The Intertemporal Approach to the Current Account: Evidence from Argentina.

In this paper, an intertemporal model is used to analyze the current account and test whether it accounts for the evolution of the Argentinean current account over the period extending from 1855 to 2002. The intertemporal model presented here takes into account several sources of external shocks for small economies such as a change of the real interest rate and the real exchange rate. Evidence shows that the intertemporal model does not pass the statistical tests and does not explain the Argentinean experience. More specifically, if the Argentinean current account was to behave as the model predicts, one would observe the opposite movement to that observed for the actual current account. Our main conjecture about the weak performance of the model is related to i) the fact that one of its most important assumption is violated for some part of the period under consideration (1931 - 1989); and ii) that the balance of payments’ crises and stop and go cycles may have altered the relation between the variables suggested by the model. To cope with this problem, we have estimated a model for the period 1885-1930 (a period with relatively high capital mobility and with neither currency crises nor stop and go cycles) and found some evidence in favour of this result. A general conclusion to be drawn is that, in contrast to other Latin American countries, an intertemporal current account model can not appropriately account for the dynamics of the current account of Argentina, even thought there is some evidence in favour of the model for the period 1885-1930.

Foreign Banks and Credit Volatility: The Case of Latin American Countries

Foreign bank presence has substantially increased in Latin America during the second half of the 1990s, which has prompted an intense debate on its banking and macroeconomic consequences. In this paper, we apply ARCH techniques to jointly estimate the impact of foreign bank presence on the level and volatility of real credit in a panel of eight Latin American countries, using quarterly data over the period 1995:1-2001:4. Results show that, together with financial development, foreign bank presence has contributed to reduce real credit volatility, improving the buffer shock function of the banking sector. This finding is consistent with the fact that foreign banks are typically well diversified institutions holding higher quality assets and having access to a broad set of liquidity sources. Keywords: foreign banks; credit volatility; Latin America; panel data; ARCH techniquesForeign Banks; Credit Volatility; Latin America; Panel Data; ARCH techniques

The intertemporal approach to the current account: evidence from Argentina

In this paper, an intertemporal model is used to analyze the current account and test whether it accounts for the evolution of the Argentinean current account over the period extending from 1855 to 2002. The intertemporal model presented here takes into account several sources of external shocks for small economies such as a change of the real interest rate and the real exchange rate. Evidence shows that the intertemporal model does not pass the statistical tests and does not explain the Argentinean experience. More specifically, if the Argentinean current account was to behave as the model predicts, one would observe the opposite movement to that observed for the actual current account. Our main conjecture about the weak performance of the model is related to i) the fact that one of its most important assumption is violated for some part of the period under consideration (1931-1989); and ii) that the balance of payments crises and stop and go cycles may have altered the relation between the variables suggested by the model. To cope with this problem, we have estimated a model for the period 1885-1930 (a period with relatively high capital mobility and with neither currency crises nor stop and go cycles) and found some evidence in favour of this result. A general conclusion to be drawn is that, in contrast to other Latin American countries, an intertemporal current account model can not appropriately account for the dynamics of the current account of Argentina, even thought there is some evidence in favour of the model for the period 1885-1930.Departamento de Economí

Interdependencies between Monetary Policy and Foreign Exchange Intervention under Inflation Targeting: The Case of Brazil and the Czech Republic

The bulk of recent literature on foreign exchange interventions has overlooked the potential interdependencies that may exist between these operations and the conduct of monetary policy. This is the case even under inflation targeting and especially in emerging-market economies, because central banks often explicitly reserve the right to intervene to calm disorderly markets and to accumulate foreign reserves, and when the exchange rate is perceived as being out of step with fundamentals. This paper uses a friction model to estimate intervention reaction functions and the associated marginal effects for Brazil and the Czech Republic since the adoption of inflation targeting in these countries in 1999 and 1998, respectively. The main findings are that: (i) in both countries interventions occur predominantly to reduce exchange rate volatility, while in Brazil the central bank also reacts to exchange rate deviations from medium-term trends; (ii) there are strong, asymmetric threshold effects in the reaction functions, and interventions are more likely and of higher magnitudes when they are carried out to depreciate than to appreciate the domestic currency; and (iii) interventions seem to take place independently of contemporaneous monetary policy in Brazil, but not in the Czech Republic, where both policies appear to be interrelated.monetary policy, interventions, inflation targeting, friction model, Brazil, Czech Republic

Esquemas Cambiarios y Monetarios Alternativos en un Modelo de Interdependencia Macroeconómica entre Argentina y Brasil

This paper presents a theoretical model of macroeconomic interdependence between Argentina and Brazil in which alternative monetary and exchange rate regimes are represented. Simulation exercises are carried out with the objective of giving some clues for the election of the most appropriate model for Argentina. The election criteria consists of minimizing the real GDP volatility and that of the CPI when shocks are produced. In the first case the favorite models are those of more exchange rate flexibility while in the second case it will be preferable a more rigid set up of exchange rate. If real GDP volatility matters as much as that of the CPI, then Dolarization achieves a good trade-off among both because it maintains stable dollar prices while eliminating a fluctuation source in the interest rate (and by this way in the GDP) like the devaluation risk. That advantage decreases when the importance of the devaluation risk falls against the default risk as a component of the interest rate and as the supply of non- tradables goods becomes more inelastic.

