M. P. Dooley, "Asia-Pacific Capital Markets: Integration and Implications for Economic Activity," NBER Working Paper No. 5280. September 1995; and M. P. Dooley, "A Survey of Academic Literature on Controls over International Capital Transactions," NBER Working Paper No. 5232, November 1995.

45 L. Bartolini and A. Drazen, "Capital Account Liberalization as a Signal," NBER Working Paper No. 5725, August 1996; and "when Liberal Policies Reflect External Shocks, What Do We Learn?" NBER Working Paper No. 5727, August 1996.

46 A. Razin and C. W. Yuen, "Can Capital Controls Alter the Inflation-Unemployment Tradeoff?" NBER Working Paper No. 5239, August 1995.

47 J. A. Frankel, "How Well do Foreign Exchange Markets Function: Might a Tobin Tax Help?" NBER Working Paper No. 5422, January 1996.

48 Members of the IFM program have participated in research organized in the public economics program. See, for example, The Effects of Taxation on Multinational Corporations, M. Feldstein, J.R. Hines, Jr., and R.G. Hubbard, eds. Chicago: University of Chicago Press, 1995. See also E.G. Mendoza and L. L. Tesar, "Supply-Side Economics in a Global Economy," NBER Working Paper No. 5086, April 1995.

49 NBER Reporter, Summer 1996, pp. 19-20.

Rose is acting director of the NBER Program on International Finance and Macroeconomics while Jeffrey A. Frankel is on leave to serve as a member of the Council of Economic Advisers. His profile appears later in this issue of the NBER reporter.