International Finance

International Finance
Macroeconomics
Game Theory
Microeconomics

(Oral) May 2002, International Economics (with distinction) and Macroeconomics
(Written) May 2001, Microeconomics (with distinction) and Macroeconomics (with distinction)

Expectations and crises: theory, empirics and policy

Professor Stephen Morris
Professor Galina Hale
Professor William Brainard
Professor Giancarlo Corsetti

May 2004

M.Phil., Economics, Yale University, May 2003
M.A., Economics, Yale University, December 2001
M.S., Economics, University of São Paulo, June 2000
B.A., Industrial Engeneering, University of São Paulo, December 1994

Carl Anderson Prize Fellowship in Economics, Yale University, 2004
Dissertation Fellowship, Yale University, 2003 (declined)
Sasakawa Fund Fellowship, Yale University, 2002-2003
Yale University Graduate Fellowship, 2000-2004
Summer Fellowship, Yale University, 2001 and 2002
Yale Center for the Studies of Globalization Funding, Summer 2003
CNPq fellowship for the Master course in Economics, 1998-2000

Instructor (undergraduate courses)
     Game Theory, Yale University, Summer 2002
     Introductory Econometrics, University of São Paulo, Spring 2000
     Introductory Macroeconomics, University of São Paulo, Fall 1999
Teaching Assistant
     (Undergraduate) International Finance, Yale University, Fall 2003
     (Graduate) Econometrics, University of São Paulo, Spring 2000
Tutor of Calculus, Yale University, Fall 2002

Research Assistant
     Professor Stephen Morris, Yale University, 2002-2003
     Professors Dino Gerardi and Leeat Yariv, Yale University, 2002

CCF Brasil Asset Management, Trader, 1996-1997
     Trader of exchange rate derivatives (future contracts and options) and interest rate.
Banco Sudameris Brasil, Trader, 1996
     Trader of interest rate (government bonds and derivatives).
Banco Norchem (Brasil), Back-office analyst, 1995

"Market expectations and currency crises: theory and empirics," mimeo [job market paper].

"Dynamics of currency crises with asset market frictions," mimeo.

(With Stephen Morris) "Risk and wealth in a model of self-fulfilling currency attacks," Cowles Foundation Discussion Paper #1433.

(With Giancarlo Corsetti and Nouriel Roubini) "International lending of last resort and moral hazard: a model of IMF’s catalytic finance," NBER Working Paper #10125.

(With Marcos Eugênio da Silva) "The possibility of exchange rate jumps implicit in option prices" (in portuguese), Revista Brasileira de Economia 56, 2002.

VI Workshop in International Economics at Universidad T. De Tella, 2003
NBER International Finance Meeting, Fall 2003
Stern School at New York University, International Economics Seminar, 2003
PUC-Rio, Brazil, Seminar, 2003
LACEA (Latin American and Caribbean Economic Association) meeting, 2002
Latin American meeting of the Econometric Society, 2002

Expectations about what others will do are crucial in currency and financial crises: in many situations, if everybody is expected to attack a currency, it is optimal to attack it, but if everybody is expected to refrain from doing so, that is the optimal choice. A literature starting with Morris and Shin (1998) applies theoretical developments in game theory to such macroeconomic problems in order to get models with endogenous expectations and a unique equilibrium.

My dissertation contributes to this literature in theoretical, empirical and policy-oriented aspects: (i) it studies the dynamics of currency crises; (ii) it generates testable predictions on expectations and performs empirical work; (iii) it studies how risk aversion and wealth affect agents’ decisions; and (iv) it studies the relation between an international lender of last resort and moral hazard.

The first essay presents a dynamic model of self-fulfilling currency crises with asset market frictions. Agents face the trade-off between the risk of a devaluation and the positive interest rate differential. Expectations about what others will do play a key role and are endogenously determined. The model has a unique threshold equilibrium. Asset market frictions have important indirect effects: contrary to a non-friction environment, large currency depreciations may occur and an attack that quickly forces the government to abandon a pegged regime may take considerable time to be triggered. I analyze the effects on agents' behavior of: interest rates, frictions, macroeconomic prospects and government's commitment to the peg. The model generates testable predictions on agents’ expectations.

Although expectations are a key factor in currency crises, research in the field has not aimed at generating testable implications on expectations and confronting them with data. The second essay takes this step. Using data on exchange rate options, it identifies the probability of a currency devaluation and its expected magnitude, and thus characterizes market participants’ expectations in the period leading up to the end of the Brazilian pegged exchange rate regime (from January-1997 to January-1999). The probability of a currency devaluation is very volatile and mostly affected by the Asian and Russian crises. Such episodes also lead to exchange rate depreciations in other Latin American countries, which suggests a link between the probability of the end of the peg and the "shadow exchange rate". The expected magnitude of a devaluation, conditional on its occurrence, is stable and virtually unrelated to the risk of a crisis. Those findings are consistent with key implications of my dynamic model presented in the first essay.

The third essay (joint work with Stephen Morris) analyzes the effects of risk aversion, wealth and portfolio on the behavior of investors in a "global games" model of currency crises with continuous action choices. The model generates a rich set of striking theoretical predictions. For example, risk aversion makes currency crises significantly less likely; increased wealth makes crises more likely; and foreign direct investment (illiquid investments in the target currency) make crises more likely. While our analysis concerns currency crises, the modelling may be relevant to a wide array of macroeconomic issues. The analysis of risk and wealth is central to macro. Self-fulfilling beliefs and strategic complementarities play an important role in many macroeconomic settings. In the marriage of these two strands in this paper, risk, wealth and portfolio effects play a central role in determining how strategic complementarities translate into economic outcomes.

The fourth essay (joint work with Giancarlo Corsetti and Nouriel Roubini) presents an analytical framework to study how an international institution providing liquidity can help stabilize financial markets via coordination of agents' expectations, and influences the incentives faced by policy makers to undertake efficiency-enhancing reform. We show that the influence of such an institution is increasing in the size of its interventions and the precision of its information. More liquidity support and better information make agents more willing to roll over their debt and reduces the probability of a crisis. Different from the conventional view stressing debtor moral hazard, liquidity provision and good policies can be strategic complement: in some cases, domestic government will not undertake costly policies/reforms unless contingent liquidity assistance is provided.