Theories of International Financial Institutions

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This is an exciting and timely project on international financial institutions. The project continues to develop a general theory of international financial institutions as a response to the imperfect ability of contracting agents to enforce international agreements. This theory provides new insights into such important issues as the international debt crisis. The investigator's past work in this and related areas is responsible for a number of valuable insights into international finance. He is capable of continuing this research. The limited incentive to enforce agreements with foreign agents constitutes a significant imperfection in world capital markets. Various institutions that are engaged in the international transfer of resources have emerged as a partial response to this imperfection. Banks, multinational corporations, and reserve and vehicle currencies are three examples. The contribution of this project comes in developing a general theory for these institutions. In particular, the reputations of these institutions may allow their equity owners (or central banks, in the case of reserve currencies) to enter into contracts that are self-enforcing. The reputation of a private bank, may allow it to make credible commitments to repay deposits and to penalize borrowers in default. A multinational corporation may be able to enter into long-term relationships with creditors and employees, and to provide a more efficient level of product quality than would be possible for an anonymous individual agent. Finally, some governments may more credibly promise to desist from imposing the inflation tax than others. The ability of particular national economies to support institutions capable of undertaking these tasks can be related to fundamental aspects of their dynamic behavior derived from intertemporal preferences and technologies.