Beyond the carry trade: Optimal currency portfolios

Author's Pre-print

Exchange rate pressure in Angola

The objective of this work is to develop an operational tool to analyze exchange rate pressure in the context of Angola. The Angolan economy exhibits a number of relevant characteristics: a closed financial account, a partially controlled current account, a highly dollarized economy and exports (oil) price determined in World markets. These features have a direct effect on the demand of foreign currency and motivate their inclusion in the specification of a model for Angola. The model provides the rational for a measure of an exchange market rate pressure (EMP) index that contains exports changes, imports changes, the foreign interest rate and inflation and the change in foreign reserves corrected for a measure dollarization. The empirical performance new measure is comparable (slightly better) to the performance of the EMP indexes obtained in Eichengreen Rose and Wyplosz (1994) and Klassen and Jager (2011).

Ciclos económicos en economías abiertas y menos desarrolladas: el papel de los "shocks" en los términos de intercambio.The business cycle in open and less developed economies: the rol of terms-of-trade shocks.

Nuestra preocupación reside en estudiar empíricamente el mecanismo de transmisión internacional de ciclos económicos a economías pequeñas y menos desarrolladas (LDC), evaluando el impacto de los shocks en los términos de intercambio en países dónde existen imperfecciones en el mercado crediticio que imponen severas restricciones en el financiamiento de la inversión doméstica y al crecimiento económico. Primero, analizamos si la cuenta corriente responde de manera asimétrica a movimientos de largo plazo en los términos de intercambio. La hipótesis es que “en los buenos tiempos” cuando se produce una mejora permanente en términos de intercambio (y con ello el nivel de ingreso) los individuos no elevan su consumo en un monto acorde con la mejora de su ingreso (permanente) sino que ahorran una fracción del aumento en su dotación para hacer frente a una reversión en la mejora en los términos de intercambios (aunque ésta sea transitoria) en el futuro. En consecuencia, la cuenta corriente (diferencia entre ingreso y absorción) responde de manera positiva a un shock permanente en los términos de intercambio, ya que el individuo ahorra de manera cautelosa –debido a que sabe que no le prestarán para suavizar consumo - aún suponiendo que en el futuro tendrá una reversión transitoria de su ingreso. Segundo, estudiamos la relación dinámica entre los términos de intercambio y la tasa de interés en la economía pequeña abierta y con imperfecciones en el mercado crediticio (información asimétrica). La hipótesis es que la economía doméstica tiene que soportar una prima de riesgo que eleva el costo de la inversión y retarda el crecimiento (Gertler y Rogoff; 1990). Esta prima de riesgo depende, además, en forma negativa del nivel del colateral que tenga la economía. El colateral es la dotación de recursos naturales, por ejemplo, que la economía posee a los fines garantizar el cumplimiento de las obligaciones contraídas (en el modelo presentado las actividades dónde se invierten son independientes del colateral). La hipótesis establecida indica que los cambios en los términos de intercambio generan un aumento del colateral de la economía y una reducción del riesgo país: aumentos en los términos de intercambio reducen la prima de riesgo de la economía que opera en mercados de capitales con asimetrías de información, y como consecuencia aumentarían los ingresos de capitales. De esta forma, se estaría encontrando una explicación a la denominada “Paradoja de Lucas”. Finalmente, el proyecto estudia la conexión entre dos variables “clave” en la economía de los países emergentes: la relación entre los términos de intercambio y el tipo de cambio real. Argumentamos que los efectos de las mejoras de los términos de intercambio sobre los flujos de capitales externos tienden a ser sobreestimadas si no se consideran los efectos “secundarios” de éstas sobre el tipo de cambio real de la economía pequeña menos desarrollada. En este proyecto se controlan estadísticamente esta relación. La estrategia empírica elegida resulta en aplicar a un panel (constituido por dieciocho países de Latinoamérica) el método generalizado de momentos (GMM) a dos modelos de regresión estadística a los fines de abordar de manera eficiente el problema de la endogeneidad de la variable dependiente que actúa como regresor rezagado. La estrategia de estimación elegida enfatiza el análisis de la relación dinámica de las variables económicas incluidas en el análisis. The paper analyzes the general problem related to the transmission of economic cycles to Small Open Economies. The analysis focuses on terms-of-trade shocks, which are considered one of the major sources of income volatility in developing economies. Specifically, we tackle the problem related to the impact of terms-of-trade shocks in Less Developed SOEs. ‘Less Developed SOEs’ are understood as those countries who have borrowing constraints. First, we put to a test the hypothesis of asymmetric response of current account to terms-of-trade shocks (the impact of the shock on current account differs depending whether it is positive or negative), which originates from considering binding restrictions in international capital markets (Agénor and Aizenman; 2004). Second, we investigate about the main determinants of External Capital Flows (ECF) directed to Developing Countries. We put to a test the Gertler and Rogoff (1990) hypothesis that a “risky rate” arises in that markets because the economy has not sufficient amount of wealth to “collateralize” the capital she needs to borrow to take advantage of the investment opportunities she has and additionally because the lender does not have the chance of observing what the borrowed does with the funds (that is information asymmetry arises because the lender can check the realized output of investment but he can not observe if he really invest in the project or secretly lend abroad). Finally, Following Prasad, E. S., Rajan and R. Subramanian, A (2007) we measure the relationship between external capital flows and domestic currency overvaluation. We run a panel GMM estimation for a set of 18 Latin American Countries during the period 1973-2008.

Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model

We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.

Convertibility, currency controls and the cost of capital in Western Europe, 1950-1999

For most of the post-war period, Europe s capital markets remained largely closed to international capital flows. Thispaper explores the costs of this policy. Using an event-study methodology, I examine the extent to which restrictions ofcurrent and capital account convertibility affected stock returns. The delayed introduction of full currency convertibilityincreased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapseof the Bretton Woods System had considerable negative effects. These findings offer an explanation for the mountingevidence suggesting that capital account liberalization facilitates growth.

Public and private saving and investment

We decompose aggregate saving and investment into its publicand private components and then document a variety of ``stylized facts''associated with saving and investment rates for a sample of15 countries over the period 1975--1989. In order to seewhether these empirical relationships are consistent with aworld of perfect capital mobility we develop a multi--countrymodel with free trade in a riskfree bond and calibrate it tothe fifteen OECD countries. We pay special attential tomodeling the fiscal policy rules. The model performsremarkably well in accounting for a wide variety of timeseries relationships. Nonetheless the model is not able to capture the crosssectional aspect of the data. In particular, the model cannot accountfor both the large cross country correlation between aggregate saving and investmentrates and the very negative cross country relationship between the public andprivate saving minus investment gaps.

Patterns of convergence and divergence in the euro area

We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples.

Russian transition in the early 21st century

Tässä tutkimuksessa käsitellään Venäjän talouden kehitystä uudella vuosituhannella. Kylmän sodan aikaan Neuvostoliitto oli suurvalta, jonka asema perustui sotilasmahtiin. Sotateollisuuden konversio palvelemaan nykytarpeita ei ole ollut helppo tehtävä. Vuoden 1998 talouskriisin jälkeen elintaso on toipunut verraten nopeasti, mikä on nähtävissä tarkastellessa kotitalouksien kulutusrakenteita, joita käsitellään tarkemmin luvussa 2. Siirtymätalouksissa vaihtotaseen vajeet ovat yleisiä, mutta luonnonrikkauksiensa ansiosta Venäjän vaihtotaseet ovat olleet huomattavan ylijäämäisiä, mitä pohditaan luvussa 3. Vaihtotaseen ylijäämien heijatusvaikutus on ollut Venäjän rooli pääomien nettoviejänä. Venäjän investointikertymä onedelleen erittäin vaatimaton suhteutettuna maan kehitysvaiheeseen. Jokaisessa menestyksekkäässä taloudessa investoinnit ovat pitkän aikavälintaloudellisen menestyksen avaintekijä. Venäjän erityispiirteitä tähän liittyen on kuvattu luvussa 4. Raportti päättyy talouden nykytilanteen analyysiin (luvut 5 ja 6).

Financial integration, capital misallocation and global imbalances

This paper shows that in a stylized model with two countries, characterized by different levels of financial development, the following facts can be replicated: 1) persistent current account surpluses and 2) high TFP growth in China. Under autarky, entrepreneurs in the emerging country overinvest in short-term projects and underinvest in long-term projects because short-term assets help them secure long-term investments in the presence of credit constraints. This creates an aggregate misallocation of capital. When financial markets integrate, entrepreneurs with long-term projects can have access to cheaper short-term assets abroad, which leaves them more resources to invest in their projects. This both reduces capital misallocations and generates capital outflows.

