Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

Emerging economies with inflation targets (IT) face a dilemma between fulflling the theoretical conditions of "strict IT", which implies a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with forex interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, forex interventions in some IT countries have been more effective in reducing volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers.inflation targeting; exchange rate volatility; foreign exchange interventions; emerging economies

Fiscal rules in Latin America : a survey

This survey first discusses general characteristics, advantages and disadvantages of different types of fiscal rules. The criterion for classifying them is based on the emphasis given: longterm sustainability (reducing the deficit bias and controlling the growth in public debt) or reducing the procyclicality of fiscal policy (short-term stabilisation). It then reviews the experience with fiscal rules in seven Latin American countries, as their use has become more widespread since the early 2000s. Only Chile targets cyclically adjusted indicators, although Colombia is also taking that approach and the Mexican rule offers some stabilisation properties. Argentina, Brazil and Peru apply numerical rules targeting the overall/primary public balance and/or public spending. The Venezuelan framework has, in practice, been diluted after its introduction. The coverage of the rule depends on the degree of decentralisation of fiscal systems, with many countries including debt limits on the subnational governments as a key tool to face the common pool problem that emerges in federal states. All in all, fiscal rules in Latin America have been more effective in helping to strengthen long-term sustainability than in responding to shocks, as proved by the recent financial crisis. Fiscal rules have had to be fine-tuned over the years and a “second generation” of fiscal rules – combining the sustainability objective with greater flexibility to accommodate economic shocks – appears to be necessary in order to increase their efficiencyEste documento analiza, en primer lugar, las características generales, las ventajas y las desventajas de los diferentes tipos de reglas fiscales. El criterio seguido para clasificar las reglas fiscales es el énfasis que ponen en distintos posibles objetivos de aquellas: la sostenibilidad a largo plazo (reducir el sesgo hacia el déficit público y controlar el crecimiento de la deuda pública) o la reducción de la prociclicidad de la política fiscal (la estabilización a corto plazo). Esta clasificación se utiliza para analizar la experiencia con reglas fiscales en siete países de América Latina, donde su uso se ha generalizado en la primera década del siglo XXI. De entre estos países, solo Chile ha seguido una regla fiscal centrada en indicadores fiscales ajustados por el ciclo económico y por los precios de las materias primas, aunque Colombia también ha adoptado recientemente este enfoque y la regla fiscal mexicana cuenta con algunas propiedades de estabilización. En Argentina, Brasil y Perú se aplican reglas numéricas que tienen como meta el saldo fiscal (ajustado o no por el pago de intereses) y/o la evolución del gasto público. La regla fiscal venezolana, en la práctica, se diluyó después de su introducción. La cobertura institucional de las reglas fiscales depende del grado de descentralización de los sistemas fiscales. Así, los países más descentralizados incluyen límites de endeudamiento a los Gobiernos subnacionales como una herramienta clave para afrontar el problema del common pool que surge en los Estados federales. Con todo, las reglas fiscales en América Latina han resultado más eficaces para ayudar a fortalecer la sostenibilidad a largo plazo de la deuda pública que para dar respuesta a los shocks que afectan a las economías, como lo demuestra la reciente crisis financiera. Aunque las reglas fiscales se han ido ajustando a lo largo de los años, una «segunda generació

WHAT MAKES BALANCE SHEET EFFECTS DETRIMENTAL FOR THE COUNTRY RISK PREMIUM?

This paper builds upon the empirical literature on the macroeconomic impact of real exchange rate depreciations for a sample of 27 emerging economies. We find that real exchange rate depreciations tend to increase a country’s risk premium. This effect is neither linear nor symmetric: large real exchange depreciations are much more detrimental and real appreciations do not seem to reduce the risk premium. We also show that the main channels for the real exchange rate to affect country risk are external and domestic balance sheet effects, stemming from the sudden increase in the stock of external or domestic dollar-denominated debt, respectively. This is particularly the case in the countries with the largest financial imperfections. Competitiveness is not an important enough factor to outweigh this negative effect. Finally, fixed exchange rate regimes tend to amplify balance sheet effects, beyond the extent of real depreciation. The data indicates that it could be due to a larger accumulation of external debt under fixed regimes.balance sheet effects, financial accelerator theories, exchange rate regime

