1) The document analyzes the behavior of inflation volatility in El Salvador after it adopted the US dollar as its official currency in 2001.
2) It finds that while dollarization was intended to reduce volatility, the distance between El Salvador's inflation and US inflation has remained the same.
3) This is because El Salvador has experienced higher inflation in prices of non-tradable goods, which creates an "internal inflation" not present in the US. Reducing volatility in non-tradable goods is key to achieving the goals of dollarization.
In this paper we evaluate critically the popular Mundell-Fleming model from the standpoint the exogenous interest rate heterodox approach. We criticize the assumptions of exogenous money supply, "perfect" international capital markets and inelastic exchange rate expectations. We show that in a more realistic framework none of the main results of the Mundell-Fleming model on the relative effectiveness of fiscal and monetary policies are valid, either in floating and fixed exchange rate regimes. We conclude that ,within certain very asymmetric bounds, the central bank has the power to determine the domestic interest rate exogenously even in open economy with free capital mobility and that there is no automatic market mechanism to ensure the automatic adjustment of the interest rate and exchange rate to sustainable levels.
The document discusses several topics related to open economies and exchange rate regimes:
1) It examines the Mundell-Fleming model which models a small open economy using IS-LM curves with the exchange rate as an additional variable. Case studies on currency crises in Mexico and Asia are summarized.
2) Issues related to floating vs fixed exchange rates and the impossible trinity are covered. Maintaining a fixed exchange rate limits independent monetary policy.
3) The Chinese currency controversy is discussed, noting China fixed its currency for years while accumulating dollar reserves, to the criticism of some arguing it was undervalued.
The Mundell-Fleming model is an extension of the IS-LM model that includes the joint determination of net exports and currency value. It suggests that fiscal expansion with monetary contraction would boost the currency value and reduce net exports, while fiscal contraction and monetary expansion would boost net exports and reduce the currency value. However, expectations play a major role in determining outcomes. Under Reagan, expectations of growth from tax cuts led to a higher dollar and lower net exports, while under Clinton, expectations of growth from spending cuts had the same effect despite different policies.
The document discusses key concepts in open-economy macroeconomics. It defines open and closed economies, and describes the international flows of goods and capital between open economies. These include exports, imports, net exports, and net capital outflow. It also discusses factors that influence these flows, including exchange rates, prices, savings, and investment. The purchasing power parity theory of exchange rate determination is introduced, which posits that exchange rates should adjust to equalize the purchasing power of currencies between countries.
This book discusses the state of the US economy over five parts. The first part addresses overall economic trends, focusing on declining expectations. The second and third parts discuss problems like trade deficits, inflation, budget deficits and policy issues. The fourth part examines financial crises. Productivity, trade deficits, inflation, the dollar, and finance are then discussed individually. The author concludes with a repetitive warning about economic issues and thanks the reader.
The document provides an overview of the Mundell-Fleming model, which analyzes the effects of fiscal and monetary policy in a small open economy with perfect capital mobility. It describes the IS* and LM* curves and how they determine equilibrium income and exchange rates. Key points covered include: fiscal policy cannot affect output, while monetary policy impacts output by changing the exchange rate; floating exchange rates allow monetary policy flexibility; and fixed rates make fiscal policy more effective at changing output.
This document summarizes the Mundell-Fleming model, which analyzes how fiscal, monetary, and trade policies affect aggregate demand in a small open economy. The model shows that under floating exchange rates, fiscal policy has no effect on output, while monetary policy shifts demand between domestic and foreign goods. Under fixed exchange rates, fiscal policy impacts output while monetary policy does not. Trade restrictions can boost domestic output under fixed but not floating rates. The document also discusses interest rate differentials and currency crises using Mexico's 1994 peso crisis as a case study.
The Mundell-Fleming model shows that the effects of fiscal and monetary policy on a small open economy depend on whether the exchange rate is floating or fixed. Under floating rates, fiscal policy has little effect while monetary policy influences output by changing the exchange rate. Under fixed rates, monetary policy has little effect while fiscal policy can influence output. The model incorporates interest rate differentials and shows that expectations of currency depreciation can become self-fulfilling.
In this paper we evaluate critically the popular Mundell-Fleming model from the standpoint the exogenous interest rate heterodox approach. We criticize the assumptions of exogenous money supply, "perfect" international capital markets and inelastic exchange rate expectations. We show that in a more realistic framework none of the main results of the Mundell-Fleming model on the relative effectiveness of fiscal and monetary policies are valid, either in floating and fixed exchange rate regimes. We conclude that ,within certain very asymmetric bounds, the central bank has the power to determine the domestic interest rate exogenously even in open economy with free capital mobility and that there is no automatic market mechanism to ensure the automatic adjustment of the interest rate and exchange rate to sustainable levels.
The document discusses several topics related to open economies and exchange rate regimes:
1) It examines the Mundell-Fleming model which models a small open economy using IS-LM curves with the exchange rate as an additional variable. Case studies on currency crises in Mexico and Asia are summarized.
2) Issues related to floating vs fixed exchange rates and the impossible trinity are covered. Maintaining a fixed exchange rate limits independent monetary policy.
3) The Chinese currency controversy is discussed, noting China fixed its currency for years while accumulating dollar reserves, to the criticism of some arguing it was undervalued.
The Mundell-Fleming model is an extension of the IS-LM model that includes the joint determination of net exports and currency value. It suggests that fiscal expansion with monetary contraction would boost the currency value and reduce net exports, while fiscal contraction and monetary expansion would boost net exports and reduce the currency value. However, expectations play a major role in determining outcomes. Under Reagan, expectations of growth from tax cuts led to a higher dollar and lower net exports, while under Clinton, expectations of growth from spending cuts had the same effect despite different policies.
