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.

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).

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.

Removing the Constraints for Growth: Some Guidelines Some Guidelines

One strand of the empirical growth literature has cast doubt on the ability of the policy recommendations from Washington Consensus in enhancing growth. They argue that not only the design but also the policy mix has an important country-specific component (e.g. Hausmann, Rodrik and Velasco, 2005 and Zettelmeyer, 2006). We argue that the effectiveness of policies in promoting growth depends upon the set of structural policies implemented or already existing in the country. This paper empirically examines the role of policy complementarities in explaining growth and development from two dimensions. First, we construct a regression-based policy index in the same vein of Burnside and Dollar (2000), and we decompose this index afterwards into domestic and outward policy indices. Second, we evaluate the role of policy complementarities in the growth process by interacting our policy index with specific country characteristics that affect growth. We repeat the same exercise with the domestic and outward policy indices. We found that outward oriented and domestic policies are highly complements to each other. Specifically, the growth effects of trade and financial openness are enhanced when domestic policies are correct and, moreover, financial and trade openness are also complements. Regarding structural factors, we found that human capital increase growth as expected but it is neither a complement nor a substitute of economic policy. On the other hand institutions and financial depth are complements with economic policy. This could be an explanation why some countries have stabilized their economies but they are not growing faster, this could be due to low financial development or bad institutions. Finally, we should remark that in addition to the Fatas and Mihov (2006) result that policy volatility hurts growth, we find that a good policy environment could propel growth by mitigating the negative effect of aggregate volatility and, more specifically, the volatility of external shocks.Growth, volatility, economic policy