Eurokriisi ja euroalueen rakenteelliset ongelmat

Maailmanlaajuinen finanssikriisi on vaikuttanut merkittävällä tavalla euroalueen toimintaan ja tuonut esiin ongelmia sen rakenteessa. Tutkielman tavoitteena oli tunnistaa eurokriisiin johtaneita tekijöitä ja euroalueen keskeisiä rakenteellisia ongelmia. Teoriakehys muodostui optimaalisen valuutta-alueen teoriasta, jota täydennettiin velkaantumiseen, pankkikriiseihin ja vaihtotaseiden epätasapainotiloihin liittyvällä teorialla. Tutkimuksessa hyödynnettiin laaja-alaisesti olemassa olevaa teoreettista ja empiiristä kirjallisuutta sekä eri tietokannoista saatavaa makrodataa. Tulokset kertovat rahoitusmarkkinoiden keskeisestä roolista epätasapainotilojen kehittymisessä sekä rahaunionin puutteellisista mukautumismekanismeista. Institutionaalisen rakenteen osalta euroalueen keskeisiä ongelmia ovat olleet tehokkaan pankkivalvonnan puute sekä viime hetken lainoittajan puuttuminen valtionvelkakirjamarkkinoilla.

Por que a poupança externa não promove crescimento

Why foreign saving fail to cause growth. The present paper is a formalization of the critique of the growth with foreign savings strategy. Although medium income countries are capital poor, current account deficits (foreign savings), financed either by loans or by foreign direct investments, will not usually increase the rate of capital accumulation or will have little impact on it in so far as current account deficits will be associated with appreciated exchange rates, artificially increased real wages and salaries and high consumption levels. In consequence, the rate of substitution of foreign savings for domestic savings will be relatively high, and the country will get indebted to consume, not to invest and grow. Only when there are large investment opportunities, stimulated by a sizeable difference between the expected profit rate and the long term interest rate, the marginal propensity to consume will get down enough so that the additional income originated from foreign capital flows will be used for investment rather than for consumption. In this special case, the rate of substitution of foreign for domestic savings tend to be small, and foreign savings will contribute positively to growth.

Globalization, nation-state and catching up

Globalization and nation-states are not in contradiction, since globalization is the present stage of capitalist development, and the nation-state is the territorial political unit that organizes the space and population in the capitalist system. Since the 1980s, Global Capitalism constitutes the economic system characterized by the opening of all national markets and a fierce competition between nation-states. Developing countries tend to catch up, while rich countries try to neutralize such competitive effort, using globalism as an ideology, and conventional orthodoxy as a strategy. Middle-income countries that are catching up in the realm of globalization are the ones that count with a national development strategy. This is broadly the case of the dynamic Asian countries. In contrast, Latin American countries have no longer their own strategy, and grow less. To add data to the argument, the author conducts an econometric test comparing these two groups of countries, and three variables: the rate of investment, the current account deficit or surplus that would indicate or not a competitive exchange rate, and public deficit.

Uma análise da estratégia nacional de desenvolvimento da Malásia

This paper aims at studying Malaysia's national development strategy in the last three decades. Firstly, we will give emphasis to the country's economic planning development, its medium-term and long-term plans, as well as Mahathir's political influence. Secondly, we will try to identify key elements in the Malaysian growth process, such as its exchange rate and current account policies, the participation of the government in the whole process and matters related to domestic savings and foreign direct investment. We will also talk about the 1997 financial crisis.

Dívida pública, poupança em conta corrente do governo e superávit primário: uma análise de sustentabilidade

On this paper, we propose a change in the primary surplus' target by the government current account saving. That concept excludes public investment from primary surplus. However, of that change has raised a question about if government current account saving represents a sustainable fiscal policy. Thus, this paper analyses if the change in the primary surplus' target by the government current account saving implies a meaning modification on the debt-to-GDP ratio path. The empirical analysis, which is based on Brazilian monthly data for the period 1999-2005, suggests that the change in fiscal target does not mean a lack of sustain-ability.

Déficits gêmeos e poupança nacional: abordagem teórica

A consensus has not yet emerged about the relationship between budget deficit, external deficit and national saving. According to mainstream economic literature the budget deficit can cause an insufficiency of national saving for a given investment rate. In this case, the investment rate will not be reduced if foreign saving is absorbed, causing an external deficit. In general, the mechanisms through which budget deficits could cause current account deficits are not highlighted in the works about this theme. We arrive at the conclusion that there is not a systematic relationship between budget deficit, current account deficit and national saving and that when it happens it can be processed only through changes in the real exchange rate.