Browsing by Author "Burnside, C"
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Item Open Access Aid, policies, and growth(American Economic Review, 2000-09-01) Burnside, C; Dollar, DThis paper uses a new database on foreign aid to examine the relationships among foreign aid, economic policies, and growth of per capita GDP. We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies. Good policies are ones that are themselves important for growth. The quality of policy has only a small impact on the allocation of aid. Our results suggest that aid would be more effective if it were more systematically conditioned on good policy. (JEL F350, O230, O400).Item Open Access Aid, policies, and growth: Reply(American Economic Review, 2004-06-01) Burnside, C; Dollar, DItem Open Access Carry trade: The gains of diversification(Journal of the European Economic Association, 2008-04-01) Burnside, C; Eichenbaum, M; Rebelo, SMarket participants routinely take advantage of the failure of uncovered interest rate parity to speculate in currency markets. Perhaps the most widely used currency speculation strategy is the carry trade. In this article we take the perspective of an individual currency trader and document the gains to diversifying the carry trade across different currencies. We show that these gains are large. Diversification boosts the typical Sharpe ratio by over 50%. © 2008 by the European Economic Association.Item Open Access Currency crises and contingent liabilities(Journal of International Economics, 2004-01-01) Burnside, CA contingent liability is a future spending commitment that is realized with some probability. International organizations emphasize the dangers of contingent liabilities when providing advice. Why? One answer is obvious-if significant contingent liabilities are realized they commit governments to substantial fiscal costs. There is a further reason: by taking on a contingent liability the government can increase the probability of the underlying shock taking place. This paper describes how the issuance of government guarantees and the methods by which they are financed affect the probability of crises taking place. It also discusses the determinants of post-crisis inflation and depreciation. © 2003 Elsevier B.V. All rights reserved.Item Open Access Detrending and business cycle facts: A comment(Journal of Monetary Economics, 1998-05-20) Burnside, CThere is nothing misleading in the fact that different filtering techniques lead to different facts about macroeconomic time series. The fact that economists use a large number of filters to extract the 'cyclical' and 'trend' components of time series simply means that these concepts do not have unique meaning among them. Alternative filters provide different windows through which economists can examine their models and data. It is an open question as to whether some of these windows are more or less interesting to look through. The fact that some economists restrict themselves to a small set of filters is an issue to the extent that they thereby induce a lack of power. Here, I argue that a commonly used method of testing business cycle models induces no such lack of power.Item Open Access Do peso problems explain the returns to the carry trade?(Review of Financial Studies, 2011-03-01) Burnside, C; Eichenbaum, M; Kleshchelski, I; Rebelo, SWe study the properties of the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. This strategy generates payoffs that are on average large and uncorrelated with traditional risk factors. We argue that these payoffs reflect a peso problem. The underlying peso event features high values of the stochastic discount factor rather than very large negative payoffs. © 2010 The Author Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.Item Open Access Factor-Hoarding and the Propagation of Business-Cycle Shocks(American Economic Review, 1996-12-01) Burnside, C; Eichenbaum, MThis paper analyzes the role of variable capital-utilization rates in propagating shocks over the business cycle. The model on which our analysis is based treats variable capital-utilization rates as a form of factor-hoarding. We argue that variable capital-utilization rates are a quantitatively important source of propagation to business-cycle shocks. With this additional source of propagation, the volatility of exogenous technology shocks needed to explain the observed variability in aggregate U.S. output is significantly reduced relative to standard real-business-cycle models.Item Open Access Fiscal shocks and their consequences(Journal of Economic Theory, 2004-03-01) Burnside, C; Eichenbaum, M; Fisher, JDMThis paper investigates the response of hours worked and real wages to fiscal policy shocks in the post-World-War II US. We identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income, and a persistent rise in aggregate hours worked as well as declines in real wages. The shocks are also associated with short lived rises in