Esquemas cambiarios y monetarios alternativos en un modelo de interdependencia macroeconómica entre Argentina y Brasil

Este trabajo expone un modelo teórico de interdependencia macroeconómica entre Argentina y Brasil en el que se representan distintos regímenes monetarios y cambiarios alternativos. Con este modelo se realizan ejercicios aplicados de simulación con el objetivo de dar indicios sobre la elección del esquema más apropiado para Argentina. El criterio de elección consiste en minimizar la volatilidad del ingreso real y del IPC ante la ocurrencia de shocks. En el primer caso los esquemas preferidos son los de mayor flexibilidad cambiaria mientras que en el segundo será preferible un esquema más rígido de tipo de cambio. A su vez si importa tanto la volatilidad del ingreso real como la del IPC (un promedio de las dos), la Dolarización logra un buen trade – off entre ambas porque mantiene estables los precios en dólares y porque elimina una fuente de fluctuación en la tasa de interés (y así en el producto) como es la devaluación esperada. Esa ventaja se reduce al caer la importancia de la devaluación esperada con relación al riesgo de default como componente de la tasa de interés y al ser más inelástica la oferta de no transables.This paper presents a theoretical model of macroeconomic interdependence between Argentina and Brazil in which alternative monetary and exchange rate regimes are represented. Simulation exercises are carried out with the objective of giving some clues for the election of the most appropriate model for Argentina. The election criteria consists of minimizing the real GDP volatility and that of the CPI when shocks are produced. In the first case the favorite models are those of more exchange rate flexibility while in the second case it will be preferable a more rigid set up of exchange rate. If real GDP volatility matters as much as that of the CPI, then Dolarization achieves a good trade-off among both because it maintains stable dollar prices while eliminating a fluctuation source in the interest rate (and by this way in the GDP) like the devaluation risk. That advantage decreases when the importance of the devaluation risk falls against the default risk as a component of the interest rate and as the supply of non-tradables goods becomes more inelastic.Facultad de Ciencias Económica

The intertemporal approach to the current account: evidence from Argentina

In this paper, an intertemporal model is used to analyze the current account and test whether it accounts for the evolution of the Argentinean current account over the period extending from 1855 to 2002. The intertemporal model presented here takes into account several sources of external shocks for small economies such as a change of the real interest rate and the real exchange rate. Evidence shows that the intertemporal model does not pass the statistical tests and does not explain the Argentinean experience. More specifically, if the Argentinean current account was to behave as the model predicts, one would observe the opposite movement to that observed for the actual current account. Our main conjecture about the weak performance of the model is related to i) the fact that one of its most important assumption is violated for some part of the period under consideration (1931-1989); and ii) that the balance of payments crises and stop and go cycles may have altered the relation between the variables suggested by the model. To cope with this problem, we have estimated a model for the period 1885-1930 (a period with relatively high capital mobility and with neither currency crises nor stop and go cycles) and found some evidence in favour of this result. A general conclusion to be drawn is that, in contrast to other Latin American countries, an intertemporal current account model can not appropriately account for the dynamics of the current account of Argentina, even thought there is some evidence in favour of the model for the period 1885-1930.Departamento de Economí

Esquemas cambiarios y monetarios alternativos en un modelo de interdependencia macroeconómica entre Argentina y Brasil

Este trabajo expone un modelo teórico de interdependencia macroeconómica entre Argentina y Brasil en el que se representan distintos regímenes monetarios y cambiarios alternativos. Con este modelo se realizan ejercicios aplicados de simulación con el objetivo de dar indicios sobre la elección del esquema más apropiado para Argentina. El criterio de elección consiste en minimizar la volatilidad del ingreso real y del IPC ante la ocurrencia de shocks. En el primer caso los esquemas preferidos son los de mayor flexibilidad cambiaria mientras que en el segundo será preferible un esquema más rígido de tipo de cambio. A su vez si importa tanto la volatilidad del ingreso real como la del IPC (un promedio de las dos), la Dolarización logra un buen trade off entre ambas porque mantiene estables los precios en dólares y porque elimina una fuente de fluctuación en la tasa de interés (y así en el producto) como es la devaluación esperada. Esa ventaja se reduce al caer la importancia de la devaluación esperada con relación al riesgo de default como componente de la tasa de interés y al ser más inelástica la oferta de no transables.This paper presents a theoretical model of macroeconomic interdependence between Argentina and Brazil in which alternative monetary and exchange rate regimes are represented. Simulation exercises are carried out with the objective of giving some clues for the election of the most appropriate model for Argentina. The election criteria consists of minimizing the real GDP volatility and that of the CPI when shocks are produced. In the first case the favorite models are those of more exchange rate flexibility while in the second case it will be preferable a more rigid set up of exchange rate. If real GDP volatility matters as much as that of the CPI, then Dolarization achieves a good trade-off among both because it maintains stable dollar prices while eliminating a fluctuation source in the interest rate (and by this way in the GDP) like the devaluation risk. That advantage decreases when the importance of the devaluation risk falls against the default risk as a component of the interest rate and as the supply of non- tradables goods becomes more inelastic.Departamento de Economí