Leonardo Leiderman

Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors

The characteristics of recent capital inflows into Latin America are discussed. It is argued that these inflows are partly explained by conditions outside the region, like the recession in the United States and lower international interest rates. The importance of external factors suggests that a reversal of those conditions may lead to a future capital outflow, increasing the macroeconomic vulnerability of Latin American economies. Policy options, it is argued, are limited.

Capital Inflows and Real Exchange Rate Appreciation in Latin America

The characteristfcs of recent capital inflows into Latin America are discussed. It is argued that these inflows are partly explained by conditions outside the region, like recession in the United States and lower international interest rates. This suggests the possibility that a reversal of those conditions may lead to a future capital outflow, fncreasing the macroeconomic vulnerability of Latin American economies. Policy options are argued to be lfmited.

Inflows of Capital to Developing Countries in the 1990s: Causes and Effects

This paper discusses the changing pattern of capital flows to developing countries. The analysis is heavily colored by recent events. It concentrates on the principal facts, developments, and policies that characterize the current episode of capital inflows to Asia and Latin America.

On the Real Effects of Inflation and Relative-Price Variability: Some Empirical Evidence

W ITH the acceleration of the inflationary process the study of the real effects of inflation, whether anticipated or unanticipated, has attracted a great deal of attention. Less effort, however, has been directed to the analysis of the effects of uneven inflation, and to the study of the impact of relative-price variability on real economic variables. The purpose of this paper is to present empirical evidence concerning the effects of relative-price variability on the rate of unemployment and on the level of output for the postwar United States. Moreover, in the course of the analysis new evidence is presented on the different effects of expected and unexpected inflation on output and unemployment, evidence which bears on the Natural-Rate Hypothesis.I Most of the previous literature on relativeprice variability under inflationary conditions has focused on isolating the main explanatory variables for such variability.2 Yet little is known, empirically, about the effects of such variability on the real sector of the economy. It is interesting to note, however, that prominent economists have advanced a specific hypothesis about such effects. For example, Friedman (1977), in his Nobel Lecture, hypothesized that increased volatility of inflation reduces the efficiency of market prices as coordinators of economic activity, and that therefore

Modeling and Testing Ricardian Equivalence: A Survey

A central proposition regarding effects of different mechanisms of financing public expenditures is that, under specific circumstances, it makes no difference to the level of aggregate demand if the government finances its outlays by debt or taxation. This so-called Ricardian equivalence states that, for a given expenditure path, substitution of debt for taxes does not affect private sector wealth and consumption. This paper provides a model illustrating the implications of Ricardian equivalence, surveys the literature, considers effects of relaxing the basic assumptions, provides a framework to study implications of various extensions, and critically reviews recent empirical work on Ricardian equivalence.

Seigniorage and the welfare cost of inflation: Evidence from an intertemporal model of money and consumption

This paper empirically investigates the restrictions embodied in a popular dynamic monetary model for the cross relations between consumption, money holdings, inflation and assets’ returns using quarterly data for the high-inflation economy in Israel, 1970–1988. The model considered includes money in agents’ utility function. A set of the estimated parameters is used in the analysis to assess the model’s quantitative implications for seigniorage and for the welfare costs of inflation. The estimates are found to account well for the observed stability over time of seigniorage in Israel and imply sizeable welfare costs of inflation.

Inflation Targeting in Dollarized Economies

The shift to inflation targeting has contributed to the relatively low inflation observed in some emerging market economies although, as noted by many economists, the preconditions required for a successful implementation were not in place. The existence of managed exchange rate regimes, a narrow base of domestic nominal financial assets, the lack of market instruments to hedge exchange rate risks, together with fear of floating and dollarization, have been stressed as factors that might weaken the efficacy of monetary policy. By examining various aspects of monetary transmission and policy formulation in two highly dollarized economies (Peru and Bolivia) vis-a-vis two economies with low levels of dollarization (Chile and Colombia), we found that, while dollarization imposes differences in both the transmission capacity of monetary policy and its impact on real and financial sectors, it does not preclude the use of inflation targeting as a policy regime.

A Monetary Approach to the Crawling-Peg System: Theory and Evidence

This paper develops and estimates a model of the joint determination of the exchange rate, international reserves, and the rate of inflation under a crawling-peg system. The framework presented, which is an extension of previous work on the monetary approach, generates short-run deviations from purchasing power parity that occur simultaneously with movements in both international reserves and the exchange rate. The model is estimated by full-information maximum likelihood on the basis of quarterly data for Brazil.

Living with Dollarization and the Route to Dedollarization

Financial dollarization in Latin America has been growing over time in spite of a major reduction in inflation and a shift toward central bank independence. After discussing the key stylized facts of dollarization and dedollarization in the region, we discuss the risks this process poses to the region. In particular, we explore the validity of concerns about the effectiveness of monetary policy in a dollarized economy and about a loss of seigniorage revenue in such an economy. After concluding that to a large extent these concerns lack empirical support, we focus on the main reason for concern: increased vulnerability due to the dollarization of public and private debt. We emphasize the importance of precautionary/regulatory measures to limit the scope of mismatches originating from liability dollarization, and of developing financial instruments designed to hedge against currency risk. Moreover, we deal with the experience of policies directly aimed at deepening domestic financial markets in local currency assets and in gradually lengthening the maturity of these assets. We find that important lessons from the experience of dedollarization in Israel are of particular interest for Latin America.

On the monetary-macro dynamics of Colombia and Mexico

Abstract This paper investigates the dynamic interrelationship among money growth, inflation, and output growth for Colombia and Mexico on the basis of implementation of a vector autoregression methodology. The evidence for Colombia generally shows autonomous output growth and money growth behavior, and an important role for money shocks in accounting for variations in inflations. A different pattern of results emerged for Mexico: there are strong two-way feedbacks among money growth and inflation, and a less autonomous output growth behavior than in Colombia.