Modeling a Small Open Economy: The Case of Chile

In this paper we present a small macroeconomic model of the Chilean economy. The model comprises four equations that capture the evolution of the main macroeconomic variables, output, inflation, policy interest rate, and the real exchange rate. Analytically, the model is expressed in a way such that only captures convergence paths toward steady state values which are not modeled in this paper, so it is not usable to analyze any shock that might affect the long-run trajectory of any variable of interest in economic policy analysis. We use the model to simulate the dynamic response of the Chilean economy to some external and internal shocks that are of interest for monetary policy purposes.

Sudden Stops, Financial Frictions, and Labor Market Flows: Evidence from Latin America

Sudden stops and international financial crises have been a main feature of developing countries in the last three decades. While their aggregate effects are well known, the disaggregated channels through which they work are not well explored yet. In this paper, we study the sectoral responses that take place over episodes of sudden stops. Using job flows from a sectoral panel dataset for four Latin American countries, we find that sudden stops are characterized as periods of lower job creation and increased job destruction. Moreover, these effects are heterogeneous across sectors: we find that when a sudden stop occurs, sectors with higher dependence on external financing experience lower job creation. In turn, sectors with higher liquidity needs experience significantly larger job destruction. This evidence is consistent with the idea that dependence on external financing affects mainly the creation margin and that exposure to liquidity conditions affects mainly the destruction margin. Overall, our results confirm the large labor market effects of sudden stops, and provide evidence of financial conditions being an important transmission channel of sudden stops within a country, highlighting the role of financial frictions in the restructuring process in general.Sudden stops, gross job flows, adjustment, financial frictions

Sudden Stops, Financial Frictions, and Labor Market Flows: Evidence from Latin America

Sudden stops and international financial crises have been a main feature of developing countries in the last three decades. While their aggregate effects are well known, the disaggregated channels through which they work are not well explored yet. In this paper, we study the sectoral responses that take place over episodes of sudden stops. Using job flows from a sectoral panel dataset for four Latin American countries, we find that sudden stops are characterized as periods of lower job creation and increased job destruction. Moreover, these effects are heterogeneous across sectors: we find that when a sudden stop occurs, sectors with higher dependence on external financing experience lower job creation. In turn, sectors with higher liquidity needs experience significantly larger job destruction. This evidence is consistent with the idea that dependence on external financing affects mainly the creation margin and that exposure to liquidity conditions affects mainly the destruction margin. Overall, our results confirm the large labor market effects of sudden stops, and provide evidence of financial conditions being an important transmission channel of sudden stops within a country, highlighting the role of financial frictions in the restructuring process in general.

Growth and Adjustment in Chile: a Look at the 1990s

This study provides a thorough review of the post-1998 slowdown in economic growth in Chile. This was a rather turbulent period in economic history, and as such, it motivates to carry on research on the likely causes of the slowdown and its possible solutions. The authors use an econometric model to test three competing hypotheses and derive general implications from the analysis. The first hypothesis puts the blame on bad luck, because of external shocks: namely, terms-of-trade losses and reduced capital inflows following the Asian crisis. A second hypothesis blames the slowdown on policies implemented as a response to the deteriorating external conditions, in particular the inability to achieve a balanced mix of monetary and fiscal policies during the 1997–1998 period. Fiscal imbalances and restrictive monetary policy, it is argued, led to very high interest rates, severely affecting the investment and consumption decisions of the private sector. Finally, a third explanation is that the lowdown resulted from the completion of a high growth cycle associated with the structural reforms introduced in the 1985–1995 period. The authors conclude that the slowdown in the Chilean economy was a mix of severe external shocks and lack of cooperation between fiscal and monetary policies.

