How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States

We evaluate the proposal for official dollarization in Costa Rica by applying a new approach to measure the business cycle comovements with the United States. While the literature often focuses on the correlation of shocks, we point out that the response of each country to the shocks is also an important aspect of stabilization policy. We analyze whether Costa Rica and the United States share a common synchronized response to shocks, i.e. a common business cycle, using the Engle and Kozicki (1993) and Cubadda (1999, 2007) serial correlation common features tests, in a quarterly GDP data set from 1991 to 2008. Although we find some tendency towards common AR(p) structures and common long run trends, we reject the hypothesis that the two countries share a common business cycle. Based on this evidence, we conclude that official dollarization in Costa Rica would impede the efforts of its stabilization policy, despite the relatively high contemporaneous correlation of shocks.Dollarization, Business Cycle Comovement, Serial Correlation Common Feature, Central America, Costa Rica

Common Trends and Common Cycles among Interest Rates of the G7-Countries

In this paper we re-investigate the comovements of interest rates in the G7-countries. We propose a structured modus operandi to analyze the time series characteristics of interest rates and to test for common features. We conduct cointegration, serial correlation common feature and codependence tests with nominal and real interest rates using quarterly data from 1975 to 2007. Overall we only find little evidence of comovements. Common trends are occasionally observed, but the majority of interest rates are not cointegrated. Although some evidence for codependence of higher order is found among European countries, common cycles appear to exist only in rare cases and cannot be generalized for all interest rates.interest rates, comovement, cointegration, serial correlation common feature, codependence

How Strong is the Case for Dollarization in Central America? An Empirical Analysis of Business Cycles, Credit Market Imperfections and the Exchange Rate

In this paper, we contrast two different views in the debate on official dollarization. The Mundell (1961) framework of optimal currency areas and a model on boom-bust cycles, by Schneider and Tornell (2004), who take account of credit market imperfections prevalent in middle income countries. We highlight that the role of the exchange rate is strikingly different in the two models. While in the Mundell framework the exchange rate is expected to smooth the business cycle, the other model predicts that the exchange rate plays an amplifying role. We empirically evaluate both models for eight highly dollarized Central American economies, and find that the main benefit of official dollarization derives from avoiding a mismatch between foreign currency liabilities and domestic revenues, as well as the boom-bust episodes that are likely to follow from it. Using a new method of Cubadda (1999, 2007), we furthermore test for cyclical comovement and reject the hypothesis that the countries form an optimal currency area with the United States according to the Mundell definition.dollarization, real exchange rate, business cycle comovement, serial correlation, common feature, boom-bust cycles, credit market imperfections, Central America

How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States

We evaluate the proposal for official dollarization in Costa Rica by applying a new approach to measure the business cycle comovements with the United States. While the literature often focuses on the correlation of shocks, we point out that the response of each country to the shocks is also an important aspect of stabilization policy. We analyze whether Costa Rica and the United States share a common synchronized response to shocks, i.e. a common business cycle, using the Engle and Kozicki (1993) and Cubadda (1999, 2007) serial correlation common features tests, in a quarterly GDP data set from 1991 to 2008. Although we find some tendency towards common AR(p) structures and common long run trends, we reject the hypothesis that the two countries share a common business cycle. Based on this evidence, we conclude that official dollarization in Costa Rica would impede the efforts of its stabilization policy, despite the relatively high contemporaneous correlation of shocks.dollarization, business cycle comovement, serial correlation common feature, Central America, Costa Rica

Common Trends and Common Cycles among Interest Rates of the G7-Countries

In this paper we re-investigate the comovements of interest rates in the G7-countries. We propose a structured modus operandi to analyze the time series characteristics of interest rates and to test for common features. We conduct cointegration, serial correlation common feature and codependence tests with nominal and real interest rates using quarterly data from 1975 to 2007. Overall we only find little evidence of comovements. Common trends are occasionally observed, but the majority of interest rates are not cointegrated. Although some evidence for codependence of higher order is found among European countries, common cycles appear to exist only in rare cases and cannot be generalized for all interest rates.Interest Rates, Comovement, Cointegration, Serial Correlation Common Feature, Codependence

International Supply Chains and Trade Elasticity in Times of Global Crisis

The paper investigates the role of global supply chains in explaining the trade collapse of 2008-2009 and the long-term variations observed in trade elasticity. Building on the empirical results obtained from a subset of input-output matrices and the exploratory analysis of a large and diversified sample of countries, a formal model is specified to measure the respective short-term and long-term dynamics of trade elasticity. The model is then used to formally probe the role of vertical integration in explaining changes in trade elasticity. Aggregated results on long-term trade elasticity tend to support the hypothesis that world economy has undertaken in the late 1980s a "traverse" between two underlying economic models. During this transition, the expansion of international supply chains determined an apparent increase in trade elasticity. Two supply chains related effects (the composition and the bullwhip effects) explain also the overshooting of trade elasticity that occurred during the 2008-2009 trade collapse. But vertical specialization is unable to explain the heterogeneity observed on a country and sectoral level, indicating that other contributive factors may also have been at work to explain the diversity of the observed results

International Supply Chains and Trade Elasticity in Times of Global Crisis

The paper investigates the role of global supply chains in explaining the trade collapse of 2008-2009 and the long-term variations observed in trade elasticity. Building on the empirical results obtained from a subset of input-output matrices and the exploratory analysis of a large and diversified sample of countries, a formal model is specified to measure the respective short-term and long-term dynamics of trade elasticity. The model is then used to formally probe the role of vertical integration in explaining changes in trade elasticity. Aggregated results on long-term trade elasticity tend to support the hypothesis that world economy has undertaken in the late 1980s a "traverse" between two underlying economic models. During this transition, the expansion of international supply chains determined an apparent increase in trade elasticity. Two supply chains related effects (the composition and the bullwhip effects) explain also the overshooting of trade elasticity that occurred during the 2008-2009 trade collapse. But vertical specialization is unable to explain the heterogeneity observed on a country and sectoral level, indicating that other contributive factors may also have been at work to explain the diversity of the observed results