Speculative attacks on debts and optimum currency area: a welfare analysis

Traditionally the issue of an optimum currency area is based on the theoretical underpinnings developed in the 1960s by McKinnon [13], Kenen [12] and mainly Mundell [14], who is concerned with the benefits of lowering transaction costs vis-à- vis adjustments to asymmetrical shocks. Recently, this theme has been reappraised with new aspects included in the analysis, such as: incomplete markets, credibility of monetary policy and seigniorage, among others. For instance, Neumeyer [15] develops a general equilibrium model with incomplete asset markets and shows that a monetary union is desirable when the welfare gains of eliminating the exchange rate volatility are greater than the cost of reducing the number of currencies to hedge against risks. In this paper, we also resort to a general equilibrium model to evaluate financial aspects of an optimum currency area. Our focus is to appraise the welfare of a country heavily dependent on foreign capital that may suffer a speculative attack on its public debt. The welfare analysis uses as reference the self-fulfilling debt crisis model of Cole and Kehoe ([6], [7] and [8]), which is employed here to represent dollarization. Under this regime, the national government has no control over its monetary policy, the total public debt is denominated in dollars and it is in the hands of international bankers. To describe a country that is a member of a currency union, we modify the original Cole-Kehoe model by including public debt denominated in common currency, only purchased by national consumers. According to this rule, the member countries regain some influence over the monetary policy decision, which is, however, dependent on majority voting. We show that for specific levels of dollar debt, to create inflation tax on common-currency debt in order to avoid an external default is more desirable than to suspend its payment, which is the only choice available for a dollarized economy when foreign creditors decide not to renew their loans.

Speculative attacks, openness and crises

In this paper we propose a dynamic stochastic general equilibrium model to evaluate financial adjustments that some emerging market economies went through to overcome external crises during the latest decades, such as default and local currency devaluation. We assume that real devaluation can be used to avoid external debt default, to improve trade balance and to reduce the real public debt level denominated in local currency. Such effects increase the government ability to deal with external crisis, but also have costs in terms of welfare, related to expected inflation, reductions in private investments and higher interest to be paid over the public debt. We conclude that openness improves expected welfare as it allows for a better devaluation-response technology against crises. We also present results for 32 middle-income countries, verifying that the proposed model can indicate, in a stylized way, the preferences for default-devaluation options and the magnitude of the currency depreciation required to overcome 48 external crises occurred as from 1971. Finally, as we construct our model based on the Cole-Kehoe self-fulfilling debt crisis model ([7]), adding local debt and trade, it is important to say that their policy alternatives to leave the crisis zone remains in our extended model, namely, to reduce the external debt level and to lengthen its maturity.

Ataques especulativos sobre dívidas e regimes monetários

A tese pretende conhecer de forma profunda a metodologia de ataques especulativos sobre dívidas, desenvolvida por Cole e Kehoe (1996), e tem três objetivos principais: (i) aplicá-la a outros países, além do México, que é feito na versão original; (ii) entender a opção de um país dolarizar, em relação à alternativa de manter sua moeda local, quando a economia depende da entrada de capitais financeiros internacionais; e (iii) estudar a união monetária como uma terceira alternativa de regime monetário, em comparação com a dolarização e o regime de moeda local. O modelo de crises da dívida de Cole-Kehoe é aplicado às economias da Coréia, da Rússia e do Brasil. Modifica-se este modelo para incluir dívida denominada em moeda local, que é totalmente adquirida pelos consumidores nacionais e que dá ao governo a possibilidade de obter receitas por meio da cobrança de um imposto inflacionário sobre estes ativos. As receitas obtidas desta forma podem ser utilizadas para pagar os banqueiros internacionais e evitar uma crise da dívida externa, que ocorreria, em caso contrário. Considera-se também, neste caso, que o banco central possa estar sujeito a pressões de seu governo para gerar estas receitas. Analogamente, para representar um país pertencente a uma união monetária, inclui-se dívida denominada em moeda comum e um governo central no modelo original. A política monetária da união está subordinada à decisão conjunta de todos os países membros. Supõe-se também que o banco central da união possa sofrer pressões políticas de alguns governos nacionais sem disciplina fiscal e dispostos a obter receitas de imposto inflacionário sobre a dívida. Na dolarização, a política monetária está submetida a do banco central do país âncora e, portanto, não há possibilidade de o governo gerar receitas extraordinárias sobre a dívida, a menos que haja forte simetria dos choques que atingem a economia dolarizada e o país âncora. Considerando estas peculiaridades dos três regimes monetários, os níveis de bem-estar são caracterizados e avaliados numericamente para o Brasil. Além disso, obtém-se a política ótima do governo para a dívida em dólar, segundo os três regimes.

