Alejandro M. Werner

Mexico'S Currency Risk Premia in 1992-1994; A Closer Look At the Interest Rate Differentials

This paper studies the behavior of interest rate differentials in Mexico during the 1992-94 period. It shows that the currency risk premia is positively related to the share of peso denominated debt in total debt and that the magnitude of this effect is considerable. For every 1 percentage point increase in the ratio of peso denominated debt in total debt, the interest rate differential increases between 20 and 30 basis points. In light of this result, and to get a better measure of the expectation of a devaluation during the period, the observed interest rate differential is adjusted for the change in the composition of public debt. In contrast to the behavior of the interest rate differential, the adjusted measure remained at extremely high levels throughout 1994, signalling a low level of confidence in the announced currency band.

Target Zones and Realignment Expectations: The Israeli and Mexican Experience

This paper studies the Mexican and Israeli experiences with a target zone. The first part of the paper develops a model of exchange rate determination under a target zone regime with stochastic realignments and examines the conditions under which the adoption of the target zone, instead of a fixed exchange rate, reduces the volatility of the interest rate differential. We conclude that, if the variance of the expected realignment is sufficiently large, then the target zone will be useful. The second part of the paper is an empirical study that shows that the target zone regime helped reduce interest rate variability in Israel and Mexico by absorbing part of the shocks to the expected realignment with movements of the exchange rate inside the band.

Terms-of-Trade Cycles and External Adjustment

We study the process of external adjustment to large terms-of-trade level shifts—identified with a Markov-switching approach—for a large set of countries during the period 1960–2015. We find that adjustment to these shocks is relatively fast. Current accounts experience, on average, a contemporaneous variation of only about ½ of the magnitude of the price shock—indicating a significant volume offset—and a full adjustment within 3–4 years. Dynamics are largely symmetric for terms-of-trade booms and busts, as well as for advanced and emerging market economies. External adjustment is driven primarily by offsetting shifts in domestic demand, as opposed to variations in output (also reflected in the response of import rather than export volumes), indicating a strong income channel at play. Exchange rate flexibility appears to have played an important buffering role during booms, but less so during busts; while international reserve holdings have been a key tool for smoothing the adjustment process.

Central Banking in Latin America: The Way Forward

Latin America’s central banks have made substantial progress towards delivering an environment of price stability that is supportive of sustainable economic growth. We review these achievements, and discuss remaining challenges facing central banking in the region. Where inflation remains high and volatile, achieving durable price stability will require making central banks more independent. Where inflation targeting regimes are well-established, remaining challenges surround assessments of economic slack, the communication of monetary policy, and clarifying the role of the exchange rate. Finally, macroprudential policies must be coordinated with existing objectives, and care taken to preserve the primacy of price stability.

Finance and Employment Formalization: Evidence from Mexico's Income-Expenditure Surveys, 2000-2010

We study the relationship between financial slack and employment formalization by exploiting heterogeneity in industry-level financial dependence in the spirit of Rajan and Zingales (1998). We use this heterogeneity along with time-series variation in aggregate credit to determine industry level financial slack and test which of two simple models of formality and finance is supported by data from Mexico. In contrast to similar studies our results suggest that more financial slack in an industry results in lower formality in that industry. This result is consistent with a theory where formal employees and/or informal firms are the capital constrained agents effected by the policy. Instead of promoting formalization our results are consistent with the notion that financial slack lets employees become informal independents and/or lets informal firms grow. Estimating the effects conditioning by age or schooling gives results that are also consistent with this notion.