nep-lam New Economics Papers
on Central and South America
Issue of 2007‒05‒04
two papers chosen by
Maximo Rossi
University of the Republic

  1. Volatility and Growth in Latin America: An Episodic Approach By Rishi Goyal; Ratna Sahay
  2. International financial linkages of Latin American banks - the effects of political risk and deposit dollarisation By Francisco Ramon-Ballester; Torsten Wezel

  1. By: Rishi Goyal; Ratna Sahay
    Abstract: This paper compares the pattern of macroeconomic volatility in 17 Latin American countries during episodes of high and low growth since 1970, examining in particular the role of policy volatility. Macroeconomic outcomes are distinguished from macroeconomic policies, structural reforms and reversals, shocks, and institutional constraints. Based on previous work, a composite measure of structural reforms is constructed for the 1970-2004 period. We find that outcomes and policies are more volatile in low growth episodes, while shocks (except U.S. interest rates) are similar across episodes. Fiscal policy volatility is associated with lower growth, but fiscal policy procyclicality is not. Low levels of market-oriented reforms and structural reform reversals are also associated with lower growth.
    Keywords: Growth , volatility , structural reforms , Latin America , episodic approach , Economic growth , Latin America , Economic reforms , Economic policy , Economic models ,
    Date: 2007–01–04
    URL: http://d.repec.org/n?u=RePEc:imf:imfwpa:06/287&r=lam
  2. By: Francisco Ramon-Ballester (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Torsten Wezel (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt am Main, Germany.)
    Abstract: This paper empirically investigates the extent to which the financial linkages of Latin American banks with the exterior are influenced by political risk and deposit dollarisation. We find that the sum of banks’ foreign assets and liabilities is a function of risk-return considerations and excess domestic credit demand. An increase in political risk is shown to be associated with a build-up of foreign positions by the banking sector, but this adverse effect on the banking system is mitigated in economies with a high share of dollarised deposits. These relationships largely hold when the determinants of foreign assets and liabilities are estimated separately, with risk-induced capital flight being moderated by a high degree of deposit dollarisation. While changes in overall country risk including the risk of macro collapse drive official capital outflows, for a wider measure of capital flight including informal flows only changes in political risk matter. In each case, deposit dollarisation is shown to possess a risk-mitigating property. The results suggest caution with active dedollarisation strategies in highly dollarised economies where political instability remains an issue. JEL Classification: E42, F36, G21.
    Keywords: Dollarisation, political risk, banking systems, financial integration, Latin America.
    Date: 2007–03
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070744&r=lam

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