The document discusses key concepts in open-economy macroeconomics. It defines open and closed economies, and describes the international flows of goods and capital between open economies. These include exports, imports, net exports, and net capital outflow. It also discusses factors that influence these flows, including exchange rates, prices, savings, and investment. The purchasing power parity theory of exchange rate determination is introduced, which posits that exchange rates should adjust to equalize the purchasing power of currencies between countries.
This book discusses the state of the US economy over five parts. The first part addresses overall economic trends, focusing on declining expectations. The second and third parts discuss problems like trade deficits, inflation, budget deficits and policy issues. The fourth part examines financial crises. Productivity, trade deficits, inflation, the dollar, and finance are then discussed individually. The author concludes with a repetitive warning about economic issues and thanks the reader.
The document provides an overview of the Mundell-Fleming model, which analyzes the effects of fiscal and monetary policy in a small open economy with perfect capital mobility. It describes the IS* and LM* curves and how they determine equilibrium income and exchange rates. Key points covered include: fiscal policy cannot affect output, while monetary policy impacts output by changing the exchange rate; floating exchange rates allow monetary policy flexibility; and fixed rates make fiscal policy more effective at changing output.
This document summarizes the Mundell-Fleming model, which analyzes how fiscal, monetary, and trade policies affect aggregate demand in a small open economy. The model shows that under floating exchange rates, fiscal policy has no effect on output, while monetary policy shifts demand between domestic and foreign goods. Under fixed exchange rates, fiscal policy impacts output while monetary policy does not. Trade restrictions can boost domestic output under fixed but not floating rates. The document also discusses interest rate differentials and currency crises using Mexico's 1994 peso crisis as a case study.
The Mundell-Fleming model shows that the effects of fiscal and monetary policy on a small open economy depend on whether the exchange rate is floating or fixed. Under floating rates, fiscal policy has little effect while monetary policy influences output by changing the exchange rate. Under fixed rates, monetary policy has little effect while fiscal policy can influence output. The model incorporates interest rate differentials and shows that expectations of currency depreciation can become self-fulfilling.
The Mundell-Fleming model is an extension of the IS-LM model that accounts for an open economy with international capital flows and exchange rates. It shows how fiscal and monetary policy can affect output and exchange rates under both fixed and flexible exchange rate regimes. Under flexible exchange rates, expansionary domestic policies may be offset by currency appreciation, while under fixed rates they may lead to balance of payments deficits. The model suggests using different combinations of fiscal and monetary policies to achieve objectives like boosting output while maintaining a stable currency value.
Brazil faced a currency crisis in 1998-1999 as investors lost faith in the government's ability to maintain the real's fixed exchange rate against the dollar. High inflation and government spending deficits weakened Brazil's economy. When Russia defaulted on its debt in 1998, investors withdrew funds from Brazil, depleting reserves. In January 1999, Brazil devalued the real by 8% initially and it fell 66% by the end of the month. The devaluation improved Brazil's current account and increased GDP as exports became cheaper. However, it also increased the country's dollar-denominated debt. Brazil could have avoided crisis by instituting a managed depreciation earlier through a pegged basket of currencies or public recognition of overvaluation.
1) Inflation occurs when prices rise overall in an economy. It can be caused by demand-pull factors like too much spending chasing too few goods, or cost-push factors like rising wages.
2) There are different rates of inflation including low inflation under 10%, galloping inflation in the double or triple digits, and hyperinflation over a million percent. High and unpredictable inflation distorts economies.
3) While low and predictable inflation may have little impact, unexpected inflation impoverishes some and enriches others by unexpectedly changing the value of assets and debts.
1) Zimbabwe experienced hyperinflation from 1998-2008, with inflation reaching 66,200% by 2007, the second highest recorded rate in history.
2) The hyperinflation was caused by the central bank excessively printing money and lending it to state-owned enterprises and private entities, effectively hiding the large fiscal deficit.
3) Some groups, like those with connections to state enterprises, benefited from arbitraging the dual exchange rates, but most Zimbabweans suffered from the hyperinflation.
Price Stability and Debt Stability: A Wicksell-Lerner-Tinbergen Framework for...pkconference
This document discusses a framework for coordinating monetary and fiscal policy to achieve both price stability and debt stability. It presents the IS curve equation showing combinations of interest rates and budget balances compatible with price stability, and the DS curve equation showing combinations compatible with a stable debt-GDP ratio. It argues that adjusting each policy instrument independently based on its target can produce endogenous policy cycles, but jointly targeting both goals can maintain potential output and a stable debt ratio. Historical estimates of these loci are provided for several decades to validate the framework.
LA Seminar - Argentina Debt Crises - David DingusDavid J Dingus
The 1982 debt crisis in Argentina was caused by large debt at variable interest rates as interest rates increased globally. High inflation in Argentina was exacerbated by falling commodity prices and economic instability. The oil crises of the 1970s quadrupled oil prices, fueling inflation worldwide and recessions that reduced demand for Argentine exports. As a result, Argentina accumulated debt that it could no longer afford when US interest rates rose in the early 1980s, precipitating the 1982 debt crisis.
Fighting inflation in a dollarized economy the case of vietnamPhan Phuong
This document summarizes a journal article about fighting inflation in Vietnam during its transition to a market economy in the 1990s. The key points are:
1) Vietnam used dollarization and exchange rate management to successfully reduce inflation from over 350% in 1988 to under 10% in the 1990s.
2) A model is developed showing that inflation in Vietnam was driven by excess money supply and exchange rate fluctuations.
3) Empirical analysis estimates that a 25% depreciation of the Vietnamese currency in 1997-1998 led to an additional cumulative inflation of 13% over that period.
