Marcus Hay Miller

• BA (Oxford), Ph D (Yale)
• Professor at University of Warwick

Taking retail deposits and lending to SMEs and households were the traditional role of commercial banks: but banking in Britain has been transformed by increasing consolidation and by the lure of high returns available from investment banking. With appropriate changes to the Diamond and Dybvig model of commercial banking, we show how market concent...

The recent financial crisis has forced a rethink of banking regulation and supervision and the role of financial innovation. This paper develops a model where prudent banks may signal their type through high capital ratios. Capital regulation may ensure separation in equilibrium, but deposit insurance will tend to increase the level of capital requ...

The traditional theory of commercial banking explains maturity transformation and liquidity provision assuming no asymmetric information and no excess profits. It captures the possibility of bank runs and business cycle risk; but it ignores the moral hazard problems connected with risk-taking by large banks counting on state bail outs. In this pape...

How and why do financial conditions matter for real outcomes? The workhorse model of money and liquidity of Kiyotaki and Moore (2008) shows how - with full employment maintained by flexible prices - shifting credit constraints can affect investment and future aggregate supply. We show that, when the flex-price assumption is dropped, an adverse but...

The traditional theory of commercial banking explains maturity transformation and liquidity provision under assumptions of free entry, no asymmetric information and no excess profits. While it captures the possibility of bank runs and business cycle risk, it is not well suited for analysing threats to competition and incentives for risk-taking that...

Why, at the end of the 20^th century, should capital markets have served to transfer resources from emerging markets to those which are more developed? Mr. Bernanke’s interpretation—that the global imbalances reflected a Savings Glut in the East fueled by fear of financial crisis—has been challenged for neglecting dis-saving in the...

As with global warming, so with financial crises – externalities have a lot to answer for. We look at three of them. First the financial accelerator due to ‘fire sales’ of collateral assets -- a form of pecuniary externality that leads to liquidity being undervalued. Second the ‘risk- shifting’ behaviour of highly-levered financial institutions who...

An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to ‘overshoot’ equilibrium when an asset bubble bursts - threatening widespread insolvency and what Richard Koo calls a ‘balance sheet recession’. Besides interest rates cuts, asset purchases and capital restruc...

How and why do financial conditions matter for real outcomes? The 'workhorse model of money and liquidity' of Kiyotaki and Moore (2008) shows how a 'Big Bang' enhancement of liquidity can stimulate investment and future aggregate supply, with full employment maintained by flexible prices. But an unexpected contraction of liquidity - though temporar...

One of the striking aspects of recent sovereign debt restructurings is, conditional on default, delay length is positively correlated with the size of 'haircut', which is size of creditor losses. In this paper, we develop an incomplete information model of debt restructuring where the prospect of uncertain economic recovery and the signalling about...

Econometric studies show that changes in real house prices are strongly autocorrelated in the UK, giving rise to prolonged departures from equilibrium. What happens when arbitrage is 'broken' and house prices no longer reflect future fundamentals? Adding a bubble to capture the disequilibrium behaviour picked up by econometricians, we show that a n...

This paper develops a fully microfounded dynamic general equilibrium model for a small open economy subject to credit market imperfections and balance sheet problems, due to the presence of a currency mismatch. Agents in this economy face credit constraints in financing investment due to information asymmetries and, while their assets are denominat...

This paper develops a fully microfounded two-sector DGE model for a small open economy subject to credit market imperfections (CMIs) and balance sheet problems (due to the presence of a currency mismatch). Specifically, some agents in this economy face credit constraints to finance investment due to information asymmetries and, while their assets a...

This paper proposes an integrated framework to analyze jointly two key issues: the emergence of global imbalances and the precautionary motive for accumulating reserves. Standard models of general equilibrium would predict modest current account surpluses in the emerging markets if they face higher risk than the US itself. But, with pronounced Loss...

What role did the US courts play in the Argentine debt swap of 2005? What implications does this have for the future of creditor rights in sovereign bond markets? The Judge in the Argentine case has, it appears, deftly exploited creditor heterogeneity - between 'holdouts' seeking capital gains and institutional investors wanting a settlement - to p...

Asset mis-pricing may reflect investor psychology; and excess volatility can arise from switches of sentiment. For a floating exchange rate where fundamentals follow a random walk, we show that excess volatility can be generated by the repeated entry and exit of currency ‘bulls’ and ‘bears’ with switches driven by ‘draw-down’ trading rules. We argu...

