Herman Kamil

Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia

Policymakers in many emerging markets are attempting to resist currency appreciation while simultaneously meeting targets for inflation. Using the recent experience of Colombia between 2004 and 2007, this paper examines the effectiveness of the Central Banks intervention in stemming domestic currency appreciation under an inflation targeting regime. The results indicate that exchange rate intervention was effective during 2004-2006, when foreign currency purchases were undertaken during a period of monetary easing. During 2007, on the other hand, intervention was ineffective in reversing or slowing down domestic currency appreciation, as large-scale intervention became incompatible with meeting the inflation target in an overheating economy. Currency derivative markets-which have grown in depth and sophistication-played a key role in blunting the effectiveness of intervention.

Are Capital Controls Effective in the 21st Century? The Recent Experience of Colombia

This paper assesses the effects of capital controls imposed in Colombia in 2007 on capital flows and exchange rate dynamics. The results suggest that the controls were successful in reducing external borrowing, but had no statistically significant impact on the volume of non- FDI flows as a whole. We find no evidence that restrictions to capital mobility moderated the appreciation of Colombias currency, or increased the degree of independence of monetary policy. We also find that controls have significantly increased the volatility of the exchange rate. Additional research is needed to assess the effects of capital controls on financial stability.

The Global Credit Crunch and Foreign Banks' Lending to Emerging Markets

The recent global financial turmoil raised questions about the stability of foreign banks‘ financing to emerging market countries. While foreign banks‘ lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks‘ lending to LAC countries—whether extended directly by their headquarters abroad or by their local affiliates in host countries—we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks‘ lending was channeled in domestic currency. We also show that foreign banks‘ involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks‘ lending. JEL Classification Numbers: F34; F36; F37.

Decentralization and Fiscal Discipline in Subnational Governments:The Bailout Problem in Uruguay

This paper analyzes the reasons behind Central Government (CG) bailouts of Subnational Governments (SNGs) in the case of Uruguay. We argued that Uruguay represents a good example of the risks of fiscal decentralization, in the context of adjustment policies, and when SNGs` responsibilities and resources have not been carefully defined. We show that, in unitary countries where SNGs lack the opportunities to misbehave that they have in federal countries (e. g. , public debt issuance, international borrowing), SNG officials find ways to finance deficits through non-compliance with politically contestable obligations. In particular, SNGs in Uruguay finance their deficits by accumulating debts with other government agencies and obtaining discretionary transfers from the CG. Through statistical analyses we show that debts and deficits are mainly related to vertical fiscal imbalances and economic conditions in the SN jurisdictions. Yet, the analysis of recent bailout episodes suggests that institutions and political factors play a role (i. e. , they are important ex-post factors). This implies that bailouts have been more than simple compensations for structural imbalances, thus creating opportunities for strategic behavior on the part of SNG authorities (partly confirmed by the disparate fiscal performance of Montevideo vis-a-vis the rest of the country).

Business Cycle Fluctuations in a Small Open Economy: The Case of Uruguay

This paper provides an empirical description of the business cycle regularities of the Uruguayan economy between 1975 and 1994. The method of estimation of the cyclical components is based on the application of the Hodrick-Prescott filter over the unobservable trend-cycle components estimated from reduced-form univariate models. The method used to derive cyclical components offers two advantages over the procedures usually used in the literature. First, the cyclical component is extracted from time series that have been previously seasonally-adjusted using a method which explicitly takes into account the specific characteristics of the estimated data generating process. Second, given that irregular components are excluded from the estimation of the final cyclical components, correlations considered in the characterization of the business cycle are not affected by non-systematic oscillations (noise) in the series. The pattern observed in the cyclical comovements of the aggregate supply and demand components as well as their levels of relative variability are similar, in general, to those observed in other economies. However, some characteristics seem to be specific to the Uruguayan economy: procyclical and low-volatility public sector expenditure, cyclical lag of monetary aggregate fluctuations and countercyclical interest rates. Exports, ex-ante real interest rates in local currency and the GDP of neighbor countries Argentina and Brazil behave as leading indicators of the reference cycle of the Uruguayan economy.

Does Procyclical Fiscal Policy Reinforce Incentives to Dollarize Sovereign Debt

This paper explores the link between the cyclical patterns of macroeconomic and policy variables and the currency composition of domestic sovereign debt in emerging market countries. The empirical analysis is anchored in an equilibrium model, in which the dollarization of sovereign debt arises as a result of the optimal portfolio choices by risk-averse investors, and of a sovereign debt manager who takes fiscal policy as given. The model predicts that in countries where the exchange rate is countercyclical (i.e., the exchange rate depreciates during recessions), a more procyclical fiscal policy (i.e., expansionary in good times and contractionary in bad times) would lead, on average, to a more dollarized domestic sovereign debt. The empirical analysis using the Jeanne-Guscina EM Debt database (2006) on the currency structure of the central government debt in 22 emerging market countries over 1980 - 2005, supports these predictions.

Exposición Cambiaria Y Uso De Instrumentos Derivados En Economías Dolarizadas: Evidencia Microeconómica Para Uruguay (Currency Exposure and Use of Derivatives in Dollarized Economies: Microeconomic Evidence from Uruguay)

Este trabajo presenta nueva evidencia sobre el uso de instrumentos financieros para el manejo del riesgo cambiario por parte de las empresas uruguayas. El analisis se basa en una muestra representativa de 837 empresas no financieras con informacion detallada sobre su uso de derivados del tipo de cambio, estructura de financiamiento, participacion en el comercio internacional y propiedad del capital durante el periodo 2008-2009. A pesar que se detecta un elevado grado de exposicion cambiaria de las empresas en sus balances financieros y flujos netos de ingresos, solo un 6 por ciento de las mismas manifestaron utilizar derivados cambiarios. La principal motivacion declarada por las firmas que usan derivados es cubrir los ingresos operativos en moneda extranjera frente a una revaluacion del peso. Entre aquellas empresas que no utilizan derivados, las tres razones mas frecuentemente citadas para no hacerlo son: la creencia de no tener exposicion cambiaria; el uso de otros metodos para administrar el riesgo cambiario (como ser el financiamiento de proveedores y clientes) y la percepcion de un seguro gratuito implicito ofrecido por la intervencion oficial en el mercado de cambios. Los resultados econometricos indican que el tamano de las firmas, la exposicion a la revaluacion del peso y cotizar en bolsa afectan significativa y positivamente la probabilidad de uso de estos instrumentos. Durante el periodo analizado las empresas no utilizaron instrumentos derivados para cubrirse frente a una eventual devaluacion de la moneda. This paper presents new evidence on the use by Uruguayan firms of financial instruments to manage currency risk. The analysis is based on a representative sample of 837 non financial firms, with detailed information on their use of currency derivatives, on their financing structure, on their participation in international commerce and ownership over the period 2008-2009. While we find a high level of currency exposure only 6 percent of the firms use currency derivatives. The main motivation for the companies that do use them is to hedge the foreing currency income influx from their operational activities in the case of a revaluation of the local currency. Among the firms that do not make use of derivatives, the three more common reasons are: the belief that there is no currency exposure; the use of different methods to manage currency risk (e.g. trade financing) and the perception of a free implicit insure offered by government intervention in the currency market. The econometric evidence show that firm size, exposure to peso revaluation and being listed in the stock market affect significative and positively the probability of using these instruments. During the analyzed period no company used any kind of derivatives to hedge against an eventual devaluation of the local currency.