The document defines and discusses deflation. Deflation is a decrease in the general price level of goods and services accompanied by falling levels of employment, output, and income. It is caused by factors like deficient demand, contractionary monetary policy, and taxes. Effects of deflation include problems for producers, traders, investors, laborers, and consumers as well as a decline in national income, rise in unemployment, and slower economic growth. While both inflation and deflation have costs, inflation is preferable to deflation as it does not reduce output and is easier for governments to counteract. The document concludes by explaining why Keynes and others view inflation as the lesser of the two evils compared to deflation.
This document discusses various topics related to inflation including:
- Definitions of inflation and general price levels
- Types of inflation such as anticipated, unanticipated, walking, and galloping inflation
- Parties affected by inflation such as families receiving subsidies, investors, and debtors
- Causes of inflation including demand-pull and cost-push inflation
- Policies to reduce inflation such as monetary and fiscal policies
- Methods of calculating and measuring inflation including price indices, absolute prices, and comparative prices
1. Inflation is defined as a rise in the general level of prices where a unit of currency buys less than it previously could. It occurs when the money supply grows faster than the economy.
2. There are three main types of inflation: demand-pull inflation caused by increased demand, cost-push inflation caused by increased costs of production, and built-in inflation caused by expectations of future inflation.
3. While inflation has some potential advantages like enabling adjustment of wages and prices, it also has disadvantages like uncertainty that reduces investment, and loss of international competitiveness from higher prices. High or hyperinflation can severely damage an economy.
Les réflexions de comptoir 2 - Oct2016Tristan Abet
The document discusses the divergence between the "new economy" (non-financial services sectors) and the "old economy" (commodity, industry, finance, construction) as the main problem for the world economy today. The trajectories of the new and old economies were similar in 2000-2010 but have since diverged, with the new economy continuing to grow while the old economy struggles. This divergence explains issues like high debt and unemployment in developed countries that rely more on the old economy. Monetary and fiscal policies have aimed to support the failing old economy for social reasons, but this is not a long-term solution.
Taking into account the pull-push debate on the weight that external or internal factors have on the behavior of capital flows and country-risk premium of developing economies, the aim of this article is to assess empirically the extent by which the push factors, linked to global liquidity and interest rates, (compared to country-specific factors) play on the changes in the risk premium of a set of countries of the periphery, in the period 1999-2019. This done using the methodology of Principal Component Analysis, which can relate the information from different countries to its common sources. We also test for a structural change in the premium risk series in 2003, by means of structural break tests. We find that push factors do play the predominant role in explaining country risk changes of our selected peripherical countries and that there was indeed a substantial general reduction in country risk premia after 2003, confirming that the external constraints of the periphery were significantly loosened by more favorable conditions in the international economy in the more recent period. The results are in line both with the view that cycles in peripherical economies are broadly subordinated to global financial cycles, in but also that such external conditions substantially improved compared to the 1990s.
This document provides an overview of classical theories of inflation and the quantity theory of money. It defines key concepts like money, inflation, the money supply, and velocity. The quantity theory of money posits that inflation is primarily caused by increases in the money supply that outpace economic growth. It predicts a direct relationship between money growth and inflation. The document uses graphs and international data to show this relationship generally holds in practice and discusses implications for interest rates.
Taking into account the pull-push debate on the weight that external or internal factors have on the behavior of capital flows and country-risk premium of developing economies, the aim of this article is to assess empirically the extent by which the push factors, linked to global liquidity and interest rates, (compared to country-specific factors) play on the changes in the risk premium of a set of countries of the periphery, in the period 1999-2019. This done using the methodology of Principal Component Analysis, which can relate the information from different countries to its common sources. We also test for a structural change in the premium risk series in 2003, by means of structural break tests. We find that push factors do play the predominant role in explaining country risk changes of our selected peripherical countries and that there was indeed a substantial general reduction in country risk premia after 2003, confirming that the external constraints of the periphery were significantly loosened by more favorable conditions in the international economy in the more recent period. The results are in line both with the view that cycles in peripherical economies are broadly subordinated to global financial cycles, in but also that such external conditions substantially improved compared to the 1990s.
This document discusses the effectiveness of fiscal policy in controlling inflation or deflation based on the slope of the IS curve. It explains that fiscal policy will be more effective when the IS curve has a steeper slope (is less elastic) as it will allow a change in fiscal policy to more significantly impact the level of income and interest rates without crowding out private investment. It also discusses how the slope of the LM curve and positions of the IS and LM curves impact the fiscal multiplier.
This document discusses inflation and monetary policy. It begins by defining average inflation over the last 50 years as around 4% according to the Consumer Price Index. It then notes that the market currently expects future inflation to be around 2%, in line with the Federal Reserve's target. However, it expresses concern that monetary policy interventions in response to the financial crisis, which dramatically increased the monetary base, could sow the seeds for higher inflation in the future if banks begin lending out excess reserves more aggressively. Fiscal policy interactions with monetary policy are also flagged as a potential issue to monitor regarding inflation.
What You Know for Sure That Just Ain't SoMitch Green
This document discusses Modern Monetary Theory (MMT) and its perspective on how monetary systems and government spending work. Some key points:
1) MMT argues that a sovereign government that issues its own currency cannot go bankrupt or run out of money. It is not revenue constrained and does not need to tax or borrow in order to spend.
2) Private sector money exists in a hierarchy with the national currency, issued by the government, sitting at the top. The government sets the policy interest rate and defines the unit of account.
3) Under MMT, maintaining full employment should be a top policy priority. A job guarantee program could help absorb unemployed workers and support aggregate demand during downturns.
El documento describe el Salto del Usero, una cueva natural excavada en el río Mula en Bullas, Murcia, con una caída de agua de 3-4 metros. El río también tenía usos tradicionales como moler grano en cinco molinos harineros a lo largo de su cauce, y dos de ellos, el Molino de Arriba y el Molino de Abajo, se han rehabilitado como establecimientos turísticos rurales.
