Dealing with Negative Oil Shocks: The Venezuelan Experience in the Eighties

The Venezuelan experience in the 1980s is a particularly fertile ground for the analysis of negative shocks. Two large shocks took place under very different control regimes, thus highlighting the role the institutional setting plays in determining the response. Moreover, the experience can shed a different light into the convenience of alternative exchange rate regimes for countries subject to large and frequent trade shocks. In addition, the analysis can be simplified for two reasons. First, oil shocks only have direct effects on the public sector, thus implying that it is the policy reaction to the shock that will affect households and firms. Secondly, the supply response of the oil industry is not of macroeconomic interest.

In Search of the Black Swan: Analysis of the Statistical Evidence of Electoral Fraud in Venezuela

This study analyzes diverse hypotheses of electronic fraud in the Recall Referendum celebrated in Venezuela on August 15, 2004. We define fraud as the difference between the elector's intent, and the official vote tally. Our null hypothesis is that there was no fraud, and we attempt to search for evidence that will allow us to reject this hypothesis. We find no evidence that fraud was committed by applying numerical maximums to machines in some precincts. Equally, we discard any hypothesis that implies altering some machines and not others, at each electoral precinct, because the variation patterns between machines at each precinct are normal. However, the statistical evidence is compatible with the occurrence of fraud that has affected every machine in a single precinct, but differentially more in some precincts than others. We find that the deviation pattern between precincts, based on the relationship between the signatures collected to request the referendum in November 2003 (the so-called, Reafirmazo), and the YES votes on August 15, is positive and significantly correlated with the deviation pattern in the relationship between exit polls and votes in those same precincts. In other words, those precincts in which, according to the number of signatures, there are an unusually low number of YES votes (i.e., votes to impeach the president), is also where, according to the exit polls, the same thing occurs.Comment: Published in at http://dx.doi.org/10.1214/11-STS373 the Statistical Science (http://www.imstat.org/sts/) by the Institute of Mathematical Statistics (http://www.imstat.org

Exchange Rates and Financial Fragility

In this paper we analyze three views of the relationship between the exchange rate and financial fragility: (1) the moral hazard hypothesis, according to which pegged exchange rates offer implicit insurance against exchange risk and thereby encourage reckless borrowing and lending; (2) the original sin hypothesis, which emphasizes an incompleteness in financial markets which prevents the domestic currency from being used to borrow abroad or to borrow long term even domestically; and (3) the commitment problem hypothesis, which sees financial crises as resulting from neither moral hazard nor original sin but from the weakness of the institutions that address commitment problems. We examine the evidence on these hypotheses and draw out their implications for exchange-rate policy in emerging markets.

Economic Development as Self-Discovery

In the presence of uncertainty about what a country can be good at producing, there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated. We develop a general-equilibrium framework for a small open economy to clarify the analytical and normative issues. We highlight two failures of the laissez-faire outcome: there is too little investment and entrepreneurship ex ante, and too much production diversification ex post. Optimal policy consists of counteracting these distortions: to encourage investments in the modern sector ex ante, but to rationalize production ex post. We provide some informal evidence on the building blocks of our model.

Asegurar la estabilidad y el crecimiento en una región propensa a las sacudidas: los retos de políticas para América Latina

(Disponible en idioma inglés únicamente) ¿Cuáles son los motivos y los costos de la inestabilidad en América Latina? Debido a que no existe el consenso sobre estas cuestiones fundamentales, no hay consenso sobre la respuesta más apropiada a la inestabilidad macroeconómica en América Latina y en países propensos a las sacudidas de otras regiones. Se presentan nuevos elementos de juicio sobre estos aspectos contenciosos y se tratan las implicaciones de políticas para la región.

The Roots of Banking Crises: The Macroeconomic Context

This paper discusses the ways in which macroeconomic developments can put stress on banks, and in extreme cases lead to banking crises. These macroeconomic causes of bank vulnerability and crisis have important implications for regulatory regimes, and for macroeconomic policy itself. Much of the discussion emphasizes the need for monetary policy to be set with an eye on the state of the domestic banking system as an occasionally important consideration. One purpose of this paper is to promote a discussion of how to do a better job of incorporating weak banking systems into macroeconomic policy management.

An Alternative Interpretation of the 'Resource Curse': Theory and Policy Implications

The existence of a natural resource curse has been a longstanding theme in the economic literature and in policy discussions. We propose an alternative mechanism and study its policy implications. The mechanism is based on the interaction between two building blocks: specialization in non-tradables and financial market imperfections. We show that if a country has a sufficiently large non-resource tradable sector, relative prices can be stable, even when the resource sector generates significant volatility in the demand for non-tradables. However, when the non-resource tradable sector disappears, the economy becomes much more volatile, because shocks to the demand for non-tradables - possibly associated with shocks to resource income - will not be accommodated by movements in the allocation of labor but instead by expenditure-switching. This requires much higher relative price movements. The presence of bankruptcy costs makes interest rates dependent on relative price volatility. These two effects interact causing the economy to specialize inefficiently away from non-resource tradables: the less it produces of them, the greater the volatility of relative prices, the higher the interest rate the sector faces, causing it to shrink even further until it disappears. At that point, the economy will face an even higher interest rate and a lower level of capital and output in the non-tradable sector. An increase in resource income that leads to specialization causes a large decline in welfare: thus the idea of the curse. Specialization is determined by the expected size and volatility in resource income. The paper justifies stabilization and savings policies as well as policies to make financial markets more efficient. However, we also find some support for more interventionist second-best trade and financial

The Impact of Inflation on Budgetary Discipline

This paper investigates budgetary rules for an economy characterized by inflation and volatile relative prices. We view the budgetary process as a limited contingencies contract between the treasury and the ministers. The budgetary process allows a minister, whose realized real budget falls short of a threshold, to ask for a treasury, the minister obtains the extra funds needed to meet the expenditure threshold level. The contract sets both the projected budget and the threshold real expenditure that justifies budget revisions. We identify the efficient contract and show that for significant state verification costs and for low volatility, the contract is non contingent (i.e., a nominal contract). For volatility significant enough the contract becomes state contingent -- it reduces the initial allocation [i.e., the projected budget,] and reduces the threshold associated with budgetary revisions. Both adjustments imply that in volatile economies the projected revenue understates the realized budget hence the average budget error is positive. As volatility increases, the contract converges to a full ex-post indexation. Hence, one of the costs of inflation is that nominal contracts lose their disciplining role in determining the real allocation. Instead, the economy shifts towards more costly arrangements like ex-post indexation, where discipline is accomplished by constant monitoring The last part of the paper uses the data from 12 Latin American countries to test the model's predictions. Our tests confirm that in an inflationary environment the planned budget is under-predicting the realized one -- higher inflation increases the budget error and the average budget error is positive.

Naturaleza, desarrollo y distribución en América Latina. Elementos de juicio sobre el papel de la geografía, el clima y los recursos naturales

(Disponible en idioma inglés únicamente) La enorme riqueza de recursos naturales de América Latina tiene efectos en muchos países de la región. La apertura económica en varios países fue seguida por un crecimiento rápido de la inversión extranjera y exportaciones de productos en cuya elaboración se emplean recursos naturales intensivamente. El crecimiento de sectores manufactureros que hacen uso intensivo de la mano de obra fue mucho menor. ¿Qué significa el aumento de la dependencia en sectores basados en recursos naturales para las perspectivas de desarrollo y la distribución del ingreso?

Inequality and the Family in Latin America

In this paper, social mobility is measured by looking at the extent to which family background determines socioeconomic success. An index of social mobility for developing countries is proposed based on the correlation of schooling gaps between siblings.