Essays on international finance, default and inflation

This thesis is composed by three papers, each one of them corresponding to one chapter. The first and the second chapters are essays on international finance appraising default and inflation as equilibrium outcomes for crisis time, in particular, for confidence crisis time that leads to speculative attack on the external public debt issued by emerging economies. With this background in mind, welfare effects from adopting common currency (chapter 1) and welfare effects from increasing the degree of economic openness (chapter 2) are analyzed in numerical exercises, based on DSGE framework. Cross-countries results obtained are then presented to be compared with empirical evidence and to help on understanding past policy decisions. Some policy prescriptions are also suggested. In the third chapter we look to the inflation targeting regime applied to emerging economies that are subject to adverse shocks, like the external debt crisis presented in the previous chapters. Based on a more theoretical approach, we appraise how pre commitment framework should be used to coordinate expectations when policymaker announcement has no full credibility and self fulfilling inflation may be possible.

Ensaios em macroeconometria e finanças

This thesis is composed of three essays referent to the subjects of macroeconometrics and Önance. In each essay, which corresponds to one chapter, the objective is to investigate and analyze advanced econometric techniques, applied to relevant macroeconomic questions, such as the capital mobility hypothesis and the sustainability of public debt. A Önance topic regarding portfolio risk management is also investigated, through an econometric technique used to evaluate Value-at-Risk models. The Örst chapter investigates an intertemporal optimization model to analyze the current account. Based on Campbell & Shillerís (1987) approach, a Wald test is conducted to analyze a set of restrictions imposed to a VAR used to forecast the current account. The estimation is based on three di§erent procedures: OLS, SUR and the two-way error decomposition of Fuller & Battese (1974), due to the presence of global shocks. A note on Granger causality is also provided, which is shown to be a necessary condition to perform the Wald test with serious implications to the validation of the model. An empirical exercise for the G-7 countries is presented, and the results substantially change with the di§erent estimation techniques. A small Monte Carlo simulation is also presented to investigate the size and power of the Wald test based on the considered estimators. The second chapter presents a study about Öscal sustainability based on a quantile autoregression (QAR) model. A novel methodology to separate periods of nonstationarity from stationary ones is proposed, which allows one to identify trajectories of public debt that are not compatible with Öscal sustainability. Moreover, such trajectories are used to construct a debt ceiling, that is, the largest value of public debt that does not jeopardize long-run Öscal sustainability. An out-of-sample forecast of such a ceiling is also constructed, and can be used by policy makers interested in keeping the public debt on a sustainable path. An empirical exercise by using Brazilian data is conducted to show the applicability of the methodology. In the third chapter, an alternative backtest to evaluate the performance of Value-at-Risk (VaR) models is proposed. The econometric methodology allows one to directly test the overall performance of a VaR model, as well as identify periods of an increased risk exposure, which seems to be a novelty in the literature. Quantile regressions provide an appropriate environment to investigate VaR models, since they can naturally be viewed as a conditional quantile function of a given return series. An empirical exercise is conducted for daily S&P500 series, and a Monte Carlo simulation is also presented, revealing that the proposed test might exhibit more power in comparison to other backtests.

Economic growth with foreign saving?

Highly indebted countries, particularly the Latin American ones, presented dismal economic outcomes in the 1990s, which are the consequence of the ‘growth cum foreign savings strategy’, or the Second Washington Consensus. Coupled with liberalization of international financial flows, such strategy, which did not make part of the first consensus, led the countries, in the wave of a new world wide capital flow cycle, to high current account deficits and increase in foreign debt, ignoring the solvency constraint and the debt threshold. In practical terms it involved overvalued currencies (low exchange rates) and high interest rates; in policy terms, the attempt to control de budget deficit while the current account deficit was ignored. The paradoxical consequence was the adoption by highly indebted countries of ‘exchange rate populism’, a less obvious but more dangerous form of economic populism.

Financiamento para o subdesenvolvimento, o Brasil e o segundo consenso de Washington

While in the social and in the ethical realms the Cardoso administration was successful, its economic outcomes were frustrating. In this administration’s eight years the investment rate did not increase and income per capita growth lagged, while the public debt and the foreign debt increased substantially. This poor economic performance may be explained by three chained causes: a mistake in agenda setting, the adoption of the Second Washington Consensus, and the alienation of elites. The decision of setting high inflation as the major problem to be tackled instead of achieving equilibrium in foreign accounts represented a major macroeconomic mistake, which can be explained by the Second Washington Consensus. This consensus proposed in the 1990s that highly indebted countries should grow counting on foreign savings, although this is not the experience among OECD countries. The outcome was to evaluate the real, to increase artificially wages and consumption, so that instead of growth what we have been increased indebtedness. Why this flopped strategy was adopted? Rich countries’ interests are not difficult to guess. On the part of Brazil, the only explanation is Brazilian elites’ alienation in relation to the country’s national interest. As a final outcome, the Cardoso administration ends with another balance of payments crisis, which was empowered by the coming presidential elections. Yet, the solvency situation of the Brazilian economy have been improving since the 1999 successful floatation of the real, so that I believe that, adopted a policy that deepens fiscal adjustment, while lowers the interest rate, and avoids new evaluation of the real, the country will eventually be able to avoid default.