El documento enfatiza la importancia de mantenerse despierto y firme en la fe, tomando buenas decisiones. Sugiere que cuando uno está dormido o distraído toma malas decisiones que afectan su vida, pero al decidir escuchar a Dios y crecer espiritualmente puede cambiar el rumbo hacia mejor.
The Mundell-Fleming model is an extension of the IS-LM model that accounts for an open economy with international capital flows and exchange rates. It shows how fiscal and monetary policy can affect output and exchange rates under both fixed and flexible exchange rate regimes. Under flexible exchange rates, expansionary domestic policies may be offset by currency appreciation, while under fixed rates they may lead to balance of payments deficits. The model suggests using different combinations of fiscal and monetary policies to achieve objectives like boosting output while maintaining a stable currency value.
Brazil faced a currency crisis in 1998-1999 as investors lost faith in the government's ability to maintain the real's fixed exchange rate against the dollar. High inflation and government spending deficits weakened Brazil's economy. When Russia defaulted on its debt in 1998, investors withdrew funds from Brazil, depleting reserves. In January 1999, Brazil devalued the real by 8% initially and it fell 66% by the end of the month. The devaluation improved Brazil's current account and increased GDP as exports became cheaper. However, it also increased the country's dollar-denominated debt. Brazil could have avoided crisis by instituting a managed depreciation earlier through a pegged basket of currencies or public recognition of overvaluation.
1) Inflation occurs when prices rise overall in an economy. It can be caused by demand-pull factors like too much spending chasing too few goods, or cost-push factors like rising wages.
2) There are different rates of inflation including low inflation under 10%, galloping inflation in the double or triple digits, and hyperinflation over a million percent. High and unpredictable inflation distorts economies.
3) While low and predictable inflation may have little impact, unexpected inflation impoverishes some and enriches others by unexpectedly changing the value of assets and debts.
1) Zimbabwe experienced hyperinflation from 1998-2008, with inflation reaching 66,200% by 2007, the second highest recorded rate in history.
2) The hyperinflation was caused by the central bank excessively printing money and lending it to state-owned enterprises and private entities, effectively hiding the large fiscal deficit.
3) Some groups, like those with connections to state enterprises, benefited from arbitraging the dual exchange rates, but most Zimbabweans suffered from the hyperinflation.
Price Stability and Debt Stability: A Wicksell-Lerner-Tinbergen Framework for...pkconference
This document discusses a framework for coordinating monetary and fiscal policy to achieve both price stability and debt stability. It presents the IS curve equation showing combinations of interest rates and budget balances compatible with price stability, and the DS curve equation showing combinations compatible with a stable debt-GDP ratio. It argues that adjusting each policy instrument independently based on its target can produce endogenous policy cycles, but jointly targeting both goals can maintain potential output and a stable debt ratio. Historical estimates of these loci are provided for several decades to validate the framework.
LA Seminar - Argentina Debt Crises - David DingusDavid J Dingus
The 1982 debt crisis in Argentina was caused by large debt at variable interest rates as interest rates increased globally. High inflation in Argentina was exacerbated by falling commodity prices and economic instability. The oil crises of the 1970s quadrupled oil prices, fueling inflation worldwide and recessions that reduced demand for Argentine exports. As a result, Argentina accumulated debt that it could no longer afford when US interest rates rose in the early 1980s, precipitating the 1982 debt crisis.
Fighting inflation in a dollarized economy the case of vietnamPhan Phuong
This document summarizes a journal article about fighting inflation in Vietnam during its transition to a market economy in the 1990s. The key points are:
1) Vietnam used dollarization and exchange rate management to successfully reduce inflation from over 350% in 1988 to under 10% in the 1990s.
2) A model is developed showing that inflation in Vietnam was driven by excess money supply and exchange rate fluctuations.
3) Empirical analysis estimates that a 25% depreciation of the Vietnamese currency in 1997-1998 led to an additional cumulative inflation of 13% over that period.
The document defines and discusses deflation. Deflation is a decrease in the general price level of goods and services accompanied by falling levels of employment, output, and income. It is caused by factors like deficient demand, contractionary monetary policy, and taxes. Effects of deflation include problems for producers, traders, investors, laborers, and consumers as well as a decline in national income, rise in unemployment, and slower economic growth. While both inflation and deflation have costs, inflation is preferable to deflation as it does not reduce output and is easier for governments to counteract. The document concludes by explaining why Keynes and others view inflation as the lesser of the two evils compared to deflation.
This document discusses various topics related to inflation including:
- Definitions of inflation and general price levels
- Types of inflation such as anticipated, unanticipated, walking, and galloping inflation
- Parties affected by inflation such as families receiving subsidies, investors, and debtors
- Causes of inflation including demand-pull and cost-push inflation
- Policies to reduce inflation such as monetary and fiscal policies
- Methods of calculating and measuring inflation including price indices, absolute prices, and comparative prices
1. Inflation is defined as a rise in the general level of prices where a unit of currency buys less than it previously could. It occurs when the money supply grows faster than the economy.
2. There are three main types of inflation: demand-pull inflation caused by increased demand, cost-push inflation caused by increased costs of production, and built-in inflation caused by expectations of future inflation.
3. While inflation has some potential advantages like enabling adjustment of wages and prices, it also has disadvantages like uncertainty that reduces investment, and loss of international competitiveness from higher prices. High or hyperinflation can severely damage an economy.
Les réflexions de comptoir 2 - Oct2016Tristan Abet
The document discusses the divergence between the "new economy" (non-financial services sectors) and the "old economy" (commodity, industry, finance, construction) as the main problem for the world economy today. The trajectories of the new and old economies were similar in 2000-2010 but have since diverged, with the new economy continuing to grow while the old economy struggles. This divergence explains issues like high debt and unemployment in developed countries that rely more on the old economy. Monetary and fiscal policies have aimed to support the failing old economy for social reasons, but this is not a long-term solution.