In this paper we show how trading rules can generate excess volatility in the exchange rate through repeated entry and exit of currency "bears" and "bulls". This is something of a caricature: but it allows us to show that official action can have self-ful.lling e¤ects as market composition shifts in ways that support official stabilization. Interve...

An updated version of Krugman’s 1993 MMF framework is used to consider the implications of buoyant domestic demand for the real exchange rate and debt dynamics. The updating includes a Taylor rule for monetary policy and explicit treatment of external assets and liabilities. In response to an exogenous rise in the aggregate demand, short-run apprec...

This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory....

An ‘efficiency wage’ model developed for Western economies is reinterpreted for Soviet Russia assuming that it was the Gulag not unemployment that acted as a ‘worker-discipline device’. Archival data now available allows for a basic account of the dynamics of the Gulag to be estimated. When this is combined with a dictatorship wishing to maximise t...

In a stylized and analytically tractable model of the global economy, we first calculate the Pareto improvement when a country experiencing a favourable supply side shock consumes more against expected future output and spreads the risk by selling shares. With capital inflows to finance the 'New Economy' significantly exceeding the current account...

In this paper, three possible reasons are examined for a sluggish inflation response to a hard-currency peg. Models of overlapping wage contracts are analyzed and shown to generate little inertia. These findings are contrasted with the effects of government credibility and the speed of private sector learning, which are shown to have a major impact...

When Argentine sovereign default in December 2001 led to a collapse of the peso, the burden of dollar debt became demonstrably unsustainable. But it was not clear what restructuring was feasible, nor when. Eventually, in 2005 after a delay of more than three years, a super-majority of creditors accepted a swap that essentially involved the 'pesific...

This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory....

When the automobile was developed near the beginning of the last century, it was the relatively new fuel gasoline, not the familiar ethanol that became the fuel of choice. We examine the intersections of the early development of the automobile and the petroleum industry and consider the state of the agriculture sector during the same period. Throug...

When Argentine sovereign default in December 2001 led to a collapse of the peso, the burden of dollar debt became demonstrably unsustainable. But it was not clear what restructuring was feasible, nor when. Eventually, in 2005 after a delay of more than three years, a supermajority of creditors accepted a swap implying a recovery rate of around 37 c...

The promising prospect of a ‘New Economy’ in the US attracted substantial equity inflows in the late 1990s, helping to finance the country’s burgeoning current account deficit. After peaking in 2000, however, US stocks fell by some 8 trillion dollars in value. To assess the welfare effects of international financial markets in this context, we use...

This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory....

When the automobile was developed near the beginning of the last century, it was the relatively new fuel gasoline, not the familiar ethanol that became the fuel of choice. We examine the intersections of the early development of the automobile and the petroleum industry and consider the state of the agriculture sector during the same period. Throug...

Over the past decades, cross-border financial flows have increased in importance and have in many occasions exceeded the underlying current account positions. This phenomenon has been accompanied by an increase in the volume of international equity transactions that accentuate the role of international risk sharing as a factor for the macroeconomic...

We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. In the face of sovereign default, the need to give appropriate incentives to the debtor leads to excessive ‘rollover failure’ by creditors. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy...

We examine whether Brazilian sovereign spreads of over 20% in 2002 could be due to contagion from Argentina or to domestic politics, or both. Treating unilateral debt restructuring as a policy variable gives rise to the possibility of self-fulfilling crisis, which can be triggered by contagion. We explore an alternative political-economy explanatio...

A bstract The Stability and Growth Pact, adopted by members of the European Union,imposes tight limits on government deficits. But since the collapse of Communism,Europe has been faced with the problems of economies in transition: and reunifiedGermany—the leading economy of the EU—combines a prosperous western stateand an eastern economy in the pro...

This paper contributes empirically to our understanding of informed traders. It analyzes traders' characteristics in a foreign exchange electronic limit order market via anonymous trader identities. We use six indicators of informed trading in a cross-sectional multivariate approach to identify traders with high price impact. More information is co...

When the automobile was developed near the beginning of the last century, it was the relatively new fuel gasoline, not the familiar ethanol that became the fuel of choice. We examine the intersections of the early development of the automobile and the petroleum industry and consider the state of the agriculture sector during the same period. Throug...

