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Latin American Macroeconomics Overview
Professor: Javier Garcia-Cicco

Lecture 1: • Outline of the course. • Some stylized facts about Latin America. • Pro-cyclicality • Terms of Trade and the curse of natural resources.

LATAM MACRO - Lecture 1

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Outline of the Course
• Lecture 1: Stylized facts about Latin America. The curse of natural resources

• Lecture 2: Fear of floating.Dollarisation. Sudden stops. Default risk.

• Lecture 3: Fiscal Policy and Fiscal Rules. Recent crisis in Latin America and their effect in the current policy framework.

• Lecture 4: Trade Integration in Latina America. The effect of and recovery from the 2008-09 crisis.

• Lecture 5: Some future prospects for Latin America. Exam.
LATAM MACRO - Lecture 1 2

The last 20 years
LA Real GDP(Index 2005=100)
140 130 120 110 100 90 80 70 60 50 40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Global Crisis

Tequila Crisis

Asian Crisis

Argentina

Argentina Crisis

Brazil Bolivia Chile Colombia Ecuador Paraguay Peru Venezuela Uruguay Mexico

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Some Historical Perspectives

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The last 20 years
LA CPIInflation (Annual % Change)
140

120

Argentina
100

Brazil Bolivia Chile Colombia Ecuador Mexico Paraguay Peru Uruguay Venezuela

80

60

40

20

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -20

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Definitions about Exchange rate regimes and Monetary Policy Framework
• Conventional fixed peg arrangements: • Thecountry pegs its currency within margins of ±1 percent or less visà-vis another currency. • Crawling pegs: • The currency is adjusted periodically in small amounts at a fixed rate or in response to changes in selective quantitative indicators. • Managed floating with no predetermined path for the exchange rate • The monetary authority attempts to influence the exchange rate without having a specificexchange rate path or target. • Independently floating: • The exchange rate is market-determined.
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Definitions about Exchange rate regimes and Monetary Policy Framework
• Exchange rate anchor: • The monetary authority stands ready to buy or sell foreign exchange to maintain the exchange rate at its pre-announced level or range. • Monetary aggregate anchor: • Themonetary authority uses its instruments to achieve a target growth rate for a monetary aggregate, such as reserve money, M1, or M2. • Inflation targeting framework: • This involves the public announcement of medium-term numerical targets for inflation with an institutional commitment by the monetary authority to achieve these targets.

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LATAM MACRO - Lecture 1

8 LATAM MACRO - Lecture 1

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Pro-cyclicality
• A feature that characterizes emerging countries is the procyclicality of capital flows, fiscal and monetary policy. • In terms of capital flows: • Most economic theory in based on the idea that people dislike large fluctuations on consumption. • Therefore, it should be optimal for an individual to save in good times and borrow in bad times. Inthis way, the fluctuations on income can be “smoothed.” • At country level, we should expect that countries use international borrowing and lending in the same way. • Thus we would expect net capital outflows during booms and inflows during recessions. If this is the case, we say that net capital inflows are countercyclical, if the opposite happens it is procyclical, and if the correlation is zerowe say it is acyclical.
LATAM MACRO - Lecture 1 10

Correlations between the Cyclical Components of Net Capital Inflows and Real GDP 1960-2003

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Pro-cyclicality
• Another way to think about capital inflows is to consider interest rates, particularly the rate on foreign borrowing.

• But in measuring the interest rate of foreign borrowing, we consider at...
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