Sebastian Edwards

Real and monetary determinants of real exchange rate behavior: Theory and evidence from developing countries☆

This paper develops a dynamic model of real exchange rate behavior in developing countries. A three goods economy (exportables, importables and nontradables) is considered. Residents of this country hold domestic and foreign assets, and there is a dual exchange rate regime. There is a government that consumes importables and nontradables. A distinction is made between equilibrium and disequilibrium movements of the RER. The determinants of real exchange rate misalignment are studied with emphasis placed on the role of devaluations and balance of payments crisis. The implications of the model are tested using data for 12 developing countries. The results obtained are generally favorable for the model. The issue of RER stationarity is also analyzed.

The Pricing of Bonds and Bank Loans in International Markets: an Empirical Analysis of Developing Countries' Foreign Borrowing

The purpose of this paper is to compare the pricing of bank loans and bonds in international markets. The results obtained, using data on LDC debtors, indicate that in both markets the country risk premium has responded to some of the variables suggested by the theory. However, the way in which these variables affect the risk premium differs across these markets. Data on LDC bond yields in the secondary market for 1980-85 are also used to analyze the way in which this market reacted and anticipated the debt crisis.

Why are Latin America's savings rates so low? An international comparative analysis

Abstract This paper presents a theoretical and empirical assessment of the determinants of savings rates, with special emphasis on Latin American savings rates. The study is based on international comparisons, using data from 36 countries for 1970–1992. A distinction is made between private and public savings. The later are endogenously determined by economic and political variables. Per capita income growth is the most important determinant of private and public savings; public savings are lower in countries with higher political instability; public savings crowd out private savings, but less than proportionately. Low Latin American savings are due to the magnitudes of their determinants, rather than structural differences.

Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops

In this paper I analyze the anatomy of current account adjustments in the world economy during the past three decades. The main findings may be summarized as follows: (i) Major reversals in current account deficits have tended to be associated with “sudden stops” of capital inflows. (ii) The probability of a country experiencing a reversal is captured by a small number of variables that include the (lagged) current account to GDP ratio, the external debt to GDP ratio, the level of international reserves, domestic credit creation, and debt services. (iii) Current account reversals have had a negative effect on real growth that goes beyond their direct effect on investments. (iv) There is persuasive evidence indicating that the negative effect of current account reversals on growth will depend on the countrys degree of openness. More open countries will suffer less-in terms of lower growth-than countries with a lower degree of openness. (v) I was unable to find evidence supporting the hypothesis that countries with a higher degree of dollarization are more severely affected by current account reversals than countries with a lower degree of dollarization. And (vi) the empirical analysis suggests that countries with more flexible exchange rate regimes are able to accommodate the shocks stemming from a reversal better than countries with more rigid exchange rate regimes.

Banks and Macroeconomic Disturbances under Predetermined Exchange Rates

As the recent Mexican crisis vividly illustrates, Latin American countries often go through boom-bust cycles caused by both domestic policies and external shocks. Such cycles are typically magnified by weak banking systems which intermediate large capital inflows. This paper develops a simple optimizing model to analyze how the banking sector affects the propagation of shocks. In particular, we show how the world business cycle and shocks to the banking system affect output and employment through fluctuations in bank credit. We also analyze the countercyclical use of reserve requirements. Econometric evidence for Chile and Mexico supports the main predictions of the model.

Explaining fiscal policies and inflation in developing countries

In this paper we investigate erririca1ly the determinants of inflation, seigniorage an fiscal deficits in developing countries. We first test the optimal taxation theory of inflation for a grip of 21 LDCs. We find that the implications of this theory is rejected for all the countries. We then proceed to implement a number of tests based on the new political economy approach to macroeconomic policies: we deal with some of the implications of a credibility and reputation model, and of a strategic government behavior model. We find that the data supports the most important predictions of the political economy view of fiscal policy. Our measures of political instability and political polarization play an important role in explaining cross country differences in seigniorage, inflation, government borrowing and fiscal deficits. We end by discussing directions for future research.

