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Research Topics

Macroeconomics


Domestic Antidotes to Sudden Stops
Izquierdo, Alejandro; Cavallo, Eduardo A.; Leon, John Jairo
Discussion Papers - English - Sep, 2017

Sudden Stops in net capital flows can be prevented when the actions of domestic investors offset a reduction in foreign lending. This paper presents evidence that while sudden stops in gross inflows—i.e., a tightening of the external borrowing constraint—are associated with global conditions and therefore, are largely outside of the control of local policymakers, domestic factors such as low levels of liability dollarization, exchange rate flexibility, inflation targeting regimes, and a solid institutional background are important to prevent these episodes from becoming sudden stops in net capital flows. Under these favorable local conditions, domestic investors may perceive reduced risk in bringing in resources at the time of an external shock, thus insulating the country from this shock.

Related JEL Codes:
E44 - Financial Markets and the Macroeconomy
E58 - Central Banks and Their Policies
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General


Fighting for the Best, Losing With the Rest:A Case for Restricting Credit to Business Start-Ups
Wills, Daniel; Hernández, Juan
Discussion Papers - English - Sep, 2017

The Jumpstart Our Business Startups (JOBS) Act of 2012 aims at increasing funding access for young firms by easing securities regulation. Motivated by this, we ask if there is a role for the regulation of the market of funds for firms that lack collateral and have a large uncertainty about their ability to generate profits. To answer that we characterize optimal financial contracts in a competitive environment with risk, adverse selection and limited liability. We find that competition among financial intermediaries always forces them to fund projects with negative expected returns both from a private and from a social perspective. Intermediaries use steep payoff schedules to screen entrepreneurs, but limited liability implies this can only be done by giving more to all entrepreneurs. In equilibrium, competition for the best entrepreneurs forces intermediaries to offer better terms to all customers, there is cross-subsidization among entrepreneurs and intermediation profits are nil. The three main features of our framework (competition, adverse selection and limited liability) are necessary in order to get the inefficient laissez-faire outcome and a role for barriers to entry into financial intermediation. Our result remains robust when firms can collateralize some portion of the credit as long as there is still an unsecured fraction.

Related JEL Codes:
D82 - Asymmetric and Private Information; Mechanism Design
G14 - Information and Market Efficiency; Event Studies
G28 - Government Policy and Regulation


Non-Linear Distortion-Based Effects of Tax Changes on Output: A Worldwide Narrative Approach
Végh, Carlos A.; Riera-Crichton, Daniel; Vuletin, Guillermo; Gunter, Samara
Discussion Papers - English - Sep, 2017

We estimate the e§ect of worldwide tax changes on output following the narrative approach developed for the United States by Romer and Romer (2010). We use a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970-2014 to identify 96 tax changes. We then use contemporaneous economic records to classify such changes as endogenous or exogenous to current (or prospective) economic conditions. In line with existing theoretical distortion-based arguments ñ and based on the exogenous tax changes ñwe Önd that the e§ect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low/moderate initial tax rate levels and much larger (in absolute terms) as the initial tax rate and the size of the change in the tax rate increases. We also show that the bias introduced by misidentiÖcation of tax shocks critically depends on the procyclical or countercyclical nature of endogenous tax changes. We simultaneously evaluate the relevance of our arguments both for our global sample and for Romer and Romerís U.S. dataset.

Related JEL Codes:
E32 - Business Fluctuations; Cycles
E62 - Fiscal Policy
H20 - Taxation, Subsidies, and Revenue: General


Revelation of Expectations in Latin America(REVELA) - Issue 74
Powell, Andrew; Sosa, Mariano
Newsletter / Journal - English - Sep, 2017

The June 2017 surveys of expectations conducted by Central Banks with inflation targeting regimes indicate that the simple average growth rate expected for 2017 for the eight countries covered by REVELA remained stable at 2.4% compared to May. At the same time, the GDP-weighted average remained constant at 1.4% compared to the previous month. On the other hand, inflation expectations for 2017 declined by 0.1% from 4.5% to 4.4% both under the simple average basis and the GDP-weighted average basis. At the individual country level, growth expectations rose in Uruguay by 0.8% from 2.6% to 3.4%, and declined by 0.1% in three countries: Brazil from 0.5% to 0.4%, Chile from 1.6% to 1.5% and Peru from 2.6% to 2.5%.


External Sustainability Analysis:Methods and Policy Issues
Cavallo, Eduardo A.; Valencia, Oscar
Policy Brief - English - Sep, 2017

This policy brief summarizes a conference on recent developments in the analysis of current account sustainability held by Research Department of the Inter- American Development Bank (IDB) and Banco de la República de Colombia organized on April 18, 2017 in Washington, DC. The purpose of the conference was to bring together economists from central banks, finance ministries, international organizations, and academics to discuss recent developments and new perspectives on the analysis of current account sustainability. The discussion was divided into three sections: i) methodological issues, ii) practical issues and iii) policy discussion, which are summarized in this document.

Related JEL Codes:
F32 - Current Account Adjustment; Short-Term Capital Movements
F36 - Financial Aspects of Economic Integration
F47 - Forecasting and Simulation


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