Essays on international economics and labor markets

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2008.Includes bibliographical references (p. 135-138).This thesis consists of three separate essays related to international economics and labor markets. The first essay, with Francisco Gallego, looks at sudden stops, a main feature of developing countries in the last decades, and their effects on these countries. Using sector-level data on job flows for four Latin American countries, we find that sudden stops are associated with lower job creation and increased job destruction. Sectoral effects are related to financial indicators: sectors with higher dependence on external financing experience lower creation and sectors with high indicators of liquidity needs experience larger destruction. These results provide evidence of financial conditions being an important transmission channel of sudden stops within a country. The second essay, with Patricia Cortés, studies whether low-skilled immigration has led high-skilled American women to change their time use decisions. We find evidence that low-skilled immigration has increased hours worked by women with a graduate degree, especially those with a professional degree or a PhD and those with children. Our estimates suggest that the low-skilled immigration flow of the 1990s increased by 7 and 33 minutes a week the average time of market work of women with a Master's and a professional degree or a PhD, respectively. Low-skilled immigration increases the fraction of high-skilled women working more than 50 (and 60) hours a week, but decreases their labor force participation. Consistently, for these women, a decrease in the time spent in household work and an increase in reported expenditures on housekeeping services. Low-skilled immigration does not affect other education groups, except for a negative effect on labor supply.(cont.) The third essay focuses on the effects of trade in services, modeled as formation of international production teams, in a diversity and trade model a la Grossman and Maggi (2000). For the two country case it is shown that when the tails of the countries' talent distributions satisfy a "similarity" condition, then free trade in goods replicates the integrated equilibrium. However, this condition is strong and it implies that generally international teams will change the allocation of agents, when trade in goods is already possible.José A. Tessada.Ph.D

Monetary Policy in Latin America: Underpinnings and Procedures

This paper studies the shift in the role of monetary policy in Latin America during the 1990s. As in most industrial economies, in Latin America there has been a refocusing of the objectives pursued by monetary policy towards the achievement of price stabMonetary policy, central banking, Latin america

Growth and Adjustment in Chile: a Look at the 1990s

Este estudio analiza en detalle la desaceleración de la economía chilena posterior al año 1998. Éste fue un período turbulento en la historia económica y, como tal, llama a investigar sobre las probables causas del freno a la actividad y sus posibles soluciones. Los autores aplican un modelo econométrico para probar tres hipótesis y derivan las implicancias generales del análisis. La primera hipótesis culpa a la "mala suerte" por los shocks externos, específicamente el deterioro de los términos de intercambio y de los flujos de capitales a consecuencia de la crisis asiática. Una segunda hipótesis atribuye la desaceleración a las políticas implementadas para enfrentar las malas condiciones internacionales, en particular a la incapacidad de lograr una combinación equilibrada entre las políticas fiscal y monetaria en los años 1997 y 1998. Se argumenta que los desequilibrios fiscales y la política monetaria restrictiva generaron una enorme presión sobre el sector privado al generar un importante aumento en el costo del endeudamiento. Por último, una tercera explicación es que la desaceleración fue la consecuencia del término de un ciclo de alto crecimiento asociado con las reformas estructurales que se habían venido aplicando entre 1985 y 1995. Los autores concluyen que el menor dinamismo de la economía chilena respondió a una combinación entre shocks externos severos y falta de cooperación entre las políticas fiscal y monetari

Modeling a Small Open Economy: the Case of Chile

Este artículo presenta un modelo macroeconómico pequeño de la economía chilena. El modelo se compone de cuatro ecuaciones que capturan la evolución de las principales variables macroeconómicas: actividad, inflación, la tasa de política monetaria y el tipo de cambio real. Desde el punto de vista analítico, el modelo está expresado de manera tal que captura solo trayectorias de convergencia hacia valores de estado estacionario que no están modelados aquí, y no se pueden usar para analizar shocks que pudieran afectar la trayectoria de largo plazo de cualquier variable de interés para el análisis de política económica. El trabajo emplea el modelo para simular las respuestas dinámicas de la economía chilena a ciertos shocks externos e internos que son de interés para efectos de política monetaria