Juan Carlos Berganza

Flexible Inflation Targets, Forex Interventions and Exchange Rate Volatility in Emerging Countries

Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of “strict IT”, which imply a fully flexible exchange rate, or applying a “flexible IT”, which entails a de facto managed-floating exchange rate with foreign exchange (forex) interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, forex interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of “flexible IT” by policymakers.

Fiscal Rules in Latin America: A Survey

This survey first discusses general characteristics, advantages and disadvantages of different types of fiscal rules. The criterion for classifying them is based on the emphasis given: long-term sustainability (reducing the deficit bias and controlling the growth in public debt) or reducing the procyclicality of fiscal policy (short-term stabilisation). It then reviews the experience with fiscal rules in seven Latin American countries, as their use has become more widespread since the early 2000s. Only Chile targets cyclically adjusted indicators, although Colombia is also taking that approach and the Mexican rule offers some stabilisation properties. Argentina, Brazil and Peru apply numerical rules targeting the overall/primary public balance and/or public spending. The Venezuelan framework has, in practice, been diluted after its introduction. The coverage of the rule depends on the degree of decentralisation of fiscal systems, with many countries including debt limits on the sub-national governments as a key tool to face the common pool problem that emerges in federal states. All in all, fiscal rules in Latin America have been more effective in helping to strengthen long-term sustainability than in responding to shocks, as proved by the recent financial crisis. Fiscal rules have had to be fine-tuned over the years and a “second generation” of fiscal rules – combining the sustainability objective with greater flexibility to accommodate economic shocks – appears to be necessary in order to increase their efficiency.

What Makes Balance Sheet Effects Detrimental for the Country Risk Premium

This paper builds upon the empirical literature on the macroeconomic impact of real exchange rate depreciations for a sample of 27 emerging economies. We find that real exchange rate depreciations tend to increase a countrys risk premium. This effect is neither linear nor symmetric: large real exchange depreciations are much more detrimental and real appreciations do not seem to reduce the risk premium. We also show that the main channels for the real exchange rate to affect country risk are external and domestic balance sheet effects, stemming from the sudden increase in the stock of external or domestic dollar denominated debt, respectively. This is particularly the case in the countries with the largest financial imperfections. Competitiveness is not an important enough factor to outweigh this negative effect. Finally, fixed exchange rate regimes tend to amplify balance sheet effects, beyond the extent of real depreciations. The data indicates that it could be due to a larger accumulation of external debt under fixed regimes.

Determinants and Implications of Low Global Inflation Rates

In this paper we look at global inflation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of inflation during the recovery from the Great Recession. We review the literature on the subject, which points at possible structural shifts in price and wage setting processes in recent decades, such as inflation’s reduced cyclical sensitivity to domestic economic slack, a bigger role being played by forward-looking inflation expectations, and the increased importance of global factors. We then test empirically whether changes in the coefficients of the Phillips curve in the wake of the global financial crisis can explain the behaviour of inflation over this period for a large group of advanced economies. Our results show a wide range of variation between countries, and in some cases the findings are insufficiently robust to offer a satisfactory explanation of the recent course of inflation. Nevertheless, the persistence of inflation and the increased importance of backward-looking inflation expectations in some countries may pose risks for inflation-expectation anchoring and central bank credibility. Finally, we review the adverse effects on the real economy of ultra-low inflation over an extended period and analyse the policy options for addressing this problem.