Emanuel Kohlscheen

Why are there Serial Defaulters? Evidence from Constitutions

Presidential democracies were 4.9 times more likely than parliamentary democracies to default on external debts between 1976 and 2000. In this article I argue that the explanation for the serial defaults by a number of sovereign borrowers lies in their constitutions. Ceteris paribus, parliamentary democracies are less likely than presidential democracies to default on their liabilities because the confidence requirement creates a credible link between economic policies and the executives political survival. This link tends to strengthen the repayment commitment when politicians are opportunistic. I show that this effect is large in the contemporary world even when the comparison is restricted to countries that are similar in terms of colonial origin, geography, and economic variables. Since a countrys form of government is typically chosen at the time of independence and is highly persistent over time, constitutions can explain why debt policies in developing countries are related to individual histories.

Order Flow and the Real: Indirect Evidence of the Effectiveness of Sterilized Interventions

This study presents indirect evidence of the effectiveness of sterilized interventions in Brazil based on the complete records of daily customer order flow data reported by Brazilian dealers, as well as foreign exchange intervention data over a time span of 10 years (2002-2011). We find that the effect of USD sales by end-users on the BRL/USD was much stronger on days in which the BCB did not intervene in the spot foreign exchange market.

Long-Run Determinants of the Brazilian Real: A Closer Look at Commodities

ABSTRACT We use cointegration analysis to show that the long‐run behaviour of the Brazilian Real effective exchange rate between January 1999 and September 2012 can largely be explained by the price variation of a basket of five commodities—that accounted for 51% of Brazilian export revenues in 2011. We estimate that a 10% variation in the real price of these five commodities moves the fundamental long‐run real exchange rate by almost 5%. Changes in interest rate differentials do not explain short or long term movements in the exchange rate during this period. Furthermore, we find that deviations of the real effective exchange rate from the long run equilibrium level have an estimated half‐life of approximately 8 months. The growing exports of oil and fuel and of iron ores, as well as the important oil discoveries in the pre‐salt layer, suggest that commodity prices will continue to influence the value of the Real in the future. Copyright

The Impact of Monetary Policy on the Exchange Rate: A High Frequency Exchange Rate Puzzle in Emerging Economies

This study investigates the impact of monetary policy shocks on the exchange rates of Brazil, Mexico and Chile. We find that even a focus on 1 day exchange rate changes following policy events – which reduces the potential for reverse causality considerably – fails to lend support for the view that associates unexpected interest rate hikes with immediate appreciations. This lack of empirical backing for the predictions of standard open economy models persists irrespective of whether we use the US Dollar or effective exchange rates, whether changes in the policy rate that were followed by exchange rate interventions are excluded, whether “contaminated” events are dropped from the analysis or whether we allow for non-linearities. We argue that it is difficult to attribute this stronger version of the exchange rate puzzle to fiscal dominance, as unexpected rate increases are not associated with increases in risk premia, and similar results are obtained in the case of Chile – a country that has had the highest possible short-term credit rating since 1995 and a debt/GDP ratio below 10%.

A Sovereign Debt Model with Trade Credit and Reserves

This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance.

Pessimistic Foreign Investors and Turmoil in Emerging Markets: The Case of Brazil in 2002

Using survey data, we document that foreign-owned institutions became more pessimistic than locally owned institutions about the strength of the Brazilian currency around the 2002 presidential elections. As a result of their relative pessimism, foreignowned institutions made larger forecast errors. Consistent with the emergence of their relative pessimism, foreign investors heavily sold Brazilian stocks and the Brazilian currency in futures markets ahead of the 2002 elections. Periods of stronger foreign sell-off were associated with larger equity price declines and larger depreciation of the Brazilian Real in spot and futures markets. These results are consistent with foreign investors’ lack of knowledge of Brazilian institutions contributing to the sharp depreciation of the Brazilian currency and stock market ahead of the 2002 presidential elections.

Uma nota sobre erros de previsão da inflação de curto-prazo

This note shows that the unbiasedness and the weak rationality hypotheses are not rejected for inflation forecasts surveyed by the Central Bank. However, a clear pattern of auto-correlation of forecast errors is found. Furthermore, increases (decreases) in inflation are systematically associated with underestimations (overestimations) of inflation in the following month. This suggests that models in which past realizations of inflation have greater weight in the formation of expectations are more accurate than the assumption of rational expectations. Models aimed at explaining how expectations are formed should be able to explain these stylized facts as well as the hysteresis of forecasts.