MISALIGNMENT, LIABILITIES DOLLARIZATION AND EXCHANGE RATE ADJUSTMENT IN LATIN AMERICA

Exchange rates in Latin America display a large volatility, constitute a central element of the policy strategies and their evolution have an important impact on financial stability due to the dollarization of liabilities which most countries exhibit. However, assessments on equilibrium exchange rates are scarce in the region. This paper aims at both filling this gap and analysing the impact of the adjustment of the exchange rates to equilibrium on financial stability. Building on the methodology of Alberola et al (1999,2002), we show that the stock of net foreign assets and the evolution of productivity are the fundamentals underlying the behavior of the real exchange rate. Using an unobserved components methodology in a cointegration framework, a time-varying equilibrium real exchange rate is derived, and deviations from this equilibrium provide an estimate of the degree of multilateral misalignment. The results uncover among other things the large overvaluation of the Argentinean peso in 2001, which was only partially explained by the estimated dollar overvaluation. The adjustment of exchange rates in 2002 corrected this and, to a lesser extent, other misalignments. The final part of the paper addresses the impact of liability dollarization on the adjustment of exchange rates. It is argued that the real exchange rate will tend to overshoot its equilibrium level, due to the need to foster higher current account surplus in the aftermath of depreciation to make up for to the increase in liabilities. An adjustment to account for this effect is performed on the previous results. This overshooting, when coupled with sudden stops of capitals, may help explaining the higher volatility of real exchange rates in the region.Equilibrium Exchange Rates, Liabilities dollarization, Overshooting

Forecasting the European carbon market

In an effort to meet its obligations under the Kyoto Protocol, in 2005 the European Union introduced a cap-and-trade scheme where mandated installations are allocated permits to emit CO2. Financial markets have developed that allow companies to trade these carbon permits. For the EU to achieve reductions in CO2 emissions at a minimum cost, it is necessary that companies make appropriate investments and policymakers design optimal policies. In an effort to clarify the workings of the carbon market, several recent papers have attempted to statistically model it. However, the European carbon market (EU ETS) has many institutional features that potentially impact on daily carbon prices (and associated …nancial futures). As a consequence, the carbon market has properties that are quite di¤erent from conventional financial assets traded in mature markets. In this paper, we use dynamic model averaging (DMA) in order to forecast in this newly-developing market. DMA is a recently-developed statistical method which has three advantages over conventional approaches. First, it allows the coefficients on the predictors in a forecasting model to change over time. Second, it allows for the entire forecasting model to change over time. Third, it surmounts statistical problems which arise from the large number of potential predictors that can explain carbon prices. Our empirical results indicate that there are both important policy and statistical benefits with our approach. Statistically, we present strong evidence that there is substantial turbulence and change in the EU ETS market, and that DMA can model these features and forecast accurately compared to conventional approaches. From a policy perspective, we discuss the relative and changing role of different price drivers in the EU ETS. Finally, we document the forecast performance of DMA and discuss how this relates to the efficiency and maturity of this market

Banking and Borrowing in the EU ETS: An Econometric Appraisal of the 2005-2007 Intertemporal Market

This article critically examines the EU ETS intertemporal market during its Phase I (2005-2007). We test the Hotelling rule as a key element of a competitive equilibrium to validate whether allowance prices rise at the same rate as the interest rate. Including readily observable characteristics of the EU ETS such as the presence of one endogenous structural break and the influence of other energy markets shocks, we argue the inter-period ban on banking undermines the ability of the EU ETS to provide efficient price signalling. We also find a significant relationship between allowance price changes and the expected scarcity of allowances approximated by the Ellerman-Parsons ratio. Finally, our results show evidence of institutional learning by market participants.Emissions trading; Banking; EU ETS; Hotelling rule; Ellerman-Parsons Ratio

Phosphatidylinositol 3-kinase improves the efficiency of positive selection

We have generated transgenic mice expressing the amino-terminal fragment of the phosphatidylinositol 3-kinase (PI3K) catalytic subunit (p110(ABD)) in thymocytes. Expression of P110(ABD) results in constitutive activation of PI3K and in significant increases in the numbers of mature, single-positive thymocytes. We previously reported that the increase in mature cells was in part due to a defect in thymic emigration. In this study we identify another component to this phenotype. Expression of p110(ABD) results in an enhancement of positive selection, without alterations in thymocyte lifespan or negative selection. Since PI3K can affect activation of Btk, which in turn potentiates calcium fluxes, during B cell development, our results suggest that PI3K could play a role in the regulation of Itk kinases in T cells, and that both cell types share a common signaling network to modulate calcium responses downstream of their antigen receptor

