Olivier Jeanne

Olivier Jeanne
Johns Hopkins University | JHU · Department of Economics

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122
Publications
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Publications

Publications (122)
Article
Financially closed economies insure themselves against current-account shocks using international reserves. We characterize the optimal management of reserves using an open-economy model of precautionary savings and emphasize several results. First, the welfare-based opportunity cost of reserves differs from the measures often used in the literatur...
Article
This paper uses a dynamic optimization model to estimate the welfare gains that a small open economy can derive from insuring against natural disasters with catastrophe (CAT) bonds. We calibrate the model by reference to the risk of earthquakes, floods and storms in developing countries. We find that the countries most vulnerable to these risks wou...
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There has been a lot of interest since the global financial crisis in policies allowing emerging market economies to smooth the effects of the global financial cycle. Although the literature has focused mostly on capital controls emerging market governments have relied mostly on international reserves management. This paper discusses the role of re...
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Financially closed economies insure themselves against current-account shocks using international reserves. We characterize the optimal management of reserves using an open-economy model of precautionary savings and emphasize several results. First, the welfare-based opportunity cost of reserves differs from the measures often used by practitioners...
Article
This paper compares ex-ante policy measures (such as macroprudential regulation) and ex-post policy interventions (such as bailouts) to respond to financial crises in models of financial amplification, i.e. models in which falling asset prices, declining net worth and tightening financial constraints reinforce each other. The optimal policy mix in...
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Will the world run out of 'safe assets' and what would be the consequences on global financial stability? We argue that in a world with competing private stores of value, the global economic system tends to favor the riskiest ones. Privately produced stores of value cannot provide sufficient insurance against global shocks. Only public safe assets...
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Has the US dollar delivered the benefits that the rest of the world is expecting from its holdings of international liquidity? US government debt has been liquid and safe, and it is supplied in sufficient quantity. But it has given a low return to the countries that accumulated the most reserves, especially when those returns are measured in terms...
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There is a wide variety in the capital account policies of emerging markets and developing economies. Some countries, such as Brazil, have recently experimented with prudential controls on capital inflows, whereas others, such as China, have continued to maintain tight controls. This paper reviews the recent theoretical literature explaining the mo...
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The government debt and banking turmoil that persists in several euro area countries begs the question of why countries such as the United States or Japan, which do not have less debt, have not been affected by the same problems. To shed light on this question, two forms of monetary dominance should be distinguished. According to the first (soft, o...
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This article is a substantially revised version of ‘The optimal level of reserves for emerging market countries: formulas and applications’ (IMF Working paper 06/98). It benefited from comments by Fernando Goncalves, Alejandro Izquierdo, Herman Kamil, Linda Goldberg, Paolo Mauro, Paolo Pesenti, Eric Van Wincoop, seminar participants at the World Ba...
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The paper analyzes contagious sovereign debt crises in financially integrated economies. Under financial integration banks optimally diversify their holdings of sovereign debt in an effort to minimize the costs with respect to an individual country's sovereign debt default. Although diversification generates risk diversification benefits ex ante, i...
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This paper presents a simple model of how a country can under-value its real exchange rate through a combination of foreign asset purchases by the government and controls on capital inflows. This policy combination is equivalent to a tariff on imports and a subsidy on exports. The welfare cost of such an intervention is measured by the valuation lo...
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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 delev...
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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 borrow...
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The Global Liquidity Trap One may wonder about the risk that a large fraction of the global economy fall in a Japanese-style liquidity trap with low growth, mild deflation and monetary policy rates close to zero. This would put the world economy in a “global liquidity trap”, a situation that has not been analyzed in the recent literature. This arti...
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This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. The introduction of hedging instruments such as futures and options enhances domestic welfare through two channels. First, by reducing export income volatility and allowing for a smoother consumption...
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We show how the willingness-to-pay problem and lack of exclusivity in sovereign lending may result in an equilibrium sovereign debt structure that is excessively difficult to restructure. A bankruptcy regime for sovereigns can alleviate this inefficiency but only if it is endowed with far-reaching powers to enforce seniority and subordination claus...