Taking into account the pull-push debate on the weight that external or internal factors have on the behavior of capital flows and country-risk premium of developing economies, the aim of this article is to assess empirically the extent by which the push factors, linked to global liquidity and interest rates, (compared to country-specific factors) play on the changes in the risk premium of a set of countries of the periphery, in the period 1999-2019. This done using the methodology of Principal Component Analysis, which can relate the information from different countries to its common sources. We also test for a structural change in the premium risk series in 2003, by means of structural break tests. We find that push factors do play the predominant role in explaining country risk changes of our selected peripherical countries and that there was indeed a substantial general reduction in country risk premia after 2003, confirming that the external constraints of the periphery were significantly loosened by more favorable conditions in the international economy in the more recent period. The results are in line both with the view that cycles in peripherical economies are broadly subordinated to global financial cycles, in but also that such external conditions substantially improved compared to the 1990s.
This document provides an overview of classical theories of inflation and the quantity theory of money. It defines key concepts like money, inflation, the money supply, and velocity. The quantity theory of money posits that inflation is primarily caused by increases in the money supply that outpace economic growth. It predicts a direct relationship between money growth and inflation. The document uses graphs and international data to show this relationship generally holds in practice and discusses implications for interest rates.
Taking into account the pull-push debate on the weight that external or internal factors have on the behavior of capital flows and country-risk premium of developing economies, the aim of this article is to assess empirically the extent by which the push factors, linked to global liquidity and interest rates, (compared to country-specific factors) play on the changes in the risk premium of a set of countries of the periphery, in the period 1999-2019. This done using the methodology of Principal Component Analysis, which can relate the information from different countries to its common sources. We also test for a structural change in the premium risk series in 2003, by means of structural break tests. We find that push factors do play the predominant role in explaining country risk changes of our selected peripherical countries and that there was indeed a substantial general reduction in country risk premia after 2003, confirming that the external constraints of the periphery were significantly loosened by more favorable conditions in the international economy in the more recent period. The results are in line both with the view that cycles in peripherical economies are broadly subordinated to global financial cycles, in but also that such external conditions substantially improved compared to the 1990s.
This document discusses the effectiveness of fiscal policy in controlling inflation or deflation based on the slope of the IS curve. It explains that fiscal policy will be more effective when the IS curve has a steeper slope (is less elastic) as it will allow a change in fiscal policy to more significantly impact the level of income and interest rates without crowding out private investment. It also discusses how the slope of the LM curve and positions of the IS and LM curves impact the fiscal multiplier.
This document discusses inflation and monetary policy. It begins by defining average inflation over the last 50 years as around 4% according to the Consumer Price Index. It then notes that the market currently expects future inflation to be around 2%, in line with the Federal Reserve's target. However, it expresses concern that monetary policy interventions in response to the financial crisis, which dramatically increased the monetary base, could sow the seeds for higher inflation in the future if banks begin lending out excess reserves more aggressively. Fiscal policy interactions with monetary policy are also flagged as a potential issue to monitor regarding inflation.
What You Know for Sure That Just Ain't SoMitch Green
This document discusses Modern Monetary Theory (MMT) and its perspective on how monetary systems and government spending work. Some key points:
1) MMT argues that a sovereign government that issues its own currency cannot go bankrupt or run out of money. It is not revenue constrained and does not need to tax or borrow in order to spend.
2) Private sector money exists in a hierarchy with the national currency, issued by the government, sitting at the top. The government sets the policy interest rate and defines the unit of account.
3) Under MMT, maintaining full employment should be a top policy priority. A job guarantee program could help absorb unemployed workers and support aggregate demand during downturns.
El documento describe el Salto del Usero, una cueva natural excavada en el río Mula en Bullas, Murcia, con una caída de agua de 3-4 metros. El río también tenía usos tradicionales como moler grano en cinco molinos harineros a lo largo de su cauce, y dos de ellos, el Molino de Arriba y el Molino de Abajo, se han rehabilitado como establecimientos turísticos rurales.
El documento enfatiza la importancia de mantenerse despierto y firme en la fe, tomando buenas decisiones. Sugiere que cuando uno está dormido o distraído toma malas decisiones que afectan su vida, pero al decidir escuchar a Dios y crecer espiritualmente puede cambiar el rumbo hacia mejor.
Tiger Global offers end-to-end sourcing services and imports from China. Our structured product sourcing model enables you to source from China with confidence.
Contact situation language and rhythm transformationElisabeth Penker
This document discusses the transformation of language and rhythm across different artistic disciplines such as music, visual art, and poetry. It provides historical examples of how rhythm was transformed through developments like syncopation in ragtime music and how language was transformed through early 20th century movements like Dadaism. It also discusses how developments in one artistic discipline, such as the introduction of noise and environmental sounds to music through Russolo's manifesto, influenced and related to transformations happening in other disciplines at the time through shared concepts and ideas. Overall, the document examines how contact between different artistic media and cultural contexts drove innovations that broke conventions and reinvented structures in language, music, and other forms of expression.
Las redes sociales son importantes para la comunicación con otros y para promover negocios sin costo, pero deben usarse con cuidado. Lo que publicas puede afectar tus oportunidades laborales si empresas revisan tus perfiles. Mantén tu información privada y no hagas comentarios negativos sobre tus empleadores.
The document summarizes the launch of a capital campaign for Scots College. The campaign aims to raise funds for two new building projects - a gymnasium for Queen Margaret College and an all-weather sports center for Scots College. The funds will come from the sale of a new cookbook called "Share" created by students and alumni from both schools, as well as donations to the "Building the All-Round Man" capital campaign. The document encourages readers to donate online to support the future of Scots College.
