Trade Openness And Real Exchange Rate Volatility: Panel Data Evidence

A recent strand of the literature, the so-called “New Open Economy Macroeconomics”, argues that nonmonetary factors have gained importance in explaining exchange rate volatility. In this context, it has been suggested the inclusion of shocks to productivity, terms of trade, and government spending, among others. The goal of the present paper is to explain the real exchange rate volatility by positing a structural relationship between volatility and its determinants. To perform our task we collected information on exchange rates, output, terms of trade, government spending, monetary aggregates, exchange rate regimes, trade and financial openness for a sample of industrial and developing countries for the 1974-2003 period. We will use GMM-IV methods for panel data to test the following hypotheses: (a) real exchange rate (RER) fluctuations are less volatile in more open countries, and (b) trade openness helps attenuate the impact of highly volatile shocks to fundamentals on the volatility of RER fluctuations.

Do Free Trade Agreements Enhance the Transmission of Shocks Across Countries?.

World Trade has experienced an increased integration over the last 15 years. More than half of world trade currently takes place under actual or future trading blocks. Our main goal is to test whether free trade or regional integration agreements (FTA or RIA, respectively) have strengthened the trade channel of international transmission of business cycles. With annual information for 147 countries over the 1960-99 period, we conduct our analysis for a panel data of country pairs (33676 country pairs), and we find the following results: (i) Higher trade intensity between two countries generates a stronger cycle synchronization. (ii) This impact is even stronger among country pairs with a free trade agreement. (iii) The impact of trade intensity on cycle synchronization is stronger among industrial than among developing country pairs. (iv) The impact within each group of country pairs is higher for the ones engaged in FTAs. (v) Economic effects of higher trade intensity in the presence of FTAs are stronger during the 1990s.

Real Exchange Rates in the Long and Short Run: A Panel Co-Integration Approach

The empirical literature on long-run real exchange rate behavior has shown mixed evidence due to problems involving the lack of long time series data and the low power of time-series unit root tests in small samples. The main objective of the present paper is to tackle these empirical issues by applying the recently developed panel cointegration techniques to the long-run real exchange rate equation implied by our model. Using annual data for 67 countries over the 1966-97, we find that the cointegrating relationship between the real exchange rate, the ratio of net foreign assets to GDP, the relative Home to Foreign productivity of the traded and non-traded sector, and the terms of trade is valid in the long run. This result holds for all sub-sample of countries (whether they are classified by income per capita or capital controls). Furthermore, our coefficient estimates are consistent with the theoretical values implied by the calibrated parameters of preferences and technology in Stockman and Tesar (1995). Robustness checks reveal that: (i) “pooling” the data to obtain a common long-run equilibrium relationship across countries is valid for the samples of countries with high income and low capital controls, (ii) the oil shock crisis in 1973 represents a structural change for these sub-samples. Finally, deviations from the equilibrium are large and persistent with half-life estimates (between 2.8 and 5) consistent with the consensus interval of 2.5-5 found in the literature (Murray and Papell, 2002).

Characterizing the Business Cycles of Emerging Economies

We document the properties of business cycles using the dating algorithm by Harding andPagan (2002) on a quarterly database for 58 countries —21 industrial countries and 37 emerging market economies (EMEs)— from 1970q1 to 2007q4. We find that: (a) recessions are deeper, steeper and costlier among EMEs (especially, in East Asia and Latin America) and that recoveries are swifter and stronger. (b) Recessions have become less costly during the globalization period (1990-2007) than before (1970-89) for industrial countries and EMEs. (c) The main characteristics of downturns are amplified when associated to crisis episodes. (d) The time path of macroeconomic indicators around peaks in real GDP is more volatile in downturns associated with crisis compared to other downturns. (e) Financial cycles (credit and asset prices) tend to precede real output cycles. (f) Credit and stock prices are strongly pro-cyclical while real exchange rates, capital flows and terms of trade tend to be a-cyclical. Finally, an exploratory analysis on the conditional correlates of the cost of recessions shows that: (i) adverse terms of trade shocks raise the cost of recessions in countries with a more open trade regime and deeper financial markets. (ii) Recessions tend to be deeper if they coincide with a sudden stop, but the effect is smaller in countries with deeper domestic credit markets. (iii) Floating exchange rate regimes appear to act as shock absorbers.Business cycles, peaks and troughs, emerging markets

Volumen y calidad de la infraestructura y la distribución del ingreso: investigación empírica

(Disponible en idioma inglés únicamente) Ofrecemos elementos de juicio sobre el vínculo entre el desarrollo de la infraestructura y la distribución del ingreso durante el período de 1960 a 1995. Para ello empleamos varias variables sustitutivas, tales como vías de comunicación, ferrocarriles, telecomunicaciones y mediciones de energía. El enfoque es amplio, ya que se aplican métodos de varios países y de panel. En el último caso, aplicamos métodos de panel dinámico GMM, para poder minimizar los problemas de endogeneidad. Tanto la cantidad de infraestructura como la calidad de la misma guardan una vinculación negativa con la desigualdad del ingreso. El vínculo cuantitativo tiende a ser más fuerte en países en desarrollo que el vínculo cualitativo. Estos hallazgos se verifican cuando se emplean otros métodos econométricos y con la mayoría de las mediciones de infraestructura. .

