Manuel Amador

Revised version

In this paper, we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions. The political economy frictions involve disagreement and political turnover, while the contracting friction is a lack of commitment regarding foreign debt and expropriation. We show that the political economy frictions induce growth dynamics in a limited-commitment environment that would otherwise move immediately to the steady state. In particular, greater political disagreement corresponds to a high tax rate on investment, which declines slowly over time, generating slow convergence to the steady state. While in the standard neoclassical growth model capital's share in production plays an important role in determining the speed of convergence, this parameter is replaced by political disagreement in our open economy reformulation. Moreover, while political frictions shorten the horizon of the government, the government may still pursue a path of tax rates in which the first best investment is achieved in the long run, although the transition may be slow. The model rationalizes why openness has different implications for growth depending on the political environment, why institutions such as respect for property rights evolve over time, why governments in open countries that grow rapidly tend to accumulate net foreign assets rather than liabilities, and why foreign aid may not affect growth. PDF.

Revised version

We study the diffusion of dispersed private information in a large economy. We assume that agents learn from the actions of others through two channels: a public channel, that represents learning from prices, and a private channel that represents learning from local interactions. We show that, when agents learn only from the public channel, an initial release of public information increases agents' total knowledge at all subsequent times and increases welfare. When a private learning channel is present, this result is reversed: more initial public information reduces agents asymptotic knowledge by an amount in order of log(t) units of precision. When agents are sufficiently patient, this reduces welfare. PDF. addendum.

Link to an older version in discrete time: old PDF.

PDF. Click here for the Python code (learn more about: Python+Economics).

We present an economy where agents are uncertain about two shocks: an aggregate productivity shock and an aggregate monetary shock. We show that when agents learn from the distribution of prices, a release of public information about either one of the two shocks (as a consequence, for example, of publishing an economic aggregate) can reduce the informational efficiency of the nominal price system and reduce welfare. In some cases, public information releases can create or eliminate multiple equilibria. PDF.

We characterize optimal taxation of foreign capital and optimal sovereign debt policy in a small open economy where the government cannot commit to policy and seeks to insure a risk averse domestic constituency. The expected tax on capital is shown to vary with the state of the economy, generating cyclicality in investment and debt in an environment where the first best capital stock is a constant. The government's lack of commitment induces a negative correlation between investment and the stock of government debt, a ``debt overhang'' effect. If the government discounts the future at a rate higher than the market, then capital oscillates indefinitely at a level strictly below the first best. Debt relief is never Pareto improving and cannot affect the long-run level of investment. Further, restricting the government to a balanced budget can eliminate the cyclical distortion of investment. PDF.

We study optimal fiscal policy in a small open economy characterized by two main frictions – incomplete financial markets and an inability of the government to commit to policy. Our main contribution is to show that in this environment, the best sustainable policy can amplify and prolong shocks to output. In particular, the government's credibility not to expropriate foreign capital endogenously varies with the state of the economy and may be "scarcest" during recessions. This increased threat of expropriation depresses investment and prolongs downturns. PDF.

This paper studies the optimal trade-off between commitment and flexibility in an intertemporal consumption/savings choice model. Individuals expect to receive relevant information regarding their own situation and tastes - generating a value for flexibility – but also expect to suffer from temptations with or without self-control – generating a value for commitment. The model combines the representations of preferences for flexibility introduced by Kreps (1979) with its recent antithesis for commitment proposed by Gul and Pesendorfer (2001), or alternatively, the hyperbolic discounting model. We set up and solve a mechanism design problem that optimizes over the set of consumption/saving options available to the individual each period. We characterize the conditions under which the solution takes a simple threshold form where minimum savings policies are optimal. We also show that in these cases the optimal commitment device can be implemented sequentially by allowing the agent to manage a portfolio of liquid and illiquid assets. PDF. Supplementary material.

Link to older NBER version.