10 Top Designer Denim Styles Hard to Resist _ Navneet VatsNavneet Vats
Denim remains a staple fabric for fashion designers around the world. The article discusses 10 top denim styles that are hard to resist, including distressed skinny jeans, a denim kimono jacket, denim leggings, a denim shirt dress, a denim midi skirt, a denim vest, denim overall pants, denim overall shorts, a denim tulle skirt, and a denim coat. Denim is described as one of the world's oldest fabrics that remains eternally young because it continuously evolves and inspires new fashion trends.
Versión actualizada de la serie creada para el proyecto de talleres 'Herramientas Google para periodistas', que ofrecí en Latinoamérica.
Esta guía ofrece una mirada distinta de las herramientas, enfocadas en cada proceso del trabajo de un periodista: organización de su 'oficina virtual', investigación, reportería, redacción y producción de contenidos y publicación.
Entorno e Incentivos para la inversión en Túnez by Basma Laouni FIPAASCAME
1st Free and Special Economic Zones Summit.
This forum aims to analyse the strengths and weaknesses inherent in the Mediterranean region and to establish and action program in this specific area.
Richard Covarrubia received an award from the Xerox Global Support Team for his work in satisfying a global customer request and developing tools to help replicate the resolution process. He took ownership of an opportunity to help with a global issue, stayed involved until it was resolved, and went beyond the immediate need to create tools that can benefit other customers. The award recognizes Richard for putting customers first in his daily activities.
El resumen describe los elementos de información necesarios para desarrollar una base de datos para la tienda departamental Bodega Aurrera. Se requiere registrar información sobre sucursales, departamentos, jefes, empleados y procesos de contratación. La base de datos almacenará datos como el nombre, dirección y teléfono de cada sucursal y departamento, los datos personales y laborales de cada jefe y empleado, y la información de contratación y sueldo de cada empleado.
FC Consulting ofrece servicios de consultoría en gestión y operaciones para mejorar la eficiencia, competitividad y rentabilidad de sus clientes. La consultora tiene experiencia trabajando con diferentes tipos de empresas y se enfoca en áreas como procesos, calidad, costos, organización y seguridad. Aplica metodologías como mejora continua y resolución de problemas para generar mejoras sustentables en el tiempo.
El documento presenta una lista de los 10 países más pobres del mundo. Incluye breves descripciones de cada país que detallan desafíos económicos como bajos ingresos, alta dependencia de la ayuda externa, destrucción de infraestructura debido a conflictos, hiperinflación, escasez de alimentos y altos niveles de desempleo. Los países mencionados son Angola, Surinam, Guatemala, Liberia, Haití, Moldova, Chad, Zimbabue y otros.
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2) The collapse of Bretton Woods increased US economic hegemony through a more widespread use of the US dollar internationally. Countries in Latin America extensively use dollars beyond international transactions.
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2) The collapse of Bretton Woods increased US economic hegemony and the global role of the US dollar. This has been actively pursued by the US to maintain advantages like persistent trade deficits. Dollarization became more widespread after Bretton Woods.
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The purpose of this chapter is to contribute to the discussion of a number of issues concerning macroeconomic policies that should be appropriate for developing countries. We shall take into account the broader political picture of changes in the international economy, reflected objectively in terms of the nature of the balance of payments constraints facing the ‘emerging markets’ and specially the Latin American economies since the early 1990s. It is within this wider context that we present our account of the particular case of Brazil.
the Brazilian experience has some peculiarities that make it an interesting testing ground for the presumed benefits of the process of financial globalization and the policies of trade and financial opening.
Many will agree that the slow growth and extremely high inflation experienced in Brazil in the 1980s had much to do with debt crisis and the subsequent interruption of capital flows towards Latin America. Indeed, in what became known as the ‘lost decade’ Brazil experienced a severe balance of payments constraint that slowed growth and triggered the acceleration of inflation. Since the early 1990s, foreign capital started again flowing towards Brazil in large quantities, first mainly as portfolio capital but towards the end of the decade more and more as foreign direct investment. one could well have expected that this large amount of foreign capital would improve ‘quality’ (presumably increasingly ‘cold’ rather than ‘hot’ money), by alleviating the balance of payments constraint, and would have had a big effect on both inflation stabilization and in the resumption of fast economic growth.
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This document discusses the fluctuations of the US dollar and its effects on the global economy. It identifies several key factors that influence the US dollar, such as trade deficits, housing markets, interest rates, and inflation. The author then examines how fluctuations in the dollar impact the economies of other countries and cause currency values to rise or fall. Several nations are discussed as being particularly affected by changes in the dollar. Finally, the document reviews some policies the US government has implemented to address fluctuations, such as monetary and fiscal policies.
Rohit Business and economic environmentRohit Yadav
Liquidity trap refers to a situation where monetary policy is ineffective because interest rates are close to zero, causing people and banks to hoard money even if more is supplied. This can occur during severe recessions and deflation. Two examples are the Great Depression and Japan's lost decade in the 1990s. Overcoming a liquidity trap requires unconventional policies like quantitative easing or expansionary fiscal policy to stimulate demand.
Much of the population is totally misinformed on the issue of the exchange rate as an economic policy instrument. This is an issue that people think it's not important unless when they decide to travel abroad. People need to understand that the exchange rate is a key factor of a national development project given that it interferes favorably or unfavorably on the competitiveness of exports and expenditure on imports, in forward or reverse of the domestic industry, the rise or fall of inflation rates, the increase or decrease of the country's production costs and the rise or fall of international reserves, among other factors. A stable exchange rate can lead to a prolonged period of economic growth, while an unstable exchange rate is able to reverse any growth process as what is currently happening in Brazil.
Over the past 60 years, there has been significant inflation in the United States as the price of basic goods like bread, cars, and houses have increased substantially. Inflation causes anxiety among the general public even when it is at relatively low levels. The document goes on to provide an introduction to the concept of inflation and signals that the following sections will explain what inflation is, how it is measured, and how it relates to interest rates and investments.