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We model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much of the previous literature as intractable. Our model cap- tures many of the key insights from the existing specialized literature on the precautionary motive. Our economy exhibits a unique target value of assets...
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We present a new approach to study empirically the effect of the introduction of the euro on currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice depends on the characteristics of both the currency and the country. We use unique quarterly panel data of Norwegian imports from OECD countries for the...
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We present a framework that clarifies the financial role of the IMF, the rationale for conditionality, and the conditions under which IMF-induced moral hazard can arise. In the model, traditional conditionality commits country authorities to undertake crisis resolution efforts, facilitating the return of private capital, and ensuring repayment to t...
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An overview is given of mechanisms through which countries can self-insure, with particular focus on national balance sheets. First, the frequency and economic costs of the most important shocks faced by different groups of member countries are analyzed. Following this, some of the actions that member countries can take to self-insure are outlined....
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This paper studies whether prosocial values are transmitted from parents to their children. We do so through an economic experiment in which children and their parents play a standard public goods game. The experimental data presents us with a surprising result. While we find significant heterogeneity in cooperative preferences in both parents and...
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Channeling human resources into occupations with high social productivity has historically been a key to economic prosperity. Occupational choices are not only driven by the material rewards associated with the various occupations, but also driven by the esteem that they confer. We propose a model of endogenous growth in which occupations carry a s...
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An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistica...
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Central banks target CPI inflation; independent central banks are concerned about their balance sheet and the level of their capital. The first fact makes it difficult for a central bank to implement the optimal escape from a liquidity trap, because it undermines a commitment to overshoot the inflation target. We show that the second fact provides...
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In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure ex post. We show, however, that competition for repayment between lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium. This ine...
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Full-text available
This paper considers whether the recent buildup in emerging market countries’ international reserves can be justified as precautionary insurance against volatility in capital flows. It presents a simple, welfare-based model of the optimal level of reserves to deal with the risk of capital account crises and calibrates the model for emerging market...
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Full-text available
Central banks target CPI inflation; independent central banks are concerned about their balance sheet and the level of their capital. The first fact makes it difficult for a central bank to implement the optimal escape from a liquidity trap, because it undermines a commitment to overshoot the inflation target. We show that the second fact provides...
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Increasing environmental performance is one of the changes involved by sustainable development and became a condition of success in economic activities. Efforts invested in this direction are explained by a number of strategic advantages – operational ecoefficiency, reputation, strategic direction, risk management, human resources management, produ...
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This paper presents a new database on government debt in 19 emerging market countries since 1980. The data set focuses on the structure of debt in terms of jurisdiction of insurance, maturity, currency composition and indexation. The paper presents stylized facts on debt structures and preliminary evidence on their determinants. We observe substant...
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Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of convergence. We show in a calibrated neoclassical model that conventionally measured welfare gains from this type of convergence appear relatively limited for the typical em...
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In this paper we examine the impact of membership in Preferential Trade Agreements (PTAs) on trade between PTA members. Rather than considering the impact of PTA membership on the volume of trade we consider the impact of membership on the structure of trade. For a large sample of countries over the period 1962-2000 we find that membership in a PTA...
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The way countries structure their public borrowing has long been considered an important determinant of economic performance. This topic has recently received renewed attention as a result of not only steep increases in public debt levels in emerging market countries - and a number of highly visible and damaging crises - but also pronounced changes...
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The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital does not flow more to countries that invest and grow more. We call this puzzle the “a...
Article
In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Allevia...
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Full-text available
Using a simple model of international lending, we show that as long as the IMF lends at an actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are efficient. Thus, under these assumptions, the IMF cannot cause...
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Financial globalization is commonly viewed as a powerful force in constraining or disciplining domestic policies. This paper presents a model that captures various ways in which international capital mobility affects domestic policy incentives. Capital mobility supports reform in two ways: 1) capital inflows enhance the benefits of good policies; 2...