Recent empirical research by Mark Taylor and co-authors has found evidence of hybrid dynamics for real exchange rates. While there is a random walk near equilibrium, for real exchange rates some distance from equilibrium there is mean-reversion which increases with the degree of misalignment. An interesting question is whether this non-linear mean-...

When the risk premium in the US stock market fell substantially, Shiller (2000) attributed this to a bubble driven by psychological factors. An alternative explanation is that the observed risk premium may be reduced by one-sided intervention policy on the part of the Federal Reserve which leads investors into the erroneous belief that they are ins...

It was at the National Economists' Club in November 2001 that Anne Krueger, first deputy managing director of the International Monetary Fund, threw down the gauntlet. "There is," she said, "a gaping hole [in the international financial architecture]-- we lack incentives to help countries with unsustainable debts resolve them promptly and in an ord...

When the risk premium in the US stock market fell far below its historic level, Shiller (2000) attributed this to a bubble driven by psychological factors. As an alternative explanation, we point out that the observed risk premium may be reduced by one-sided intervention policy on the part of the Federal Reserve, which leads investors into the erro...

Recent empirical research has found evidence of hybrid dynamics for the real exchange rate. While there is a random walk near equilibrium, for real exchange rates some distance from equilibrium there is mean-reversion which increases with the degree of misalignment. An interesting question is whether this nonlinear mean-reversion is policy-induced....

The risk premium in the US stock market has fallen far below its historic level, which Shiller (2000) attributes to a bubble driven by psychological factors. As an alternative explanation, we point out that the observed risk premium may be reduced by one-sided intervention policy on the part of the Federal Reserve which leads investors into the err...

The current risk premium in the US stock market seems far below its historic level, which Robert Shiller attributes to a bubble driven by psychological factors. As an alternative, we show how estimated risk premia can be sharply reduced by fully-credible one-sided intervention policy on the part of the Federal Reserve, which lulls investors into be...

Acknowledgement: We would like to thank participants to seminars at the Bank of Finland and the Warwick Financial Option Research Centre for their comments and suggestions, particularly those from Daniel Cohen and Stewart Hodges. The paper was completed when Marcus Miller was Visiting Scholar at the IMF Research Department and he is grateful for th...

Increasing emphasis has been placed on the need for an effective lender of last resort for sovereign states and on procedures for sovereign debt restructuring to help cope with global financial crises. Where private creditors use short-term debt to check sovereign debtor`s moral hazard, there is the risk of self-fulfilling crises. In this context,...

Collapsing credit markets have been blamed for the depth and persistence of the Great Depression in the United States. Could similar mechanisms have played a role in ending the East Asian economic miracle--and in creating fragility in global financial markets? After a brief account of the nature of the East Asian crises of 1997/8, we use the framew...

Is sovereign borrowing so different from corporate debt that there is no need for bankruptcy-style procedures to protect debtors? With the waiver of immunity, sovereign debtors who already face severe disruption from short-term creditors grabbing their currency reserves are also exposed to litigious creditors trying to seize what assets they can in...

Is sovereign borrowing so different from corporate debt that there is no need for bankruptcy- style procedures to protect debtors? With the waiver of immunity, sovereign debtors who already face severe disruption from short-term creditors grabbing their currency reserves are also exposed to litigious creditors trying to seize what assets they can i...

East Asian economies caught in the recent crisis have seen their output contract fiercely despite enormous real exchange rate depreciation. Why are relative prices not maintaining demand and output at pre-crisis levels? We investigate the idea that there are negative supply-side shifts due to balance sheet effects. Specifically, we use the framewor...

Recent development cooperation with Guinea-Bissau, focusing on good governance, statebuilding and conflict prevention, did not contribute to democratization nor to the stabilization of volatile political, military and economic structures. The portrayal of Guinea- Bissau as a failed “narco-state”, as well as Western aid meant to stabilize this state...

How are we to understand the East Asian crisis? There are two popular explanations: first that it was just like a nineteenth century British bank panic, calling for prompt action by a 'lender of last resort', namely the IMF; second that it was much worse —nothing less than the bursting of a modern-day South Sea Bubble. Jeffrey Sachs of Harvard Univ...

No one can deny the outstanding success of the East Asian economies in the last two decades of rapid economic growth backed by surging capital inflows. Key questions posed by the current crisis are: what went wrong, and why? how to fix it? and, how to prevent a recurrence? To answer them, the article begins with a brief overview of recent developme...

Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the USA. Could similar mechanisms have played a role in ending the East Asian miracle? After a brief account of the nature of the recent crisis, we use a model of highly levered credit-constrained firms due to Kiyotaki and Moore (1997) to explore t...

Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the USA. Could similar mechanisms have played a role in ending the East Asian miracle? After a brief account of the nature of the recent crises, we use a model of highly levered credit-constrained firms due to Kiyotaki and Moore (1997) to explore t...

Germany is generally regarded as the nominal anchor for Europe. Its participation is the sine qua non of EMU. It has been the largest net contributor to EU finances, the leading proponent of greater economic and political union, and the leading example of the virtues of fiscal and monetary rectitude as enshrined in the Maastricht Treaty. Reunified...

In response to severe financial crises in 1997, several Asian governments—backed by bilateral and multilateral lenders—provided enormous amounts of support to ailing domestic banks, and issued sweeping guarantees of private financial liabilities (needing funding of up to 30 percent of GDP). In this paper, we examine how the provision of financial s...

Producing high technology output and supplying sophisticated services often involves costly investment in industry-specific skills. But the threat of poaching means that it is the individual 'stakeholder,' not the firm, who must bear the cost. The authors investigate various mechanisms for funding human capital investment in an industry equilibrium...

This paper investigates how unemployment persistence affects the optimal delegation of monetary policy to an independent central banker (CB). Two opposing forces are shown to be at work: with more persistence, the government's incentive to stabilize the economy is greater; but (if the CB is forward-looking) its incentive to create inflation surpris...

The government of a small open economy trying to manage its exchange rate faces a ‘time consistency’ problem. If markets expect implementation of the optimal linear intervention rule, the government will be tempted to ‘defect’: knowing this, markets will expect less activism; and, in the discretionary equilibrium, this is what they get. How far thi...

Using a variant of the Cagan (1956) model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the inflation tax for any given rate of inflation. This s...

This article shows (1) how entry and exit of firms in a competitive industry affect the valuation of securities and optimal capital structure, and (2) how, given a trade-off between tax advantages and agency costs, a firm will optimally adjust its leverage level after it is set up. We derive simple pricing expressions for corporate debt in which th...

Using a variant of the Cagan model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the inflation tax for any given rate of inflation. This study ex...

Using Krugman's (1991) target zone model, we find an explicit, subgame-perfect solution for a central bank wishing to stabilise the exchange rate given proportional costs of intervention. We demonstrate, however, that precommitment to narrower bands would yield a welfare gain — which provides a theoretical rationale for an Exchange Rate Mechanism (...

The theory of irreversible investment predicts that development of an oil field should take place when a unique 'price trigger' is passed. At the start of the 1990/91 Gulf War, however, oil prices promptly doubled, only to fall back to their previous level when peace returned six months later. To incorporate such large but 'transitory' price hikes,...

We examine the effects of introducing stochastic shocks into a linear rational expectations model with saddlepoint dynamics generated by a forward-looking asset price. We derive the fundamental differential equation governing the path of the asset price as a function of the ‘sluggish’ variable. The equation does not admit closed form solutions in g...

The view held by Keynes that there was a speculative appreciation of sterling prior to its return to the gold standard, has been challenged by Gregor Smith and Todd Smith, who argue that expectations of return must have weakened the currency. The authors demonstrate that the positive but decreasing trend displayed in the exchange rate data is consi...

This paper develops a model where agents learn about the probability of devaluations in a fixed exchange rate regim e. The true probability of devaluation is assumed to be low (or zero) b ut agents are initially unsure about the government's intentions and st art with a high prior belief. Bayesian updating dictates that private sector expectations...

In this paper three possible reasons are examined for a sluggish inflation response to a hard currency peg. Models of overlapping wage contracts are analyzed and shown to generate little inertia. This contrasts with the effects of government credibility and the speed of private sector learning, which are shown to have a major impact on the speed of...

In the first decade of its existence, the European Monetary System passed through three phases of realignments: full accommodation, partial accommodation, and zero accommodation of inflation differentials. But to what extent does the new freedom of capital movements rule out such gradual convergence with realignments for new members? This paper use...

Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price-setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. The effects of rules for realignment of the band are also examined. Results are compared with those th...

This paper is one of four in this Working Paper Series, focusing on financial liberalisation, along with those of Kupiec, Driscoll and Blundell-Wignall and Browne. It surveys recent work, both theoretical and empirical, on the question of market efficiency in various asset markets. A number of studies of behaviour in the foreign exchange market, wh...