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice presiden...Nigel Mark Dias
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice president & portfolio manager
SUMMARY
Has the Federal Reserve reached the bottom of its policy toolkit? Many things are still possible, at least in theory, including negative interest rates (which we believe would be ineffective and potentially harmful) or a “helicopter drop” of money. Another option is to resurrect a successful plan from 83 years ago: Purchase a tremendous amount of gold at a price substantially higher than market levels.
A massive Fed gold purchase program might finally lift the anchor on inflationary expectations and consumers’ spending habits. It would increase the price of a globally recognized store of value. It almost sounds like a fairy tale – but it’s happened before.
Though it seems incredibly farfetched, a massive Fed gold purchase program could echo a Depression-era effort that effectively boosted the U.S. economy.
Warren Buffett famously railed against the shiny yellow metal in 2012 when he noted all the gold in the world could be swapped for the totality of U.S. cropland and seven ExxonMobils with $1 trillion left over for “walking-around money.” His point was that these assets can generate significant returns while owning gold produces no discernable cash flow.
While this observation is certainly true, the rub is that this is not a fair comparison since gold is not an asset; rather, it should be considered an alternate currency. Pundits often describe the five factors that define “money”:
Its supply is controlled or limited,
It is fungible/uniform – this is why diamonds cannot qualify,
It is portable – this is why land cannot qualify,
It is divisible – thus art cannot be money, and
It is liquid – this means people will readily accept it in exchange.
By this definition, gold is certainly a form of money, and to Mr. Buffett’s point, one also earns no cash flow on paper dollars, euros, yen or yuan.
Chapter 14_The International Financial SystemRusman Mukhlis
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- Types of foreign exchange rate interventions and their impact on monetary bases
- Components and purpose of a country's balance of payments
- Fixed and floating exchange rate regimes and how central banks intervene to maintain fixed rates
- Challenges of large current account deficits and the euro's challenge to the US dollar's global reserve status.
Question 1Response 1Development inside and out effects t.docxaudeleypearl
Question 1:
Response 1:
Development inside and out effects the entire country's economy. It impacts the managing body, regardless the clearly irrelevant subtleties in the average person's dependably life. Both a conditions and clear deferred results of how the economy is getting along, swelling has the two its fans and spoilers. Distinctive envisions that particular degrees of swelling are helpful for a prospering economy, yet that progressively critical rates raise concerns. It can degrade the money basically and, at logically lamentable, has been a key part to subsidences.
Swelling, as referenced, is the rate a worth ascensions, and fundamentally how much the dollar is worth at a given moment concerning checking. The idea behind swelling being an impact for good in the economy is that a reasonable enough rate can nudge financial movement without debasing the money so much that it ends up being basically vain (Kohn, 2006).
Swelling can in like manner falter from asset for asset. Subordinate upon the season, the expense of gas could go up independently from with everything considered headway as it routinely does as summer moves close. In reality, there is even a term - focus improvement - for swelling that parts in everything except for sustenance and imperativeness (gas and oil), as these regions have separate factors that add to them. There are a wide degree of sorts of swelling, subordinate upon what remarkable is being viewed comparatively as what the development rate truly is by all accounts. For example, what happens if the swelling rate is well over the Fed's normal goal? At a higher rate, yet still in the single digits, that is known as walking swelling. It is seen as concerning yet sensible (Ball, 2006).
Swelling is generally depicted reliant on its rate and causes. By and large, Inflation happens in an economy when vitality for thing and experiences outmaneuvers the supply of yield. in this manner, clarifications behind Inflation have different sides, the intrigue side and supply side. The widely inclusive activity of hazard premiums in driving enlargement pay over the scope of advancing years is dependable with secured budgetary improvement and inside and out oblige cash related procedure events in the moved economies. The degree for further fitting budgetary enabling seen with money related stars seems to have declined amidst the enough low advance charges and gigantic monetary records of national banks (Bodie, 2016).
In relentless time, the correspondence of perils has wound up being constantly phenomenal, the general point of view has lit up, and money related conditions have engaged on net. With the work superstar proceeding to reinforce, and GDP improvement expected to keep up a vital good ways from back in the consequent quarter, it likely will be fitting soon to change the affiliation supports rate. Likewise, if the economy propels as shown by the SEP concentrate way, the affiliation supports rate will probably app ...
The document provides an overview of various financial forces that impact international business, including foreign exchange rates, taxation, tariffs, and inflation. It discusses how changes in currency values and demand/supply of foreign exchange can affect payment balances for companies. Tariffs are described as taxes on imported goods that make foreign products more expensive for consumers. The document also outlines different exchange rate systems such as free floating, managed float, and fixed rates, and how government intervention works to influence currency values under these systems.
FDA Website AssignmentGo to FDA website www.fda.gov1. Unde.docxssuser454af01
FDA Website AssignmentGo to FDA website www.fda.gov1. Under “Laws FDA Enforces”, go to the Federal Food, Drug and Cosmetic Act and read Chapter 2, Definitions, particularly the definition of drugs and devices.2. Write a paper, 500 words, describing A. three things that you as a consumer can learn from the web page andB. three things that you as a part of industry can learn from the web page
Background
Following the finish of the common war and the adjustment of the residential cash by the national bank, the principal compensation change process occurred in 1996, and a novel correction in 2008 allowed a singular amount increment of LBP 200,000 every month for both open and private divisions representatives, conveying the lowest pay permitted by law up to LBP 500,000 from LBP 300,000.1 For the following sixteen years, in any case, there were no wage increments despite the fact that swelling continued rising and achieved a hundred percent and the acquiring energy of the Lebanese individuals began to drop significantly.2
In an examination led by the Lebanese Federation of Consumer Protection, Lebanon was positioned first among 14 Arab nations regarding high costs for meat, sugar, tea, and drain, and it positioned second when it came to tomato, potato, and vegetable oil costs. The investigation credited these outcomes to the nearness of ineffectively aggressive buyer markets (restraining infrastructures), and to the non-implementation of controls identified with settling business benefit margins.3 These variables and others have added to a noteworthy abatement in the offer of wages in the Gross Domestic Product, which a few substances claim to have achieved a low of 30%.4
By mid of 2011, speaks began mounting about the low level of wages that is keeping Lebanese laborers from fulfilling their essential needs in light of rising sustenance costs and the cost of fundamental administrations like power and transportation. In fact, the issue of wages modification wound up noticeably one of the best needs on general society scene over a five-month time frame between September 2011 and January 2012. These discussions were at first supported by a "political open door" that was emerged by the arrangement of another administration in July 2011 and which pronounced putting social equity among its priorities.5 They were likewise convenient on account of the drawing closer of the new scholastic year that involves along the weight of rising school and college educational cost charges.