¿Fomentan las democracias conductas de procura de rentas?

(Disponible en idioma inglés únicamente) Empleando datos históricos institucionales objetivos, ponemos a prueba el vínculo existente entre el alcance, la duración y la transparencia en las democracias y las conductas de procura de rentas, empleando enfoques de series temporales y datos de panel. En este trabajo nos concentramos en el caso de Uruguay, un país étnicamente homogéneo. Obtuvimos tres resultados principales. En primer lugar, los regímenes democráticos guardan una vinculación negativa con las acciones de procura de rentas. En segundo lugar, mientras más tiempo haya durado una democracia, menos conductas de procura de rentas exhibirá la sociedad. En tercer lugar, la legislación promulgada con mayor transparencia guarda una correlación negativa con conductas de procura de rentas. Nuestros resultados son valederos con el uso de diversos métodos econométricos y con las pruebas de validez básica, y se corresponden con las teorías imperantes.

The Effects of Infrastructure Development on Growth and Income Distribution

This paper provides an empirical evaluation of the impact of infrastructure development on economic growth and income distribution using a large panel data set encompassing over 100 countries and spanning the years 1960-2000. The empirical strategy involves the estimation of simple equations for GDP growth and conventional inequality measures, augmented to include among the regressors infrastructure quantity and quality indicators in addition to standard controls. To account for the potential endogeneity of infrastructure (as well as that of other regressors), we use a variety of GMM estimators based on both internal and external instruments, and report results using both disaggregated and synthetic measures of infrastructure quantity and quality. The two robust results are: (i) growth is positively affected by the stock of infrastructure assets, and (ii) income inequality declines with higher infrastructure quantity and quality. A variety of specification tests suggest that these results do capture the causal impact of the exogenous component of infrastructure quantity and quality on growth and inequality. These two results combined suggest that infrastructure development can be highly effective to combat poverty. Furthermore, illustrative simulations for Latin American countries suggest that these impacts are economically quite significant, and highlight the growth acceleration and inequality reduction that would result from increased availability and quality of infrastructure.Infrastructure, Growth, Income Inequality

Financial Frictions and Real Devaluations

In this paper I study the effects of real exchange rate devaluations on output performance using a sample of large devaluation episodes for a group of emerging and developed countries. I find that balance sheet effects, captured by the interaction between the real exchange rate devaluation and the level of external indebtedness of the country, have a significant and negative impact on output. Nevertheless, there is also evidence of a positive effect of the real devaluation associated to the traditional expansionary effect. For countries with large foreign-denominated external debt, the combined effect of the real exchange rate depreciation is likely to generate significant output losses in the short-run. However, in the medium term, the expansionary effect of the real devaluation tends to dominate the balance sheet effect, which implies a positive effect on output in the medium term. Finally, countries with deeper financial market experience lower output losses following a devaluation.

Trends in Infrastructure in Latin America, 1980-2001

There is widespread concern across Latin America that the provision of infrastructure services has suffered as a consequence of the retrenchment of the public sector and the insufficient response of the private sector to the opening up of infrastructure industries to private participation in most countries. This paper documents the recent trends in infrastructure stocks and infrastructure investment in major Latin American economies. Using an updated dataset constructed for this task, the paper describes the evolution of the quantity and quality of infrastructure assets – power, transport, telecommunications– as well as the investment expenditures of the public and private sectors. The paper finds that Latin America lags behind the international norm in terms of infrastructure quantity and quality, and there is little evidence that the gap may be closing – except in the telecommunications sector. Furthermore, overall infrastructure investment has fallen, as a combined result of the retrenchment of public investment and the limited response of the private sector, which has been mostly confined to the telecommunications industry. However, there is considerable disparity across countries. On the whole the data show that the countries most successful in attracting large volumes of private investment (Chile, Colombia, Bolivia) are precisely those where public investment has remained high.

Purchasing Power Parity in an Emerging Market Economy: A Long-Span Study for Chile.

Recent research has found evidence that supports the purchasing power parity (PPP) condition in developed countries using very long-span data, while evidence for developing countries is almost nonexistent. This paper tries to fulfill this void by testing the validity of PPP as a long run equilibrium condition for Chile, using data, since its birth as a nation, developed by Díaz, Lüders and Wagner (2003). A battery of unit-root and cointegration tests is applied. We found evidence in favor of PPP. Results are robust to changes in the domestic price index, to changes in the sample period, and to the econometric technique applied.