BALANCE SHEET EFFECTS AND THE COUNTRY RISK PREMIUM: AN EMPIRICAL INVESTIGATION

This paper investigates empirically whether there is a negative relationship between a country’s risk premium and the balance sheet effect, as implied by recent theories emphasizing financial imperfections. We find evidence that balance sheet effects, stemming from the increase in the external debt service after an unexpected real depreciation, significantly raise the risk premium. We also show that the increase in the risk premium is not due to the debt service as such. While the result holds for the whole sample, we show that it is mainly driven by those countries with the largest financial imperfections, as argued by imperfect capital market theories. Particularly large real depreciations also seem to be disproportionately important, meaning that the balance sheet effects may be strongest at times of economic crisis, when large devaluations occur.balance sheet effects, country risk premium, sovereign spreads

What makes balance sheet effects detrimental for the country risk premium?

This paper builds upon the empirical literature on the macroeconomic impact of real exchange rate depreciations for a sample of 27 emerging economies. We find that real exchange rate depreciations tend to increase a country¿s risk premium. This effect is neither linear nor symmetric: large real exchange depreciations are much more detrimental and real appreciations do not seem to reduce the risk premium. We also show that the main channels for the real exchange rate to affect country risk are external and domestic balance sheet effects, stemming from the sudden increase in the stock of external or domestic dollar denominated debt, respectively. This is particularly the case in the countries with the largest financial imperfections. Competitiveness is not an important enough factor to outweigh this negative effect. Finally, fixed exchange rate regimes tend to amplify balance sheet effects, beyond the extent of real depreciations. The data indicates that it could be due to a larger accumulation of external debt under fixed regimes

Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

Las economías emergentes con metas de inflación (MI) se enfrentan a un dilema entre cumplir las condiciones teóricas de una «MI estricta», lo que implica un tipo de cambio totalmente flexible, o seguir una gestión más activa de su moneda («MI flexible»), lo que supone implementar intervenciones cambiarias para moderar su volatilidad. Utilizando un modelo de datos de panel para 37 países, mostramos que, a pesar de que las MI implican una mayor inestabilidad del tipo de cambio que regímenes alternativos, las intervenciones realizadas por algunos países con MI han sido más eficaces para reducir la volatilidad que aquellas de países sin MI. Este resultado puede justificar la utilización de «MI flexibles» por parte de los bancos centrale

The flatttening of the yield curve in the United States

Artículo de revistaThe yield curve for US government debt securities has flattened significantly since late 2016 and its slope, while positive, has fallen to levels not observed since before the global financial crisis. The inversion of the yield curve slope is considered, on occasions, as a leading indicator of future recessions. And this, given moreover that the current expansionary phase is proving more durable than previous upturns, has prompted debate on the implications of the recent flattening of the curve. However, as illustrated in this article, unlike previous episodes, in which the flattening of the curve was explained by the behaviour of the interest rates expected at different terms, at this current juncture it is warranted substantially by the compression of term premia. Against this background, the historical relationship between the yield curve and predicted recessions in the US economy might have altere

Reglas fiscales en América Latina

Artículo de revist

Federal unemployment insurance in the United States

Artículo de revistaUnemployment insurance in the United States is one of the fiscal risk-sharing mechanisms designed to mitigate the negative consequences of economic shocks. The system is based on complementary federal and state benefits, which behave very differently during normal and crisis periods. Thus, unemployment insurance is principally a state competence during normal periods, while the federal government assumes an active role in crisis periods, smoothing the negative impact of economic crises on household consumption and mitigating the heterogeneous effects across states. This is an element that distinguishes the United States from the European Monetary Union, which lacks automatic fiscal stabilising tools for the area as a wholeconsequently the costs arising from shocks have to be assumed by each country individually, which makes it difficult for the area to function homogeneousl

The challenges for monetary policy normalisation in the United States in the current economic situation

Artículo de revist