Evaluating the Chilean Government’s Debt Denomination

This paper proposes a framework to assess the convenience of the current public debt denomination of the Chilean Government, through its implications on fiscal budget risk management. A “Value at Risk” methodology is proposed to compare alternative denominations regarding currency and interest rate. If the correlations found between the main factors affecting the fiscal result are valued at their point estimates, the exercise suggests that swapping the current debt denomination in fixed interest payments to variable payments indexed to Libor or government bond rates would significantly reduce fiscal results' volatility. The results also point to reduce current currency denomination in US dollars towards a stronger position in Euros or British Pounds. A more statistically rigorous analysis that considers the volatility of estimated correlations, however, recommends taking previous conclusions with caution.

Labor Market Rigidity and Structural Shocks: An Open-Economy Approach for International Comparisons

We construct performance-based measures of labor market rigidity considering an open economy framework. We derive and estimate an indicator that depends exclusively on the theoretical measure of unions' bargaining power, with which we rank a sample of 18 heterogeneous countries. The indicator is obtained from unemployment persistence to structural shocks identified using a SVAR with longrun restrictions. We find that Korea, Hong Kong, Chile and the US are relatively flexible, while Germany, Sweden, Spain and Colombia are among the most rigid labor markets. Our index shows high correlation with labor market performance and institutional regulation variables, mainly associated to union representation.

Denomination of the Debt of the Chilean Government: A Risk Management Perspective

This paper proposes a framework to assess the convenience of the current public debt denomination of the Chilean Government, through its implications on fiscal budget risk management. A “Value at Risk” methodology is proposed to compare alternative denominations regarding currency and interest rate. This methodology computes the implicit volatility of the budget’s result considering both the variance of individual accounts, as well as their respective covariance, and permits to compare quantitatively the relative risk of different debt denominations. The exercise suggests that changing the current debt denomination in fixed interest payments to variable payments indexed to Libor or government bond rates would significantly reduce the volatility of fiscal results. If more recent correlations are considered in the exercise, the results also suggest reducing current currency denomination in US dollars towards a stronger position in euros. An additional analysis that considers the volatility of estimated correlations, however, recommends taking previous conclusions with caution.

El Embriague Financiero: Una Visión Alternativa de Amplificación Bancaria

This paper develops a model that explains the amplification of negative shocks faced by an economy through its banking system, but with a different grip as the standard financial accelerator theory. When a bank faces insolvency, it has incentives to continue sub-optimal projects in its portfolio, retarding or clutching the necessary process of creative destruction, which leads to sluggish economic performance. Considering three sectors, asymmetric information and agency problems, it is shown how the original magnitude of a generalized adverse shock can be amplified by the banking sector. The motivation of this study is provided by the current symptoms of the Japanese banking sector and the Chilean experience of the early 80´s debt crisis. These episodes show clear signals that validate the mechanisms identified by the theory, and suggest some measures to face crisis periods on a proper manner.

Evaluating Labor Market Flexibility in Chile from an International Perspective

We rank Chile in terms of labor market flexibility among a group that includes both OECD and emerging economies. We use a performance-based indicator of labor-market flexibility based on the half life of unemployment responses to macroeconomic shocks. This indicator captures the cyclical behavior of the labor market and is obtained by estimating a structural VAR (SVAR). The SVAR is identified using long-run restrictions, which are based on a simple open-economy model with labor-market rigidity. We found that Korea, Hong Kong, Chile, US, and Mexico are the most flexible economies. At the other end, our index indicates that Germany, Sweden, Spain and Colombia are the most rigid labor markets.

Errores de Proyección en Perspectiva

This paper examines the growth and inflation forecasts contained in the Monetary Policy Reports (MPR) of the Central Bank of Chile, comparing them with private forecast, the forecasts made by the Bank during the previous decade, and the forecasts performed by other Central Banks that follow inflation targeting frameworks. It concludes that forecast errors during the last few years have been smaller than those committed by the Bank in the past, and that although the errors in forecasting growth are marginally larger than those committed by private forecasters, they are substantially smaller in the case of inflation. Moreover, the performance of MPR forecasts is similar to those of other Central Banks, in particular when considering the different volatilities of GDP growth and inflation across countries. Although the volatility of MPR forecasts is comparable to those of other Central Banks, in the case of growth the sign of the change in the forecast has been more persistent in the case of Chile.

Denominación de la Deuda del Gobierno de Chile: una Perspectiva de Manejo de Riesgos

Este trabajo propone un marco de análisis para evaluar la conveniencia de la denominación actual de la deuda del Gobierno Central de Chile, a través del efecto en el riesgo asociado al resultado fiscal. Se propone una metodología tipo VaR (Valor en riesgo) para comparar denominaciones alternativas de moneda y tasa de interés. Dicha metodología calcula la volatilidad implícita del resultado fiscal considerando tanto la varianza de cada cuenta por separado, como la covarianza entre ellas, y permite hacer una comparación cuantitativa del riesgo relativo de distintas denominaciones. El ejercicio sugiere que realizar un cambio de las actuales tasas fijas que paga el Estado por su deuda a tasas Libor o de bonos de gobierno contribuiría a reducir considerablemente su volatilidad. Si se utilizan las correlaciones más recientes en el ejercicio, los resultados apuntan también a reducir la actual posición en dólares hacia euros. Un análisis adicional que considera la volatilidad de las correlaciones, sin embargo, recomienda tomar los resultados con mayor cautela

Evaluating the chilean government's debt denomination

Este trabajo propone un marco de análisis para evaluar la conveniencia de la denominación actual de la deuda del Gobierno Central de Chile, a través del efecto en el riesgo asociado al resultado fiscal. Se propone una metodología tipo VaR (Value at Risk) para comparar denominaciones alternativas de moneda y tasa. Si las correlaciones encontradas entre los principales factores que afectan el resultado fiscal se consideran a su valor puntual de estimación, el ejercicio sugiere que realizar un swap de las actuales tasas fijas que paga el Estado por su deuda a tasas Libor o de bonos de gobierno, contribuiría a reducir considerablemente su volatilidad. El ejercicio recomienda adicionalmente reducir la actual posición en dólares hacia euros y/o libras. Un análisis estadístico más riguroso que considera la volatilidad de las correlaciones, sin embargo, recomienda tomar los resultados con mayor cautela

El Embrague Financiero: un Mecanismo Alternativo de Amplificación Bancaria

Este artículo desarrolla un modelo que explica la propagación de los shocks negativos que enfrenta una economía a través del sistema bancario, pero con un enfoque distinto al resaltado en la literatura del acelerador financiero. Cuando un banco se encuentra en una situación de insolvencia, tiene incentivos para ¿apostar por la supervivencia¿, manteniendo en su cartera proyectos subóptimos que liquidaría en tiempos normales. Esta decisión atrasa o embraga el proceso de destrucción creativa necesario para el crecimiento económico. Considerando tres sectores, información asimétrica y problemas de agencia, se muestra cómo la magnitud inicial de shocks adversos puede verse amplificada por el sector bancario. El trabajo está motivado por los síntomas observados en la banca japonesa en la actualidad y en la experiencia chilena de principios de los ochenta. Estos episodios entregan señales que validan los mecanismos identificados en la teoría y sugieren políticas más adecuadas para enfrentar períodos de crisis