Cena, Mariano Andrés
(2012)
On booms and busts in Latin American economies.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis deals with one obsession: the role of external factors in generating boombust
cycles in Latin American countries. In the first chapter, I employ a Markov
switching model to statistically validate the claim that the region is currently experiencing
a combination of unprecedented favourable external conditions: high
commodity prices and low global real interest rates. Based on this evidence, I introduce
a model of a resource-rich small open economy with financial frictions in
which external conditions switch stochastically between two regimes: “windfall” and
“shortfall”. The model is calibrated to Argentina to study how changes in external
conditions give rise to boom-bust cycles. I contribute to the current debate on the
desirability of controls on capital inflows by studying, from a positive perspective,
the effects of introducing a regime contingent tax rate on debt holdings. I conclude
that the welfare effect, albeit always very small, is determined by the strength of the
domestic financial frictions. The third chapter attempts to empirically evaluate the
model by performing an event study. I assess the ability of the model to reproduce
the behaviour of the economy during a five-year window period centered around the
Great Recession of 2008/09. To capture the external environment following Lehman
Brothers’ collapse, I introduce a regime switch in global financial conditions: normal
and panic periods. I conclude that the model captures remarkably well the dynamic
in this period and that its main weakness is the inability to reproduce the large
swings observed in asset prices. The second chapter presents and studies a novel
mechanism through which low-frequency fluctuations in foreign interest rates can
generate different boom-bust patterns in an internationally borrowing constrained
small open economy: intertemporal spillovers via collateral markets. When interest
rates are low, the presence of a binding international borrowing constraint creates an
intertemporal wedge that spills over into the intertemporal equation for capital due
to its dual role as physical capital and financial collateral. As a result, in economies
where the main source of collateral is reproducible capital, the spillover effect resembles
an investment subsidy and fluctuations are smooth since there are no valuation
effects. In contrast, when non-reproducible capital is posted as collateral, the disturbance
resembles a financial service dividend and the interest rate fluctuations cause
ample swings in macro aggregates due to their strong impact on asset valuations.
It is my belief that in these chapters, I have contributed to our understanding of
medium-run macroeconomic fluctuations in “semi-peripheral” countries.
Actions (login required)
 |
Record administration - authorised staff only |
Download statistics
Download statistics