aggregate investment and small movements in private consumption. We describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock. Simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock. Once we allow for habit formation and investment adjustment costs, the model can also account reasonably well for the quantitative effects of a fiscal shock. © 2003 Elsevier Inc. All rights reserved.Item Open Access Government finance in the wake of currency crises(Journal of Monetary Economics, 2006-04-01) Burnside, C; Eichenbaum, M; Rebelo, SWe address three questions: (i) Can classical models be reconciled with the fact that many crises are marked by high rates of depreciation and small increases in seignorage revenue? (ii) What are the implications of different financing methods for post-crisis rates of inflation and depreciation? (iii) How do governments pay for the fiscal costs associated with currency crises? To study these questions we use a general equilibrium model in which prospective government deficits trigger a currency crisis. We then use our model in conjunction with fiscal data to interpret government financing in the wake of three recent currency crises: Korea (1997), Mexico (1994) and Turkey (2001). © 2006 Elsevier B.V. All rights reserved.Item Open Access Hedging and financial fragility in fixed exchange rate regimes(European Economic Review, 2001-06-23) Burnside, C; Eichenbaum, M; Rebelo, SCurrency crises that coincide with banking crises tend to share at least three elements. First, banks have a currency mismatch between their assets and liabilities. Second, banks do not completely hedge the associated exchange rate risk. Third, there are implicit government guarantees to banks and their foreign creditors. This paper argues that the first two features arise from bank's optimal response to government guarantees. We show that guarantees completely eliminate banks' incentives to hedge the risk of a devaluation. Our model also articulates one reason why governments might be tempted to provide guarantees to bank creditors. Guarantees lower the domestic interest rate and lead to a boom in economic activity. But this boom comes at the cost of a more fragile banking system. In the event of a devaluation, banks renege on foreign debts and declare bankruptcy. © 2001 Elsevier Science B.V. All rights reserved.Item Open Access Labor hoarding and the business cycle(Journal of Political Economy, 1993-12-01) Burnside, C; Eichenbaum, M; Rebelo, SThis paper investigates the sensitivity of Solow residual based measures of technology shocks to labor hoarding behavior. Using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption, it estimates the fraction of the variability of the Solow residual that is due to technology shocks. Results support the view that a significant proportion of movements in the Solow residual are artifacts of labor hoarding behaviour. Specifically, the variance of innovations to technology is roughly 50% less than that implied by standard real business cycle models. In addition, results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate US output. -AuthorsItem Open Access Small-sample properties of GMM-based wald tests(Journal of Business and Economic Statistics, 1996-01-01) Burnside, C; Eichenbaum, MThis article assesses the small-sample properties of generalized-method-of-moments-based Wald statistics by using (a) a vector white-noise process and (b) an equilibrium business-cycle model as the data-generating mechanisms. In many cases, the small-sample size of the Wald tests exceeds its asymptotic size and increases sharply with the number of hypotheses being jointly tested. We argue that this is mostly due to difficulty in estimating the spectral-density matrix of the residuals. Estimators of this matrix that impose restrictions implied by the model or the null hypothesis substantially improve the properties of the Wald statistics. © 1996 Taylor & Francis Group, LLC.Item Open Access The cross section of foreign currency risk premia and consumption growth risk: Comment(American Economic Review, 2011-12-01) Burnside, CLustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk," yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle.Item Open Access Understanding booms and busts in housing markets(Journal of Political Economy, 2016-08-01) Burnside, C; Eichenbaum, M; Rebelo, S© 2016 by The University of Chicago. All rights reserved.Some booms in housing prices are followed by busts. Others are not. It is generally difficult to find observable fundamentals that are useful for predicting whether a boom will turn into a bust or not. We develop a model consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of “social dynamics.” Agents with tighter priors are more likely to convert others to their beliefs. Boom-bust episodes typically occur when skeptical agents happen to be correct. The booms that are not followed by busts typically occur when optimistic agents happen to be correct.