Incompatibilidade distributiva e desenvolvimento auto-sustentado

Effective macroeconomic stability and sustained economic growth will only be achieved in Brazil when the country settles the distributive inconsistency that arose in the 1970s. Since then the state and the nation started to incur respectively in high domestic and foreign debt. Wages grew at much slower rate than productivity, and income concentrated in the hands of business entrepreneurs and particularly of rentiers. Sheer populist practices, or disguised combination of neo-liberal and neopopulist policies were unable to address the problem. Budget deficits and high inflation, or exchange rate overvaluation and financial crises were the typical outcome. To settle distributive inconsistency by compensating in the short term workers for their income losses is not realistic. Only a consistent growth strategy and a credible commitment to share future growth benefits, combined with active social policies oriented to the poor, will do the job.

Crises financeira nos anos 1990 e poupança externa

Ao contrário do que afirma a análise econômica convencional, a causa das crises financeiras dos anos 1990 no México, Ásia, Brasil e Argentina não foi principalmente fiscal, mas sim a decisão dos governos de crescerem com poupança externa, isto é, com déficits em conta corrente. Essas foram crises de balanço de pagamento geradas pela sobreapreciação da moeda local e pelo alto nível de dívida externa e/ou rápido crescimento de déficit de conta corrente. Assim, repentinamente os credores externos se convenceram de que o país não enfrenta apenas um problema de liquidez, mas de solvência, e para de rolar a dívida. Um teste econométrico demonstra essas afirmações

Testing the hypothesis of contagion using multivariate volatility models

The aim of this paper is to test whether or not there was evidence of contagion across the various financial crises that assailed some countries in the 1990s. Data on sovereign debt bonds for Brazil, Mexico, Russia and Argentina were used to implement the test. The contagion hypothesis is tested using multivariate volatility models. If there is any evidence of structural break in volatility that can be linked to financial crises, the contagion hypothesis will be confirmed. Results suggest that there is evidence in favor of the contagion hypothesis.

O controle do endividamento público no Brasil: uma perspectiva comparada com os Estados Unidos

Estudando o controle do endividamento público no Brasil e Estados Unidos, este trabalho examina a eficácia das restrições constitucionais e legais existentes nestes países, os fatores políticos e de mercado que afetam o deficit público e o nível do endividamento. Enfase especial é atribuída ao papel do Senado no caso brasileiro e aos mecanismos de controle através do mercado no caso americano.

Efeitos dinâmicos de programas de estabilização

Com o emprego do modelo de dois setores de acumulação ótima de capital em economia aberta, determina-se o impacto sobre a trajetória do câmbio, dos salários, do investimento, da poupança e, portanto, da dívida externa e do estoque de capital, de uma elevação permanente e não antecipada da produtividade da economia. Em geral, após um choque positivo permanente de produtividade há redução da poupança, piora do balanço de pagamentos em transações correntes e valorização do câmbio. Todos fenômenos que do ponto de vista do modelo são de equilíbrio intertemporal, conseqüência da elevação da renda permanente e do excesso de demanda por bens domésticos que sucede o ganho de produtividade. Supondo que os programas de estabilização elevaram a produtividade da economia é possível com a estrutura analítica construída racionalizar qualitativamente os fenômenos observados após estes planos.

O controle do endividamento público no Brasil: uma perspectiva comparada com os Estados Unidos II

Estudando o controle do endividamento público nos Estados Unidos, este trabalho examina a eficácia das restrições constitucionais e legais existentes naquele país, os fatores políticos que afetam o deficit públic e o nível do endividamento e ainda os mecanismos de controle das finanças públicas através do mercado.

Prêmio sobre o risco (risk premium) dos títulos soberanos e política fiscal discricionária vs. regras de política fiscal para um país em desenvolvimento: o caso do Brasil

O projeto de pesquisa é parte do projeto entitulado "Credibilidade de Políticas Monetárias e Fiscais para o Brasil: Risco Soberano, Instituições, Âncoras Nominais, e Acesso aos Mercados Financeiros Internacionais". Dentro do atual plano de estabilização, um estudo empírico sobre a economia brasileira fornece um exemplo vívido do impacto de vários fatores, como o grau de institucionalização das políticas monetárias e orçamentárias que tem sido utilizadas desde a implementação do Plano Real, que aumentariam a credibilidade, sustentando a política cambial e o fluxo positivo do capital internacional, na percepção do mercado do risco de suspensão de pagamento (default risk) da dívida externa de um país em desenvolvimento. O foco dentro deste projeto de pesquisa será na questão de pesquisa: "Prêmio sobre o risco (risk premium) dos títulos soberanos e política fiscal discricionária vs regras de política fiscal para um país em desenvolvimento: o caso do Brasil".

Mercado de capitais e financiamento privado para o desenvolvimento

This research argues that Brazil should create conditions for long run financing of development. The end of the inflationary process is just a first step. A second step is the development of an institutional framework to offer good alternatives to investors that have long run targets, such as pension funds etc. Particularly, in the Brazilian market predominates the trade of preferred shares instead of common shares that give more prerrogatives for investors that plan to hold these shares on long term basis. This attitude turns the market more volatile and in this way corporations lose the chance of financing their projects with large amounts of capital and have to rely instead on more debt which weakens their financial strenght.