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Research Topics

Macroeconomics


Template for External Sustainability Assessment
Castillo, Marola
Technical Notes - English - Sep, 2016

This manual explains in detail the external sustainability assessment approach following Castillo (2016), given by the stock-flow relationship among net external positions, non-income current account, 1 and real exchange rate. This approach consists of determining the non-income current account over GDP that would stabilize a benchmark net foreign asset (NFA) position over the mediumterm, and a “gap” by comparing the NFA-stabilizing non-income current account over GDP with its value expected to prevail over the medium term. The text develops an External Sustainability Template and provides guidance in the customization of empirical assessments by addressing three methodologies: Standard Approach, Endogenous Net Foreign Assets Dynamics Approach, and Fan-Charts Approach.

Related JEL Codes:
E01 - Measurement and Data on National Income and Product Accounts and Wealth
F31 - Foreign Exchange
F32 - Current Account Adjustment; Short-Term Capital Movements
F37 - International Finance Forecasting and Simulation


Theoretical Background on External Sustainability Assessments
Castillo, Marola
Technical Notes - English - Sep, 2016

This paper explains in detail the external sustainability assessment approach given by the stock-flow relationship between the net external positions, non-income current account plus net capital transfers, and real exchange rate. This approach consists of determining the non-income current account over GDP that would stabilize a benchmark net foreign asset (NFA) position over the medium term, and a “gap” by comparing the NFA-stabilizing non-income current account over GDP with the nonincome current account expected to prevail over the medium term. Additionally, the paper addresses the role of the returns differential in explaining the channels through which the external sustainability adjustment may occur (i.e., trade and financial channels).

Related JEL Codes:
E01 - Measurement and Data on National Income and Product Accounts and Wealth
F31 - Foreign Exchange
F32 - Current Account Adjustment; Short-Term Capital Movements
F37 - International Finance Forecasting and Simulation


Revelation of Expectations in Latin America(REVELA) - Issue 64

Newsletter / Journal - English - Aug, 2016

The June 2016 surveys of expectations conducted by Central Banks with inflation targeting regimes indicate that the simple average growth rate expected for 2016 for the eight countries covered by REVELA has increased by 0.1% from 1.7% to 1.8% compared to the previous month. The GDP weighted-average growth rate expected also rose by 0.2% from -0.7% to -0.5%. At the same time, inflation expectations fell by 0.1% from 5.3% to 5.2% on a simple average basis, and remained constant at 5.5% on a GDP weighted average basis. Growth expectations for 2016 rose in Brazil by 0.5%, in Peru by 0.2% and in Guatemala by 0.1%, and decreased in Uruguay by 0.3% compared to May. Growth expectations remained constant in Paraguay at 3.0%, Colombia at 2.9%, Mexico at 2.4% and Chile at 1.7%. Expected growth for the region now ranges from -3.4% in Brazil to 3.8% in Guatemala. Inflation expectations for 2016 decreased in Colombia by 0.8% and Paraguay by 0.3%, while they increased in Brazil and Uruguay by 0.2% and in Guatemala by 0.1%, and remained stable in Peru and Chile at 3.5% and in Mexico at 3.1%. Inflation expectations for the region now range from 3.1% in Mexico to 10.3% in Uruguay.


Bond Finance, Bank Credit, and Aggregate Fluctuations in an Open Economy
Gulan, Adam; Fernandez, Andres; Chang, Roberto
Working Papers - English - Aug, 2016

Corporate sectors in emerging markets have noticeably increased their reliance on foreign financing, presumably reflecting low global interest rates. The evidence also shows a rebalancing from bank loans towards bonds. To study these developments, this paper develops a dynamic open economy model where these modes of finance are determined endogenously. The model replicates the stylized facts following a drop in world interest rates; in particular, rebalancing towards bonds occurs because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. More generally, the model is suitable for studying interactions between modes of finance and the macroeconomy.

Related JEL Codes:
E32 - Business Fluctuations; Cycles
E44 - Financial Markets and the Macroeconomy
F41 - Open Economy Macroeconomics
G31 - Capital Budgeting; Fixed Investment and Inventory Studies


Can Countries Rely on Foreign Saving for Investment and Economic Development?
Eichengreen, Barry; Cavallo, Eduardo A.; Panizza, Ugo
Working Papers - English - Aug, 2016

A surprisingly large number of countries have been able to finance a significant fraction of domestic investment using foreign finance for extended periods. While many of these episodes are in low-income countries where official finance is more important than private finance, this paper also identifies a number of episodes where a substantial fraction of domestic investment was financed via private capital inflows. That said, foreign savings are not a good substitute for domestic savings, since more often than not episodes of large and persistent current account deficits do not end happily. Rather, they end abruptly with compression of the current account, real exchange rate depreciation, and a sharp slowdown in investment. Summing over the deficit episode and its aftermath, growth is slower than when countries rely on domestic savings. The paper concludes that financing growth and investment out of foreign savings, while not impossible, is risky.

Related JEL Codes:
F32 - Current Account Adjustment; Short-Term Capital Movements
O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance


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