By Shihab Osman Malik and Faisal Bandar Alsaadi
This study examines the relationship between the fixed exchange rate regime, economic growth, and output volatility in oil-‐‑producing Saudi Arabia over the post-‐‑Bretton Woods period (1973–2016). We assess the implications of the current exchange rate regime on macroeconomic and growth performance, and evaluate its sustainability in the context of oil-‐‑dependency and market dynamics. We develop and employ a theoretical framework and empirical specification based on previous literature to find that for Saudi Arabia, the fix is associated with faster growth and lower output volatility. We believe the result is primarily driven by the credibility of the fix in terms of establishing a strong nominal anchor and monetary policy framework.
Advisor: Lori Leachman | JEL Codes: E42, F31, F36, F41, O53
By Junaid Arefeen
The recent onset of the sovereign debt crisis in the Eurozone has brought the viabil-ity of the Eurozone as a currency area into question. The unsustainable debt and deﬁcit balances accumulated by several Eurozone nations since the adoption of the common currency in 1999, and the consequent incidence of high levels of sovereign default risk in the euro-area, indicate that the ﬁscal convergence criteria employed by the European Central Bank to monitor the ﬁscal discipline and sustainability of its members have been largely ine↵ectual. This paper draws upon the theory of optimum currency areas, and proposes a set of business cycle convergence criteria that can be employed as an alternate means to minimize the risk of ﬁscal imbalances and sovereign default. Economic theory suggests that a currency union with convergent business cycles will be insulated from asymmetric shocks, removing the need for countries to rely wholly on their ﬁscal policies when dealing with negative shocks (as would be the case in a currency union with non-synchronous countries su↵ering from negative asymmetric shocks). Therefore, as the risk of ﬁscal imbalances is minimized, a currency union with synchronous business cycles is expected to have low incidences of sovereign default risk. This paper tests this economic intuition empirically, and employs a multivariable panel regression model to determine the relationship between business cycle convergence and sovereign default risk (proxied using sovereign yield spreads). The regressions reveal that the degree of business cycle convergence is one of the main determinants of yield di↵erentials, and the relationship between the two is negative (as expected). The consistency of the results to numerous robustness checks provide a strong case for substituting the current ﬁscal convergence criteria with measures that assess the degree of business cycle convergence.
Advisor: Andrea Lanteri, Cosmin Ilut | JEL Codes: E32, E43, F34, F44, F45 | Tagged: Cycle Convergence, Optimum Currency Area, Sovereign Default Risk
Understanding the Argentine Peso’s Devaluation in 2014 —Analysis on Argentina’s Fiscal Sustainability from 1993 to 2013
By Feng Pan
This research analyzes the fiscal sustainability of Argentina from 1993 to 2013. Specifically, it explains the peso devaluation in early 2014 and suggests that it is primarily due to the fundamental problems in Argentina’s economy. This paper highlights Argentina’s inability to enhance its fiscal conditions and suggests possible future economic developments in Argentina. This paper concludes that there is high
chance of hyperinflation, debt default, and the eventual dissolution of the managed exchange rate regime in Argentina in the future.
Advisor: Alison Hagy, Craig Burnside | JEL Codes: E43, E44, E52, E58, E62, F31 | Tagged: Argentine Peso, Exchange Rate, Fiscal Sustainability
By Rajlakshmi De
Understanding the role of foreign aid in poverty alleviation is one of the central inquiries for development economics. To augment past cross-country studies and randomized evaluations, this project data from Malawi is used in combination with multiple rounds of living standards data to predict the allocation and impact of health aid, water aid, and education aid. Both instrumentation and propensity score matching methods are used.
Advisor: Kent Kimbrough, Lori Leachman | JEL Codes: F35, I15, I25, I32, O12 | Tagged: