Avoiding some costs of inflation and crawling toward hyperinflation : the case of the Brazilian domestic currency substitute

The pattem of a classical hyperinflation is an acute acceleration of the inflation levei accompanied by rapid substitution away from domestic currency. Brazil, however, has becn experiencing inflation leveis well above 1,000% a year since 1988 without entering the classical hyperinflation path. Two elements play key roles in differcntiating the Brazilian case from other hyperinflationary experiences: indexation and the provision of a reliable domestic currency substitute, Le., the provision of liquidity to interest-bearing assets. This paper claims that the existence of this domestic currency substitute is lhe main source of both lhe inability of the Brazilian central bank to fight inflation and of the unwillingness of Brazilians to face the costs of such a fight. The provision of the domestic currency substitute through the banking sector is modeled, and the main macroeconomic consequences of this monetary regime are derived. Those are: the lack of a nominal anchor for the price system due to the passive monetary policy; the endogeneity of seignorage unlikc traditional models of hyperinflation; and lhe ineffectiveness of very high real interest rates.

Interests prices and the Barosky - Summers resolution of the Gibson paradox under the gold standard

This paper presents a structural monetary ��amework featunng a demand function for non-monetary uses of gold, such as the one drawn by Barsky and Summers in their 1988 analy8��I of the Gibson Paradox as a natural concomitant of the gold standard period. That structural model predicts that the laws of behavior of nominal prices and interest rates are functions of the rules set by the government to command the money supply. !ta fiduciary vemon obtaina Fisherian relationships &8 particular cases. !ta gold atandard 801ution yields a modelsimilar to the Barsky and Summers model, in which interest rates are exogeneous and subject to shocb. This paper integrates governnment bonds into the analysis, treats interest rates endogenously, and ahifts the responsibility for the shocb to the government budgetary financing policies. The Gibson paradox appears as "practically" the only cl&18 of behavioral pattern open for interest rates and price movements under apure gold standard economy. Fisherian-like relationshipe are utterly ruled out.

Essays on banking theory and history of financial arrangements

Esta tese cont��m dois cap��tulos, cada um lidando com a teoria e a hist��ria dos bancos e arranjos financeiros. No cap��tulo 1, busca-se extender uma economia Diamond-Dybvig com monitoramento imperfeito dos saques antecipados e realizar uma compara����o do bem estar social em cada uma das aloca����es poss��veis, como proposto em Presscott and Weinberg(2003). Esse monitoramento imperfeito �� implementado a partir da comunica����o indireta ( atrav��s de um meio de pagamento) entre os agentes e a m��quina de dep��sitos e saques que �� um agregado do setor produtivo e financeiro. A extens��o consiste em estudar aloca����es onde uma fra����o dos agentes pode explorar o monitoramento imperfeito e fraudar a aloca����o contratada ao consumirem mais cedo al��m do limite, usando m��ltiplos meios de pagamento. Com a puni����o limitada no per��odo de consumo tardio, essa nova aloca����o pode ser chamada de uma aloca����o separadora em contraste com as aloca����es agregadoras onde o agente com habilidade de fraudar �� bloqueado por um meio de pagamento imune a fraude, mas custoso, ou por receber consumo futuro suficiente para tornar a fraude desinteressante. A compara����o de bem estar na gama de par��metros escolhida mostra que as aloca����es separadoras s��o ��timas para as economias com menor dota����o e as agregadoras para as de n��vel intermedi��rio e as ricas. O cap��tulo termina com um poss��vel contexto hist��rico para o modelo, o qual se conecta com a narrativa hist��rica encontrada no cap��tulo 2. No cap��tulo 2 s��o exploradas as propriedade quantitativas de um sistema de previs��o antecedente para crises financeiras, com as v��riaveis sendo escolhidas a partir de um arcabou��o de ``boom and bust'' descrito mais detalhadamente no ap��ndice 1. As principais vari��veis s��o: o crescimento real nos pre��os de im��veis e a����es, o diferencial entre os juros dos t��tulos governamentais de 10 anos e a taxa de 3 meses no mercado inter-banc��rio e o crescimento nos ativos totais do setor banc��rio. Essas vari��veis produzem uma taxa mais elevada de sinais corretos para as crises banc��rias recentes (1984-2008) do que os sistemas de indicadores antecedentes compar��veis. Levar em conta um risco de base crescente ( devido �� tend��ncia de acumula����o de distor����es no sistema de pre��os relativos em expans��es anteriores) tamb��m prov�� informa����o e eleva o n��mero de sinais corretos em pa��ses que n��o passaram por uma expans��o credit��cia e nos pre��os de ativos t��o vigorosa.

Information asymmetry and competition in credit markets: the pricing of overdraft loans in Brazil

This paper evaluates how information asymmetry affects the strength of competition in credit markets. A theory is presented in which adverse selection softens competition by decreasing the incentives creditors have for competing in the interest rate dimension. In equilibirum, although creditors compete, the outcome is similar to collusion. Three empirical implications arise. First, interest rate should respond asymmetrically to changes in the cost of funds: increases in cost of funds should, on average, have a larger effect on interest rates than decreases. Second, aggressiveness in pricing should be associated with a worseing in the bank level default rates. Third, bank level default rates should be endogenous. We then verify the validity of these three empirical implications using Brazilian data on consumer overdraft loans. The results in this paper rationalize seemingly abnormallly high interest rates in unsecured loans.

A restatement of the welafare costs of inflation. The wast of scarce resources in the manufacturing , banking and household sectors

Lucas (2000) estimates that the US welfare costs of inflation are around 1% of GDP. This measurement is consistent with a speci���c distorting channel in terms of the Bailey triangle under the demand for monetary base schedule (outside money): the displacement of resources from the production of consumption goods to the household transaction time �� la Baumol. Here, we consider also several new types of distortions in the manufacturing and banking industries. Our new evidences show that both banks and firms demand special occupational employments to avoid the inflation tax. We de���ne the concept of ���the foat labor���: The occupational employments that are aflected by the in���ation rates. More administrative workers are hired relatively to the bluecollar workers for producing consumption goods. This new phenomenon makes the manufacturing industry more roundabout. To take into account this new stylized fact and others, we redo at same time both ���The model 5: A Banking Sector -2��� formulated by Lucas (1993) and ���The Competitive Banking System��� proposed by Yoshino (1993). This modelling allows us to characterize better the new types of misallocations. We ���nd that the maximum value of the resources wasted by the US economy happened in the years 1980-81, after the 2nd oil shock. In these years, we estimate the excess resources that are allocated for every speci���c distorting channel: i) The US commercial banks spent additional resources of around 2% of GDP; ii) For the purpose of the firm foating time were used between 2.4% and 4.1% of GDP); and iii) For the household transaction time were allocated between 3.1% and 4.5 % of GDP. The Bailey triangle under the demand for the monetary base schedule represented around 1% of GDP, which is consistent with Lucas (2000). We estimate that the US total welfare costs of in���ation were around 10% of GDP in terms of the consumption goods foregone. The big di��erence between our results and Lucas (2000) are mainly due to the Harberger triangle in the market for loans (inside money) which makes part of the household transaction time, of the ���rm ���oat labor and of the distortion in the banking industry. This triangle arises due to the widening interest rates spread in the presence of a distorting inflation tax and under a fractionally reserve system. The Harberger triangle can represent 80% of the total welfare costs of inflation while the remaining percentage is split almost equally between the Bailey triangle and the resources used for the bank services. Finally, we formulate several theorems in terms of the optimal nonneutral monetary policy so as to compare with the classical monetary theory.

Firm financial constraints and the impact of monetary policy: evidence from financial conglomerates

Building on recent evidence on the functioning of internal capital markets in financial conglomerates, this paper conducts a novel test of the balance sheet channel of monetary policy. It does so by comparing monetary policy responses of small banks that are affiliated with the same bank holding company, and this arguably face similar constraints in accessing internal/external sources of funds, but that operate in different geographical regions, and thus face different pools of borrowers. Because these subsidiaries typically concentrate their lending with small local businesses, we can use cross-sectional differences in state-level economic indicators at the time of changes of monetary policy to study whether or not the strength of borrowers' balance sheets influences the response of bank lending. We find evidence that the negative response of bank loan growth to a monetary contraction is significantly stronger when borrowers have 'weak balance sheets. Our evidence suggests that the monetary authority should consider the amplification effects that financial constraints play following changes in basic interest rates and the role of financial conglomerates in the transmission of monetary policy.

In search of exchange rate predictability : a study about accuracy, consistency, and granger causality of forecasts generated by a Taylor Rule Model

Este estudo investiga o poder preditivo fora da amostra, um m��s �� frente, de um modelo baseado na regra de Taylor para previs��o de taxas de c��mbio. Revisamos trabalhos relevantes que concluem que modelos macroecon��micos podem explicar a taxa de c��mbio de curto prazo. Tamb��m apresentamos estudos que s��o c��ticos em rela����o �� capacidade de vari��veis macroecon��micas preverem as varia����es cambiais. Para contribuir com o tema, este trabalho apresenta sua pr��pria evid��ncia atrav��s da implementa����o do modelo que demonstrou o melhor resultado preditivo descrito por Molodtsova e Papell (2009), o ���symmetric Taylor rule model with heterogeneous coefficients, smoothing, and a constant���. Para isso, utilizamos uma amostra de 14 moedas em rela����o ao d��lar norte-americano que permitiu a gera����o de previs��es mensais fora da amostra de janeiro de 2000 at�� mar��o de 2014. Assim como o crit��rio adotado por Galimberti e Moura (2012), focamos em pa��ses que adotaram o regime de c��mbio flutuante e metas de infla����o, por��m escolhemos moedas de pa��ses desenvolvidos e em desenvolvimento. Os resultados da nossa pesquisa corroboram o estudo de Rogoff e Stavrakeva (2008), ao constatar que a conclus��o da previsibilidade da taxa de c��mbio depende do teste estat��stico adotado, sendo necess��ria a ado����o de testes robustos e rigorosos para adequada avalia����o do modelo. Ap��s constatar n��o ser poss��vel afirmar que o modelo implementado prov��m previs��es mais precisas do que as de um passeio aleat��rio, avaliamos se, pelo menos, o modelo �� capaz de gerar previs��es ���racionais���, ou ���consistentes���. Para isso, usamos o arcabou��o te��rico e instrumental definido e implementado por Cheung e Chinn (1998) e conclu��mos que as previs��es oriundas do modelo de regra de Taylor s��o ���inconsistentes���. Finalmente, realizamos testes de causalidade de Granger com o intuito de verificar se os valores defasados dos retornos previstos pelo modelo estrutural explicam os valores contempor��neos observados. Apuramos que o modelo fundamental �� incapaz de antecipar os retornos realizados.

The influence of macroeconomic factors on primary issues in the Brazilian market

This research analyses the influence of the macroeconomic factors on the primary issue of stocks and debentures in the Brazilian market. Previous studies have agreed on the importance of aspects of the economic situation on a company���s capital structure, but have not established a relationship between the macroeconomic variables and the level of aggregate debt; we can mention Procianoy and Caselani (1997) and Terra (2003) as examples of this. According to Leal (2000), the limitations of the Brazilian capital market suggest that management takes advantage of moments of euphoria in the market - whether caused by a reduction in the rate of interest or by the return being offered by the equity market - to raise funds at rates that are more advantageous to the company. This characterizes the first evidence we have of opportunistic behavior influencing a company���s financing decisions. Eid Jr. (1996) provides us with the first evidence of this opportunistic behavior in his research in which 47% of those interviewed said that they chose fund sources that are economically more advantageous.

Volatility of returns, variations in prices and volume traded: evidence from the main stocks in Brazil

We study the relationship between the volatility and the price of stocks and the impact that variables such as past volatility, financial gearing, interest rates, stock return and turnover have on the present volatility of these securities. The results show the persistent behavior of volatility and the relationship between interest rate and volatility. The results also showed that a reduction in stock prices are associated with an increase in volatility. Finally we found a greater trading volume tends to increase the volatility.

Europe���s financial crisis: the Euro���s flawed design and the consequences of lack of a government banker

This paper argues the euro zone requires a government banker that manages the bond market and helps finance country budget deficits. The euro solved Europe���s problem of exchange rate speculation by creating a unified currency managed by a single central bank, but in doing so it replaced the exchange rate speculation problem with bond market speculation. Remedying this requires a central bank that acts as government banker and maintains bond interest rates at sustainable levels. Because the euro is a monetary union, this must be done in a way that both avoids favoring individual countries and avoids creating incentives for irresponsible country fiscal policy that leads to ���bail-outs���. The paper argues this can be accomplished via a European Public Finance Authority (EPFA) that issues public debt which the European Central Bank (ECB) is allowed to trade. The debate over the euro���s financial architecture has significant political implications. The current neoliberal inspired architecture, which imposes a complete separation between the central bank and public finances, puts governments under continuous financial pressures. That will make it difficult to maintain the European social democratic welfare state. This gives a political reason for reforming the euro and creating an EPFA that supplements the economic case for reform.

Macroeconomic constraints to growth of Brazilian economy diagnosis and some policy proposals

The recent process of accelerated expansion of the Brazilian economy was driven by exports and fixed capital formation. Although the pace of growth was more robust than in the 1990��s, we can still witness the existence of certain macroeconomic constraints to its continuation in the long run such as, for instance, the exchange rate overvaluation in particular since 2005, and in general the modus operandi of monetary policy. Such constraints may jeopardize the sustainability of the current pace of growth. Therefore, we argue that Brazil still lies in a trap made up of high interest and low exchange rates. The elimination of the exchange rate misalignment would bring about a great increase in the rate of interest, which on its turn would impact negatively upon investment and hence upon the sustainability of long run economic growth. We outline a set of policy measures to eliminate such a trap, in particular, the adoption of an implicit target for the exchange rate, capital controls and the abandonment of the present regime of inflation targeting. Recent events seem to go in this direction.

Legal enforcement, collateral and heterogeneity of project financing contracts

This paper employs mechanism design to study the effects of imperfect legal enforcement on optimal scale of projects, borrowing interest rates and the probability of default. The analysis departs from an environment that combines asymmetric information about cash flows and limited commitment by borrowers. Incentive for repayment comes from the possibility of liquidation of projects by a court, but courts are costly and may fail to liquidate. The value of liquidated assets can be used as collateral: it is transferred to the lender when courts liquidate. Examples reveal that costly use of courts may be optimal, which contrasts with results from most limited commitment models, where punishments are just threats, never applied in optimal arrangements. I show that when voluntary liquidation is allowed, both asymmetric information and uncertainty about courts are necessary conditions for legal punishments ever to be applied. Numerical solutions for several parametric specifications are presented, allowing for heterogeneity on initial wealth and variability of project returns. In all such solutions, wealthier individuals borrow with lower interest rates and run higher scale enterprises, which is consistent with stylized facts. The reliability of courts has a consistently positive effect on the scale of projects. However its effect on interest rates is subtler and depends essentially on the degree of curvature of the production function. Numerical results also show that the possibility of collateral seizing allows comovements of the interest rates and the probability of repayment.

Welfare cost of inflation considering adoption decisions and interest-bearing deposits

Attanasio et al. (JPE, 2002) have used microeconomic data on households to provide new estimates of the welfare costs of infiation using Bailey's unidimensional welfare measure as a basis for their calculations. Such a measure does not properly take into consideration lhe fact that the majority of households in their sample (58.7 percent) holds not only bank deposits and currency, but also a second type of interest-bearing assct. This work devises alternative formulas which account for the existence of bank deposits and a sccond interest-bearing asset in the economy, as well as for adoption decisions regarding alternative financiai technologies.

On the distributive impact of unconventional monetary policy

Logo ap��s �� crise financeira de 2007-08 o Federal Reserve interveio para tentar controlar a recess��o. No entanto, ele n��o apenas baixou os juros, como tamb��m adotou pol��ticas n��o-convencionais, incluindo o empr��stimo direto para empresas em mercados de cr��dito de alto n��vel. Estas novas medidas foram controversas e alguns opositores protestaram porque elas estariam ajudando disproporcionalmente aquelas pessoas ligadas ao sistema financeiro que j�� eram ricas. N��s utilizamos um modelo DSGE para a an��lise de pol��ticas monet��ria n��o convencional e introduzimos dois tipos distintos de agentes, capitalistas e trabalhadores, para investigar o seu impacto distributivo. N��s encontramos que a pol��tica de cr��dito to Fed foi bem sucedida no mercado de trabalho, o que ajuda mais os trabalhadores, e introduziu um novo competidor no mercado banc��rio, o governo, o que prejudica mais os capitalistas. Logo, n��s encontramos que a pol��tica de cr��dito diminuiu a desigualdade nos EUA.