The Demand for International Reserves and Monetary Equilibrium: Some Evidence From Developing Countries

Traditionally, two alternative explanations have been offered for the behavior of international reserves through time. On the one hand, the literature on the demand for international reserves postulates that reserves movements respond to discrepancies between desIred and actual reserves. Onthe other hand, according to the monetary approach to the balance of payments,changes in international reserves will be related to excess demands or excess supplies for money. The purpose of this paper is to empirically integrate these two basic explanations for international reserves movements. This is done by estimating a dynamic equation that explicitly allows reserves movements to reflect the monetary authority's excess demand for international reserves, and the public's excess demand for money. The results obtained,using a sample of 23 developing countries that maintained a fixed exchange rate during period 1965-1972, confirm the hypothesis that reserves movements respond both to monetary factors and to differences between actual and desired reserves. These results indicate that the exclusion of monetary considerations from the dynamic analysis of international reserves will yield biased coefficients.

Capital Mobility and Economic Performance: Are Emerging Economies Different?

In this paper I use a new cross-country data set to investigate the effects of capital mobility on economic growth. The new indicator of capital mobility used in this analysis is superior to previously used indexes in two respects: (1) It allows for intermediate situations, where a country's capital account is semi-open; and (2) it is available for two different periods in time. The results obtained suggest that, after controlling for other variables (including aggregate investment), countries with a more open capital account have outperformed countries that have restricted capital mobility. There is also evidence, however, suggesting that an open capital account positively affects growth only after a country has achieved a certain degree of economic development. This provides support to the view that there is an optimal sequencing for capital account liberalization.

Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability

In this paper I analyze whether restrictions to capital mobility reduce vulnerability to external shocks. More specifically, I ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows. I use three new indexes on the degree of international financial integration and a large multi-country data set for 1970-2004 to estimate a series of random-effect probit equations. I find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant, but very small. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction. The benefits of flexible rates increase as the degree of capital mobility increases. A higher current account deficit increases the probability of a capital flow contraction, while a higher ratio of FDI to GDP reduces that probability.

On the Interest Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Coutries

Contrary to what is suggested by the theory, most empirical studies on the demand for international reserves have failed to find a significant(negative) coefficient for the opportunity cost of holding reserves. In this paper it is argued that the reason for this is that the opportunity cost of holding international reserves has been measured incorrectly. In the empirical analysis presented in this paper the spread between the interest rate at which countries can borrow from abroad and LIBOR is used as a proxy for the net opportunity cost for holding reserves. The results obtained using data for a group of developing countries for 1976-198O show that when this net opportunity cost is used, the regression coefficient is significantly negative.

LDC's Foreign Borrowing and Default Risk: An Empirical Investigation

This paper investigates to what extent the international financial community has taken into account the risk characteristics of borrowing less developed countries when granting loans. Specifically, this study analyzes the determinants of the spread between the interest rate charged to a particular country and the London Interbank Borrowing Rate (LIBOR). The empirical analysis uses data on 727 public and publicly guarantied Eurodollar loans granted to 19 LDC's between 1976 and 1980. The results obtained show that lenders in Eurocredit markets have tended to take into account (some of) the risk characteristics of borrowers. In particular it was found that the level of the spread will be positively related to the debt/GNP ratio and the debt service ratio. On the other hand, the spread will benegatively related to the international reserves to GNP ratio and the propensity to invest. The results obtained also show that an increase in the foreign debt coupled with an equivalent increase in international reserves will tend to leave the perceived probability of default unaffected. The empirical analysis presented in this paper also indicates that as late as 1980 the international financial community had not perceived any significant increase in the probabilities of defaulting in the countries that eventually run into serious debt problems (i.e., Argentina, Brazil, Mexico).

Capital Flows, Foreign Direct Investment, and Debt-Equity Swaps in Developing Countries

One of the nest serious consequences of the debt crisis of 1982 has been the reduction in the accessibility to the world capital market for most developing countries. This situation has proved to be particularly serious for Latin American nations. At this juncture, a key question is how to improve the LLCs attractiveness for foreign capital flows. In this paper I explore the role of two potential sour of additional private capital inflows: increased direct foreign investment, and the debt-conversion mechanisms. The paper presents the results from an economic analysis of the determinants of the cross-country distribution of the OECD direct foreign investment (DFI) into the LDCs. Particular emphasis is given to assessing the relative importance of political variables of the recipient countries. The role of the debt-equity swaps as investments for reducing the extreme debt burden is also investigated, using the recent Chilean experience with these mechanisms as a case-study.

The Economics of Latin American Art: Creativity Patterns and Rates of Return

In this paper I use a large data set to analyze two aspects of the Latin American arts: (1) the nature of artistic creative process, and (2) Latin American art as an investment. I use data on auctions to understand the relation between artists' age and the value of their work. The analysis on creativity suggests that Latin American artists have followed very different patterns from that followed by U.S. artists. There is strong evidence suggesting that American artists born after 1920 did their best work at an earlier age than their older colleagues; exactly the opposite is true for the case of Latin America. Indeed, the results reported in this paper suggest that Latin American artists born after 1920 did their best work at a significantly older age than their colleagues from earlier cohorts. The analysis of art as an investment is based on the estimation of hedonic price indexes, and indicates that Latin American art has had a relatively high rate of return indeed much higher than that of other type of paintings. The results also indicate that returns on Latin American art have a very low degree of correlation that is, a very low beta relative to an international portfolio comprised of equities. This means that adding Latin American art will lower the overall risk of an international portfolio.