Alan Walters has suggested that the European Monetary System will prove dynamically unstable when capital controls are removed. The argument is analyzed within a model where overlapping contracts generate price inertia. In this context, it is found that the short-run effects predicted by Walters only arise when the credibility of the peg differs as...

The authors formulate a stochastic rational-expectations model of exchange-rate determination in which there are random shocks to the process of sluggish price adjustment. They examine the effects of imposing limits upon the range of variation of both nominal and real exchange rates, and describe the intervention policies needed to defend the bands...

Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. Results are compared to those that emerge from a simple monetary model subject to velocity shocks. The...

Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. Results are compared to those which emerge from a simple monetary model subject to velocity shocks. Th...

Krugman (1988) provides a stationary characterisation of an exchange rate inside a currency band. Here we derive the non-stationary solution for a floating exchange rate which applies when currency dealers expect such a band to be imposed at a known future date.

The authors analyze the effect of rational bubbles in the foreign exchange market, taking account of the interdependence between bubble paths and economic fundamentals. The risk of the bubble ending, modeled as a Poisson process, adds an insurance premium to the interest differential governing currency arbitrage. Qualitative solutions are obtained...

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...

We examine the effect of introducing stochastic shocks into a linear rational expectations model with saddlepoint dynamics generated by a forward looking asset price. We derive the fundamental differential equation governing the path of the asset price as a function of the 'sluggish' variable. The equation does not admit of closed form solutions in...

The extent which exchange rate management can coexist with an independent monetary policy is examined in the context of a model with exchange rate bands. Using a Dornbusch model in which stochastic shocks are added to the Phillips curve, we analyze the implications of assuming that the monetary authorities follow certain simple rules for realigning...

In a continuous-time model of two symmetric open economies, with a floating exchange rate, we find that the pay-off to macroeconomic policy coordination depends systematically on how heterogeneous is their inflation experience. While monetary policy coordination improves welfare in handling a common rate of underlying inflation, it exacerbates the...

This is an exercise in the positive economics of alternative monetary regimes. The behaviour of output and prices is compared using a stochastic specification which allows asymptotic variances to be obtained without difficulty. Free floating of exchange rates together with national money supply targets is analysed first, with and without the presen...

This article examines the target zone proposal for exchange-rate management by presenting the results of simulations performed on both a large macroeconometric model and a small analytical model. The main conclusions derived from the large model are: (1) that exchange-rate-oriented monetary policy could have curbed misalignments without undermining...

This paper analyses how the output or unemployment cost of achieving a sustainable reduction in the rate of inflation depends on the structure of the wage-price process and how the "sacrifice ratio" can be minimized. In models where the natural rate is invariant under the anti-inflationary policies, price level inertia is not sufficient for a posit...

This paper investigates optimal stabilization policy in a small open economy using a continuous time model in which inflation depends on future monetary policy as well as past inflation. The impact of monetary policy is assumed to operate via real interest rates and the real exchange rate and the setting of real interest rates is chosen so as to mi...

This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets...

Chinese policy-makers fear that an RMB appreciation will reduce low technology exports. We investigate this issue using data on China's exports to 30 countries. We find that an appreciation of the RMB would substantially reduce China's exports of clothing, furniture and footwear. We also find that an increase in foreign income, an increase in the C...

A model of Dornbusch is adapted to analyze the consequences for output and competitiveness of certain aspects of the U.K. government's medium term financial strategy and some other policy actions. This includes the announcement of a sequence of reductions in the target rate of monetary growth, an increase in VAT and a move to make the U.K. banking...

Current macroeconomic policy differs from conventional Keynesian demand management in two major respects, namely in the announced objectives of policy and in the means chosen to pursue them. Early in its period of office the present Government indicated that it did not endorse the conventional list of objectives (namely low employment, low inflatio...

Implementing a 'gradualist' policy of monetary contraction, in an open economy with a freely floating exchange rate but with nominal inertia in domestic labor costs, can lead to prompt and substantial changes in the nominal and real exchange rate. One of the virtues claimed for such exchange rate 'overshooting', however, is its immediate effect on...

In the budget of 1980 the current administration launched the Medium Term Financial Strategy (MTFS), a four year plan designed primarily to reduce inflation but also to generate economic growth, see FSBR (1980). What is not immediately apparent from the name is that it is as much a fiscal strategy as a financial strategy; indeed what it seeks to do...