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This paper presents a theory of the maturity of international sovereign debt and derives its implications for the reform of the international financial architecture. It presents a general equilibrium model in which the need to roll over external debt disciplines the policies of debtor countries but makes them vulnerable to unwarranted debt crises o...
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Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of convergence. We show in calibrated exercises that conventionally measured welfare gains from this type of convergence appear relatively limited for the typical emerging coun...
Article
Using a simple model of international lending, we show that as long as the IMF lends at an actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are efficient. Thus, under these assumptions, the IMF cannot cause...
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Full-text available
This paper explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility. I present a model in which firms choose the currency composition of their debts so as to minimize their probability of default. Decreasing monetary credibility can induce firms to dollarize their lia...
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We present a stylized framework which encompasses a variety of "balance sheet approaches" to currency crises that have been suggested in the literature, and analyze their policy implications. The common theme is that currency and maturity mismatches in private sector balance sheets constrain the capacity of monetary and fiscal policies to deal with...
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The link between monetary policy and asset price movements has been of perennial interest to policy makers. In this paper we consider the potential case for pre-emptive monetary restrictions when asset price reversals can have serious effects on real output. First, we provide some historical background on two famous asset price reversals: the U.S....
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Policy-makers often justify their choice of fixed exchange rate regimes as a shelter against nonfundamental influences in the foreign exchange market. This paper proposes a framework, based on endogenous noise trading, which makes sense of the policy-makers' view. We show that as a result of multiple equilibria, the model violates Mundell's “Incomp...
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Policy-makers often justify their choice of fixed exchange rate regimes as a shelter against nonfundamental influences in the foreign exchange market. This paper proposes a framework, based on endogenous noise trading, which makes sense of the policy-makers' view. We show that as a result of multiple equilibria, the model violates Mundell's "Incomp...
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The link between monetary policy and asset price movements has been of perennial interest to policy makers. In this paper we consider the potential case for pre-emptive monetary restrictions when asset price reversals can have serious effects on real output. First, we present some stylized facts on boom-bust dynamics in stock and property prices in...
Article
Full-text available
Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of convergence. We show in calibrated exercises that conventionally measured welfare gains from this type of convergence appear relatively limited for the typical emerging coun...
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Full-text available
this paper circulated under the titles Sovereign Liquidity Crises and the Global Financial Architecture" (mimeo, IMF, October 1998) and Debt Maturity and the Global Financial Architecture" (CEPR Discussion Paper No.2520, 2000). This paper beneted from comments by two anonymous referees, a number of IMF colleagues and participants in a number of sem...
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We develop a growth model in which individuals care about their social status, which is in turn determined by their relative wealth. It is shown that the presence of a desire for status, even if very limited, can generate endogenous long-run growth. When the status-seeking motive is weak, long-run growth only appears if the initial stock of capital...
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This paper considers how an international lender of last resort (LOLR) can prevent self-fulfilling banking and currency crises in emerging economies. We compare two different arrangements: one in which the international LOLR injects liquidity into international financial markets, and one in which its resources are used to back domestic banking safe...
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This paper considers how an international lender of last resort (LOLR) can prevent self-fulfilling banking and currency crises in emerging economies. We compare two different arrangements: one in which the international LOLR injects liquidity into international financial markets, and one in which its resources are used to back domestic banking safe...
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International Bailouts The IMF's role The large international bailouts of the 1990s have been criticized for generating moral hazard at the expense of the global taxpayer. We argue that this criticism is misleading because international bailouts create no, or very few, costs to the international community. Instead, the problem is to ensure that bai...
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We analyze a simple model of endogenous growth in which individuals care about both consumption and their rank in the distribution of wealth. We show that the steady-growth rate of the economy increases with both the strength of the status-seeking motive and the initial equality of the wealth distribution. Contrary to the basic model of endogenous...
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Defending a government's exchange-rate commitment with active interest rate policy is not an option in first-generation models of speculative attacks. In those models, the interest rate is the passive reflection of currency-depreciation expectations. In this paper, we show how to adapt the first-generation framework to allow for an interest rate de...