Tango with the Gringo: the hard peg and real misalignment in Argentina

Between 1990 and 2001 the Argentine peso appreciated by 80 percent in real terms, and its overvaluation has been singled out as one of the main suspects in the debate on the causes of the Argentina collapse of late 2001. This paper assesses the degree of real misalignment in Argentina over the Convertibility period using a model in which the equilibrium real exchange rate is defined as the value consistent with (i) a balance of payments position where any current account imbalance is financed by a sustainable flow of international capital (external equilibrium), and (ii) traded/nontraded sector productivity differentials (internal equilibrium). Empirical implementation of the model suggests that the initial real appreciation of the peso, between 1990 and 1993, was consistent with the productivity increases that Argentina enjoyed following the stabilization of the economy after the hyperinflation of the late 1980s. But after 1996 a widening gap opened between the observed real exchange rate and that consistent with a sustainable net foreign asset position. Our estimates indicate that in 2001 the peso was overvalued by over 50 percent. The model allows us to assess how much of the overvaluation resulted from Argentina's inadequate choice of anchor currency and how much from a divergence of fundamentals between the U.S. and Argentina, ultimately due to the maintenance of policies inconsistent with the peg. We find that both factors played a role in the overvaluation accumulated between 1977 and 2001 that preceded the collapse of the Convertibility regime.Fiscal&Monetary Policy,ICT Policy and Strategies,Environmental Economics&Policies,Payment Systems&Infrastructure,Economic Theory&Research,Economic Stabilization,Macroeconomic Management,Economic Theory&Research,Environmental Economics&Policies,Fiscal&Monetary Policy

The EU ETS: CO2 prices drivers during the learning experience (2005-2007)

This chapter identifies the main price drivers of European Union Allowances (EUAs), valid for compliance under the European Union Emissions Trading Scheme (EU ETS) created in 2005 to regulate CO2 emissions of more than 10,000 high carbon-intensive installations across Member States. Based on key design features of the EU ETS, this chapter develops carbon pricing strategies based on allowances supply and demand, institutional decisions, and the influence of other energy markets and weather conditions. Finally, we discuss the likely effects on economic growth on CO2 emissions and carbon prices as a by product. The discussions developed in this chapter focus on Phase I (2005-2007) of the EU ETS, which may described as the “pilot” period for the future development of this environmental market scheme.EU ETS; Cap-and-Trade Program; Climate Change Policy; CO2 Price; Energy Markets; Weather Influences; Institutional Influences; Energy Policy

SAY YOU FIX, ENJOY AND RELAX THE DELETERIOUS EFFECT OF PEG ANNOUNCEMENTS ON FISCAL DISCIPLINE

This paper explores the impact of actual exchange rate regimes on fiscal discipline, which we purportedly link to the effect of announcing the peg and to the availability of external funds. To stress this point, the focus of the analysis is emerging markets spanning from the beginning of the nineties, given the importance of financial integration in the last fifteen years and the centrality of external financing for these countries. We empirically show that announcing the pegs has deleterious effects on fiscal discipline, while ‘de facto’ pegs which have not been announced deliver superior fiscal outcomes. The evidence suggests that this is due to the initial positive credibility shock of the announcement, which allows for easier and less costly access to the financing of fiscal deficits in emerging countries.exchange rate regimes, fiscal discipline

European carbon prices fundamentals in 2005-2007: the effects of energy markets, temperatures and sectorial production.

This article aims at characterizing the daily price fundamentals of European Union Allowances (EUAs) traded since 2005 as part of the Emissions Trading Scheme (ETS). First, the presence of two structural changes on April, 2006 following the disclosure of 2005 veri?ed emissions and on October, 2006 following the European Commission announcement of stricter Phase II allocation allow to isolate distinct fundamentals evolv- ing overtime. The results extend previous literature by showing that spot prices react not only to other energy markets and temperatures, but also to economic activity within the main sectors covered by the EU ETS such as proxied by sectoral production indices. Besides, the sub-period decomposition of the pilot phase gives a better grasp of institutional and market events that drive allowance price changes.Carbon Emissions Trading; EU ETS; Market Price Fundamentals;

Lula, Argentina y el futuro de las reformas en América Latina

Este análisis pretende, a partir de la comparación entre Brasil y Argentina, justificar las razones de sus trayectorias divergentes con el fin de evaluar el futuro de las reformas en América Latina y sus posibles alternativas. La respuesta de Brasil y Argentina a sus recientes crisis ha sido diametralmente opuesta. Mientras que en Argentina se ha producido una involución de las reformas que retrotrae a modelos de desarrollo superados, Brasil ha apostado por la disciplina económica y el impulso de las reformas, a pesar de la impopularidad de esta estrategia, con el fin de recuperar la confianza de los mercados internacionales. Tras el pobre desempeño económico de los últimos años, el modelo argentino de aislamiento de los mercados internacionales puede resultar atractivo, pero América Latina depende del capital exterior para financiar su crecimiento. Por ello, del éxito de Brasil en su estrategia dependen en buena medida que éste y otros países no sigan la deriva argentina, y, en definitiva, las posibilidades de lograr un crecimiento sostenido en la región