Benjamin A. Abugri

Currency substitution: Evidence from Latin America

Abstract Currency substitution represents a shift from domestic currency to foreign currency and is often related to times of high and variable inflation. In this paper, we investigate the extent of currency substitution in Argentina, Brazil and Mexico using a vector error correction (VEC) model. We empirically test this hypothesis by introducing artificial shocks to the system of equations and find that M1 response to a one standard deviation increase in that country’s interest rate is negative and significant for Argentina and Brazil but not for Mexico. An artificially introduced one standard deviation increase in nominal exchange rate results in a statistically significant increase in M1 in Argentina and Brazil but again not for Mexico. Based on the patterns of the impulse response functions (IRFs) and the magnitude of the coefficients, we conclude that currency substitution occurs to a greater extent in Argentina and Brazil than Mexico. This is reflective of the implementation of relatively more credible macroeconomic policies in Mexico after the December 1994 crisis. Thus from a policymaking perspective, it is important to consider that the greater the degree of currency substitution, the more sensitive a country’s monetary aggregates are to sudden movements in exchange rates, productivity and interest rates.

The U.S. Productivity Figures and Foreign Direct Investment in Japan

In this paper, we present empirical evidence linking the movements in the U.S.

Market Efficiency in Emerging Markets: Does the Legal System Matter?

/Yen exchange rate and the U.S. productivity figures to the U.S. outbound foreign direct investment (FDI) in Japan by constructing a five variable vector autoregressive (VAR) model. Our results show a lagged and statistically significant negative response of the U.S. FDI to a one standard deviation increase in the U.S. productivity figures. We further find that a once and for all appreciation in the U.S. dollar increases the U.S. FDI in Japan which is consistent with the earlier findings in the literature. The U.S. export figures, however, are found to serve as a complement to the U.S. outbound FDI whereas the impact of the U.S. imports from Japan on the U.S. outbound FDI is found to be negative. The results support the view that a productivity increase in the U.S. decreases the amount of the U.S. outbound foreign direct investment in the long run.

Testing Trade-Off and Pecking Order Models Under Different Institutional Environments

This paper investigates the question of market efficiency in a sample of thirty-four emerging markets with different legal systems. We use both dollar and local currency returns to examine whether exchange rate effects can improve our understanding of the information flows in these capital markets. Using various tests, we find that market efficiency rate is higher for dollar denominated returns than for local currency returns. Contrary to our predictions, we find weak evidence that one country’s legal system contributes to the level of market efficiency. At the minimum, we can state that for local currency returns, civil law countries seem to have markets that are more efficient compared to those in common law countries. Overall, the findings are consistent with the suggestion that exchange rate reforms as well as exchange rate fluctuations may introduce biases that can affect market efficiency.

Empirical relationship between macroeconomic volatility and stock returns: Evidence from Latin American markets

In this paper, we examine the differences in information asymmetry and financing patterns and a generalized version of the trade-off theory across countries with different institutional environments. We find that firms in Civil law countries have higher information asymmetry, rely more on internally generated funds, and use more short-term debt to finance their financing deficit, relative to those in Common law countries. In both Civil law and Common law countries, factors suggested by the trade-off theory explain the financing deficit coefficient in the generalized version of the trade-off model. Overall, the generalized version of the trade-off theory provides a better explanation for the changes in capital structure relative to the pecking order theory, even in countries with higher information asymmetry.