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The paper starts from the premise that the debate on the ‘new architecture’ of the international financial system should be based on a theory that endogenizes the structure of countries' external liabilities. I present a model in which the maturity of a country's external sovereign debt is the solution to an incentives problem, which may lead to re...
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Defending a government's exchange-rate commitment with active interest rate policy is not an option in the Krugman-Flood-Garber (KFG) model of speculative attacks. In that model, the interest rate is the passive reflection of currency-depreciation expectations. In this paper we show how to adapt the KFG model to allow for an interest rate defence....
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This paper discusses some problems posed by foreign currency debt for emerging economies in the context of the ongoing debate on the reform of the global financial architecture. We present a model in which the currency composition of corporate debt is endogenous, and discuss the optimality of measures aimed at coping with the risks posed by foreign...
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We develop a model of a fixed exchange rate peg arrangement derived from the Barro–Gordon model of rules versus discretion. It is shown that the fixed peg is vulnerable to self-fulfilling currency crises in which the unemployment rate increases, the credibility of the rule decreases, but, paradoxically, the reputation of the policy-maker improves....
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This paper puts recent theoretical developments in the literature on currency crises in perspective by comparing two theoretical approaches, one based on the speculative attack model of Krugman-Flood-Garber and the other approach, which evolved following the 1992-93 crisis of the European Monetary System, and that we call here "escape clause". The...
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Fashions are characterized by fragility of mass behavior and a Life-cycle trajectory. We argue that fashions may be generated by the simultaneous presence of local externalities and word-of-mouth communication. We develop a model based on these two ingredients and show that in order for fashions to arise, communication has to be segmented across so...
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We study a two-class growth model in which agents care about both consumption and the social perception of their wealth rank. The latter determines the social status enjoyed by agents. Social perceptions are based upon noisy signals of wealth and in equilibrium there is incomplete separation of classes. The steady growth rate of the economy increas...
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We develop an endogenous growth model in which individuals form matches in order to consume goods that are not explicitly traded. The matching process endogenously generates a concern for relative wealth and is thereby beneficial for capital accumulation and economic growth. We then study how social segmentation in the matching process affects econ...
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The emerging market crises of the 1990s-in particular, the Asian crisis-have generated a perception of deep inadequacies in the international financial system and an intense debate on global financial reform, particularly regarding capital flows to emerging markets. It is now widely accepted that these crises resulted from both domestic policy fail...
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Fashion is a popular style of behavior at a given time or place. In this paper we model fashion as a dynamic phenomenon, characterized by fragility of mass behavior and life cycles. Conformity of behavior is generated by a consumption externality, while the typical intertemporal aspects of fashions are the outcome of segmented communication: knowle...
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This paper develops a theoretical framework for studying conspicuous consumption. This is modeled as a device that signals the consumer's social status. Status is some function of the individual's rank in the wealth hierarchy. This approach makes it possible to distinguish between snob and conformist consumer behavior. It is shown that when behavio...
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This paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotic dynamics for the devaluation expectations. We then propose an...
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We develop a model of status seeking in the presence of incomplete information and derive its implications for aggregate savings. Status seeking endogenously takes the form of conspicuous consumption. Its impact on savings depends on the scheduling of the contests for status over the life cycle. If individuals engage in conspicuous consumption when...
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Full-text available
This paper studies the role of unemployment in sterling's interwar experience. According to most narrative accounts, the proximate cause of the 1931 sterling crisis was a high and rising unemployment rate that placed pressure on British governments to pursue reflationary policies. We present a model which, in the spirit of the second generation' ap...
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This paper attempts to assess whether money can generate persistent economic fluctuations in dynamic general equilibrium models of the business cycle. We show that a small nominal friction in the goods market can make the response of output to monetary shocks large and persistent if it is amplified by real-wage rigidity in the labor market. We also...
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This paper studies the respective roles of the fundamentals and self-fulfilling speculation in currency crises. We first present a model of a fixed exchange rate system in which self-fulfilling speculation can arise following a bifurcation in the fundamentals. We then estimate the model in the case of the 1992–3 crisis of the French franc, and find...

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