Marcos Chamon

Capital Inflows; The Role of Controls

With the global economy beginning to emerge from the financial crisis, capital is flowing back to emerging market countries (EMEs). These flows, and capital mobility more generally, allow countries with limited savings to attract financing for productive investment projects, foster the diversification of investment risk, promote intertemporal trade, and contribute to the development of financial markets. In this sense, the benefits from a free flow of capital across borders are similar to the benefits from free trade (see Reaping the Benefits of Financial Globalization, IMF Occasional Paper 264, 2008), and imposing restrictions on capital mobility means foregoing, at least in part, these benefits, owing to the distortions and resource misallocation that controls give rise to (see Edwards and Ostry, 1992, for an example of how capital controls interact with other distortions in the economy).

Why are Saving Rates of Urban Households in China Rising

From 1995 to 2005, the average urban household saving rate in China rose by 7 percentage points, to ¼ of disposable income. We use household-level data to explain the postponing of consumption despite rapid income growth. Tracing cohorts over time indicates virtually no consumption smoothing over the life cycle. Saving rates have increased across all demographic groups, although the age-profile of savings has an unusual U-shaped pattern, with saving rates being the highest among the youngest and oldest households in recent years. These patterns are best explained by the rising private burden of expenditures on housing, education, and health care.

Managing Capital Inflows : What Tools to Use?

Ostry, Jonathan David; Ghosh, Atish R.; Habermeier, Karl F; Chamon, Marcos d; Qureshi, Mahvash S; Kokenyne, Annamaria.April, 2011.Managing Capital Inflows,Reports,[Washington D.C.]IMF,Staff Discussion Notes/11/06,41

Sovereign Debt Structure for Crisis Prevention

The debate on government debt in the context of possible reforms of the international financial architecture has thus far focused on crisis resolution. This paper seeks to broaden this debate. It asks how government debt could be structured to pursue other objectives, including crisis prevention, international risk-sharing, and facilitating the adjustment of fiscal variables to changes in domestic economic conditions. To that end, the paper considers recently developed analytical approaches to improving sovereign debt structure using existing instruments, and reviews a number of proposals--including the introduction of explicit seniority and GDP-linked instruments--in the sovereign context.

Coping with the Crisis; Policy Options for Emerging Market Countries

This chapter outlines policies to help solve the debt overhang and bring about recovery in both groups of countries. The current financial turmoil is confronting emerging market economies with two shocks: a ‘sudden stop’ of capital inflows resulting from the global deleveraging process, and a collapse in export demand associated with the global slump. A key ingredient appears to be greater official financing to expand the ‘policy space’ available to emerging market economies (EME) to pursue supportive macroeconomic policies—including, in countries with large debt overhangs, by helping to meet the fiscal outlays associated with the resolution of that overhang. An important first step is to ensure an adequate framework to facilitate rapid debt workouts. Debt restructuring mechanisms can provide greater scope for monetary easing by reducing the negative repercussions of exchange rate depreciation on unhedged balance sheets. Depending on the available fiscal space, expansionary fiscal policy should also be deployed to support economic activity.

The Iceberg Theory of Campaign Contributions: Political Threats and Interest Group Behavior

We present a model where special interest groups condition contributions on the receiving candidates support and also her opponents. This allows interest groups to obtain support from contributions as well as from threats of contributing. Out-of-equilibrium contributions help explain the missing money puzzle. Our framework contradicts standard models in predicting that interest groups give to only one side of a race. We also predict that special interest groups will mainly target lopsided winners, whereas general interest groups will contribute mainly to candidates in close races. We verify these predictions in FEC data for US House elections from 1984-1990. (JEL D72)

Why Can't Developing Countries Borrow from Abroad in Their Currency?

This paper analyzes the different implications of denominating foreign debt in a tradable or in a nontradable good, analogous to foreign currency and a local price index respectively. While the price of tradables is exogenous to a small open economy, the price of nontradables reacts to the shocks it experiences, being high (low) following a good (bad) shock. Since defaults are correlated with large real depreciations, debt denominated in the tradable good will have a relatively higher face-value in those states. If there are large deviations from strict creditor seniority enforcement, a nontradable denominated debt holders claim on a borrowers bankrupt firm can be expropriated through additional borrowing denominated in the tradable good. This dilution mechanism is an inefficient expropriation technology, whose cost is borne by the borrower in equilibrium. That discourages the use of nontradable denominated instruments, even though they can improve international risk sharing and help prevent financial crises.

Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers however believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically, and find support for the key predictions in the data.

Asian Growth and African Development

Since World War II, integration with the world economy has arguably been the chief route from poverty to wealth. Japan initially exported cheap goods and later moved on to more technologically sophisticated products. When Japan became rich, Korea, Taiwan Province of China, Hong Kong SAR, and Singapore replaced Japan as low-wage exporters, and when these countries moved on to more sophisticated products, Thailand and Malaysia filled their niche. More recently, China has become an important exporter of manufactured goods and India is increasingly moving into services exports. No mainland sub-Saharan African country has experienced this type of transformation. Even countries that have undergone major economic reforms seem far from takeoff. Forecasts for Africa, based on extrapolation of its historical experience, tend to be bleak. We consider whether it is possible to construct a model, consistent with the data, which supports a more optimistic view. Motivated by the Asian experience, the model assumes countries can potentially undergo rapid economic transformation only if they integrate into the world economy by producing nontraditional exports. For the purposes of constructing a long-run model of the world economy, we are agnostic on whether exports matter due to technological learning by doing spillovers, political economy considerations, or other factors. As each developing country transforms and becomes advanced, it further improves trade opportunities for the remaining developing countries. For example, if China becomes rich, a billion more people will live in countries that import toys and a billion fewer will live in countries that export them. Our approach is similar to that of Robert E. Lucas (2000) in that we assume growth prospects improve with the state of the world economy, potentially generating accelerating world growth. Unlike Lucas (2000), however, we allow for differential population growth between rich and poor countries. The steady-state proportion of the world population living in advanced countries depends on the rate at which developing countries transform into advanced ones, and on the magnitude of population growth differentials between these two groups of countries. The economic transformation process will overcome the demographic trend, leading to a prosperous steady state, only if the initial share of world population in advanced countries is above a threshold. A simple calibration using historical data suggests that the longrun prospects for lagging developing regions may hinge on a race between economic growth in China and India and population growth in the lagging regions, particularly Africa. If the former “wins,” we may eventually observe accelerating global growth. This suggests some caution should be used when interpreting empirical studies on growth determinants, as these results may not be stable over time. Country characteristics that lead to poor performances today may well allow for rapid growth in the future if, and when, the world economy reaches a sufficiently advanced stage. Our model also suggests a queuing effect, where the order in which countries are absorbed into the world economy is determined by the quality of their policies. Economic reforms in one country may potentially have a large impact on growth if they move the country to the front of the queue. But similar reforms in all countries may have a much smaller impact on world growth.

Is There a Novelty Premium on New Financial Instruments? The Argentine Experience with GDP-Indexed Warrants

This paper examines the Argentine experience with GDP-indexed warrants in order to gauge the existence of a novelty premium on new financial instruments. It develops a Monte Carlo pricing exercise to calculate the expected net present value of payments, on the basis of various forecast assumptions. The results show that the residual premium paid by these warrants over standard bonds declined significantly by about 600 basis points between December 2005 and July 2007. This suggests that financial innovation may be associated with premia, which decay reasonably fast.