Ernesto Talvi

Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons

We offer an alternative explanation for the fall of Argentinas Convertibility Program based on the countrys vulnerability to Sudden Stops in capital flows. Sudden Stops are typically accompanied by a substantial increase in the real exchange rate that breaks havoc in countries that are heavily dollarized in their liabilities, turning otherwise sustainable fiscal and corporate sector positions into unsustainable ones. In particular, we stress that the required change in relative prices is larger the more closed an economy is in terms of its supply of tradable goods. By contrasting Argentinas performance relative to other Latin American countries that were also subject to the Sudden Stop triggered by the Russian crisis of 1998, we identify key vulnerability indicators that separated Argentina from its piers. We also provide an explanation for the political maelstrom that ensued after the Sudden Stop, based on a War of Attrition argument related to the wealth redistribution conflict triggered by the Sudden Stop and fiscal collapse. This framework also provides elements to rationalize the banking crisis that accompanied the fall of Convertibility.

Tax Base Variability and Procyclical Fiscal Policy

While fiscal policy in the G-7 countries appears to be broadly consistent with Barros tax smoothing proposition, in developing countries government spending and taxes are highly procyclical (i.e., government spending rises and taxes fall during expansions, while the reverse is true in recessions). To explain this puzzle, we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending. Given this distortion, a government that faces large (and perfectly anticipated) fluctuations in the tax base will find it optimal to run a procyclical fiscal policy. We argue that the differences in fiscal policy between the G-7 countries and developing countries can be traced back to the fact that the tax base in developing countries is much more volatile than in the G-7 countries.

Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness

Latin America is volatile--about two to three times as volatile as the industrial economies. It is more volatile than any region other than Africa and the Middle East. Latin America`s access to international financial markets is sporadic, and often disappears just when it would be most valuable.

Booms and Busts in Latin America: The Role of External Factors

This paper analyzes the relevance of external factors in average quarterly GDP growth for 1990-2006 in the seven largest Latin American countries (LAC7). Modeling the relationship between LAC7 GDP and several external factors, it is found that those factors account for a significant share of variance in LAC7 GDP growth, and that external shocks produce significant responses. Likewise, a significant share of recent LAC7 growth performance can be explained by an external factor “tailwind. ” Also evaluated is the impact of deterioration in external financial conditions. Finally, the relevance of these findings for policy evaluation is emphasized. Growth performance, the strength or weakness of macroeconomic fundamentals and the impact of domestic macro and micro policies on growth can only be properly appraised by first filtering out the effects of external factors.

Exchange Rate-Based Stabilization with Endogenous Fiscal Response

In the context of a perfect foresight, intertemporal optimizing, cash-in-advance model, this paper studies the dynamics of an inconsistent exchange rate-based stabilization policy that fixes the exchange rate without an underlying fiscal adjustment to ensure that the exchange rate policy is sustainable in the long run. The perception that the exchange rate policy is temporary leads to an initial expansion in consumption, and, since the model allows for distortionary taxes on consumption, to an endogenous increase in tax revenues large enough to eliminate the ex-ante fiscal deficit. This paper was prepared for the 8th NBER Inter-American Seminar, held in Bogota, Colombia in November 1995.

Saving Behavior in Latin America: Overview and Policy Issues

This paper reviews and contributes to the policy debate on the issue of saving in Latin America, presenting an alternative perspective on the relationship between saving and growth, saving and inflation stabilization and structural reform, and saving and capital flows.

Integration, Interdependence, and Regional Goods: An Application to Mercosur

The paper is organized as follows. The next section presents some stylized facts on Mercosur, documenting the evolution of trade in goods within member countries and then highlighting the characteristics of the trade agreement that make smaller Mercosur economies vulnerable to macroeconomic developments in Brazil. The subsequent section presents the main empirical contribution of the paper. Specifically, we develop empirical definitions of regional goods and then measure the extent of trade in regional goods by estimating intraregional trade in services, identifying the commodity items that can relatively easily find alternative markets, and calculating three alternative indicators of export exposure. The following section formally incorporates the concept of regional goods into a model of an intertemporal open economy. This model is used to assess Afonso Bevilaqua, Marcelo Catena, and Ernesto Talvi 159 the main channels of the transmission of shocks to the price of regional goods, to perform sensitivity analysis to ascertain the main factors behind vulnerability, and to set the stage for meaningful policy discussions. In the final section, we discuss the policy implications.

Fiscal Policy Sustainability: A Basic Framework

The main purpose of this paper is to provide a simple analytical framework that can guide the development of indicators of fiscal policy sustainability in economies which operate in a highly volatile macroeconomic environment.

Growth and External Financing in Latin America

This paper discusses the economic performance of Latin America in the last decade, paying special attention to growth and the financial sector. In particular, it shows that external factors, such as like U.S. interest rates and the business cycle, play a key role in capital inflows, investment, and growth. As a result, economic growth in the region tends to be fragile and exhibits a high degree of co-movement, i.e., high cross-country output correlation. This last feature exacerbates fragility, because there is little room for mutual insurance within Latin America in case a country suffers a bad shock, and finance during downturns has to come primarily from outside the region.