Financial Openness, Sudden Stops, and Current-Account Reversals

In this paper I use a panel data set to investigate the mechanics of sudden stops of capital inflows and current account reversals. I am particularly interested in four questions: (a) What is the relationship between sudden stops and current account reversals? (b) To what extent does financial openness affect the probability of a country being subject to a current account reversal? In other words, do restrictions on capital mobility reduce the probability of such occurrences? (C) Does openness -- both trade openness and financial openness -- play a role in determining the effect of current account reversals on economic performance (i.e. GDP growth)? And, (d) does the exchange rate regime affect the intensity with which reversals affect real activity? The empirical analysis shows that sudden stops and current account reversals have been closely related. The econometric analysis suggests that restricting capital mobility does not reduce the probability of experiencing a reversal. Current account reversals, in turn, have had a negative effect on real growth that goes beyond their direct effect on investment. The regression analysis indicates that the negative effects of current account reversals on growth will depend on the countrys degree of trade openness: More open countries will suffer less in terms of lower growth relative to trend than countries with a lower degree of trade openness. On the other hand, the degree of financial openness does not appear to be related to the intensity with which reversals affect real economic performance. The empirical analysis also suggests that countries with more flexible exchange rate regimes are able to accommodate better shocks stemming from a reversal than countries with more rigid exchange rate regimes.

Interest Rate Determination in Developing Countries: a Conceptual Framework

A medida que algunos paises en desarrollo van adoptando sistemas financieros mas liberales, quienes elaboran su politica economica tienen que determinar la forma en que los tipos de interes reaccionan ante las influencias exteriores y de la politica interna. Lo tradicional en la mayoria de los estudios existentes sobre tipos de interes es considerar solo los casos extremos: una economia totalmente abierta en la que se da alguna forma de arbitraje de los tipos de interes, o una economia totalmente cerrada en la cual los tipos de interes resultan exclusivamente de la accion de factores monetarios internos. Pero las economias en desarrollo, por lo general, se encuentran a mitad de camino entre esos dos extremos, por lo cual no les seran aplicables los modelos estandar de determinacion de los tipos de interes. La finalidad del presente trabajo consiste en esbozar un marco teorico que sirva de punto de partida para analizar la evolucion de los tipos de interes en los paises en desarrollo que han comenzado a eliminar los controles al sector financiero y las restricciones a las corrientes de capital. En el enfoque aqui sugerido se combinan elementos extraidos de modelos elaborados para economias cerradas y para economias abiertas, lo cual permite incorporar los efectos de los tipos de interes externos, de la variacion prevista de los tipos de cambio y de la evolucion monetaria interna sobre los tipos de interes internos. Una caracteristica interesante del modelo presentado es que permite determinar el grado aproximado de apertura financiera –que se define como la medida en que los tipos de interes internos estan vinculados a los externos– mediante el examen de los datos del pais analizado. A modo de ejemplo de la validez empirica del modelo propuesto, se le aplico a dos paises: Colombia y Singapur. Estos dos paises difieren considerablemente en cuanto al grado de apertura y desarrollo financieros, por lo cual resultan idoneos para una primera comprobacion de la aplicabilidad general del modelo. Este logra representar ambos casos muy adecuadamente. Las estimaciones indicaron que en Colombia tanto los factores externos como los internos revisten importancia, en tanto que en Singapur los tipos de interes internos estan determinados exclusivamente por los tipos de interes externos y por las variaciones del tipo de cambio. Esto es precisamente lo que cabia esperar de acuerdo con las caracteristicas del sistema financiero de estos dos paises.

Interest-Rate Volatility in Emerging Markets

We use high-frequency interest-rate data for a group of Latin American and Asian countries to analyze the behavior of volatility through time. We focus on volatility comovements across countries. Our analysis relies on univariate and bivariate switching volatility models. We compare the results from the switching models with those from rolling-standard-deviation models. We argue that the switching models are superior. Our results indicate that high-volatility episodes are, in general, short-lived, lasting from 2 to 7 weeks. We also find some evidence of interest-rate volatility comovements across countries.

The welfare effects of trade and capital market liberalization

Treatise on the welfare effects of trade and capital market liberalization. Consquenses of the capital account liberalization in the presence of trade restrictions; Specifies on the liberalization of trade in the presence of foreign borrowing constraints; Proves superiority of gradual liberalization of trade to an abrupt liberalization.