Countercyclical Fiscal Policy, A Review of the Literature, Empirical Evidence and some Policy Proposals

stabilization, fiscal policy, capital flows, taxation

Market Discipline in Depositors’ Behavior and the Role of Risk-Rating Agencies: The Case of Chile

This study re-examines the evidence of market discipline in depositors’ behavior in the Chilean banking system, and analyzes the role of risk-rating agencies in complementing the information available to the market for evaluating bank solvency in Chile. With that in mind, we use data on deposits by size and institutional sector, effective interest rates on time deposits, a set of indicators that reflect the solvency of banks, and the risk rates of bank-issued fixed-income securities. Our results for Chile show that the empirical evidence about market discipline tends to be stronger and more robust when measured by the interest rate, as opposed to the rate of growth of time deposits. Our empirical assessment regarding the role of risk-rating agencies in disseminating relevant information that promotes market discipline is inconclusive. On the one hand, we find some evidence in favor of the hypothesis that the analytical contribution of these entities cannot be replaced by more direct indicators of bank solvency, which can be constructed with publically available information. On the other, we find other evidence that tend to weaken the previous hypothesis.

Capital Account Regulations and Macroeconomic Policy: Two Latin American Experiences

A resurgence of perceived opportunities by international investors has resulted in a new policy debate regarding the regulation of capital flows into certain South American countries. The integrationist camp defends totally open markets on the grounds that they result in a more efficient financial sector, greater asset diversification, and other benefits, while those in the isolationist camp support regulating capital inflows on the grounds that they generate macroeconomic instability and reduce the effectiveness of monetary policy. Noting that there are both costs and benefits associated with external capital flows, Guillermo Le Fort V., international director of the Central Bank of Chile, and Carlos Budnevich L., manager of financial analysis for the Central Bank of Chile, argue against both extremes, opting instead for a policy falling somewhere between the two. An intermediate policy of gradual and limited financial integration has been adopted in Chile and Colombia, two countries experiencing capital account surpluses. Le Fort and Budnevich examine the macroeconomic and financial results during the 1990s of the countries' policies regarding external capital accounts. In the early 1980s the Chilean financial system was wracked by insolvency that was deepened by recession. By 1983 volatile international capital inflows, resulting from the removal of restrictions to such flows, had precipated a widespread crisis. Having weathered this experience, Chile's financial institutions are cautious and concerned about maintaining moderate current account deficits. Policies to accomplish this goal include a targeted range for the medium-term current account deficit, foreign exchange market and capital account regulations, and a limit to the degree of integration of external and domestic markets. The authors note, however, that the reserve requirement cannot stem currency appreciation, which has averaged about 4 percent per year. They also conclude that capital account regulations have not impaired the financial system. "In fact, despite the regulations, the financial system and the capital markets have achieved very significant development in Chile over the past few years."

Scale and Scope Economies in the Chilean Banking System

This paper estimates a cost function for the Chilean banking system for a sample comprising all banks operating during 1989-2000. We found evidence of increasing returns to scale for small banks but not for larger banks. We did not find support for the popular belief that a financial supermarket increases efficiency, as we found no evidence of economies of scope in banking. The strength of our results relies on the specification of the cost function and their robustness to different definitions of the basket of financial services and other robustness tests. Finally, among other results, the paper provides evidence that banks that held subordinated debt with the Central Bank (due to rescue measures adopted in the wake of the banking crisis of the early eighties) raised their efficiency levels after the latter debt with the Central Bank was extinguished.