The procedure began with an exchange among different concerned gatherings, including the Presidency of the Council of Ministers, the Ministry of Labor, monetary bodies, and worker's guilds. Notwithstanding, the level headed discussion swelled into a contention that undermined the solidarity of the administration before coming full circle in the selection of the wage alteration announce No. 7426 amid the January 18, 2012 session of the Lebanese Cabinet.
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1. Behavior of Inflation Volatility in El Salvador
under a dollarization regime
Rafael Mata León*†
Abstract
Complete Dollarization occurs when the inhabitants of a country use the
United States dollar instead of the domestic currency. Under this regime,
domestic nominal interest rate is pegged to the US nominal interest rate. At
present time, three countries have adopted this monetary policy strategy,
Ecuador, El Salvador, and Panama, in the years 2000, 2001, and 1904
respectively. Dollarization, as Reinhart et al mention, is increasingly a defining
characteristic in many emerging market economies. There are very few
observed cases of dollarization, and hence history provides little guidance as to
its consequences.
The purpose of this study is to observe and compare the inflation volatility of
El Salvador related to the fluctuations in the same index of the United States.
As we will observe, there was a cointegration of series between El Salvador and
the US inflation before the US dollar was adopted in 2001 as the main currency.
The methodology to follow is to gather monthly data from 1996 to 2010, and
work with the logarithm percent change. The data will be obtained from different
sources such as central banks, IMF, ecowin Reuters, etc.
We will observe how the adoption of the US dollar in El Salvador helped to
control the volatility of inflation. Consequently, better and more secure
information became available. Now, the volatility of inflation follows a pattern
that can be studied and this is a necessary condition to attract foreign direct
investment to the country. Also, we will observe that the existence of volatility of
inflation in El Salvador is mainly due to a variance in the consumer prices of non
transactable goods.
Advisor: Antonio Moreno Ibañez
*Department of Economics, Universidad de Navarra, Pamplona, Spain. E-mail : rmleon@alumni.unav.es
† I would like to thank Carlos Carcach because he showed me the path to be followed. To my advisor
Antonio Moreno for all the help and guidance provided. To my director and all my professors of the
master, because they taught me the few things I know about economics. Finally special thanks to my
parents, family, and friends who were constantly supporting me.
2. Content Page
1. Introduction 2
1.1. El Salvador 3
2. Model 6
3. Data 6
4. Results 7
5. Conclusion 9
6. Tables and Figure 11
2
3. Introduction
Dollarization is the process by which a country leaves its own currency and
adopts a more stable currency as its main legal currency. When a country takes
the decision to dollarize it adopts the monetary policy of the Federal Reserve of
the United States with the objective of have more stable cycles of devaluation
and inflation. To use the US dollar drastically reduces the exchange and market
risk, it reduces transaction costs for goods and services in the international
environment, and it is easier to accountability evolved in the international ambit.
The supposedly reduction in the nominal interest rate will attract more foreign
direct investment and consequently growth.
On the other hand the welfare costs of dollarization, relative to the optimal
policy, are due to both the fixity of exchange rates and the loss of seigniorage.
Seigniorage is the difference between the value of money and the cost to
produce it, or in other words, the economic cost of producing a currency within a
given economy or country. If the seigniorage is positive, then the government
will make an economic profit; a negative seigniorage will result in an economic
loss. For example, if to a central bank the cost of produce a bill of one monetary
unit is 0.05 monetary units, the positive seigniorage resulting of 0.95 monetary
units. The measured dollar loss of seigniorage may be associated with an
increase in social welfare. The implication is that computed seigniorage losses
can only be unambiguously interpreted as “real losses” to the economy if policy
credibility problems are assumed away, a point that seems to have been
missed in the debate.
The fixity of the exchange rate eliminates the faculty of using the real
exchange rate to avoid or reduce external shocks, and even the political
instability typical from our countries.
To adopt a dollarization strategy does not guarantee the economic growth
and stability. Have volatility of inflation been reduced with the adoption if the US
as the main currency in El Salvador?
3
4. o El Salvador
At the end of November 2000 the Salvadorian government approves the
Monetary Integration Law. On January 1st 2001 all ATM’s were programmed to
give dollars and all saving accounts were converted to the US currency. The
way to proceed is to peg a rate to debts, contracts, and financial assets. When
a country pegs its currency against another one, its inflation rate must converge
towards the inflation rate of this foreign partner because of the risk of losing
competitiveness and current account imbalances.1 Additional perceived
advantages of pegging the exchange rate include the potential reduction of the
devaluation risk and the default or sovereign risk (default or sovereign risk is the
possibility that a country will default on its external debt) of domestic interest
rates, thereby lowering the cost of borrowing for both the government and the
private sector and encouraging greater international trade.2
The decision to adopt the US dollar as the main currency is still in debate to
some economists. As we will observe, the inflation in El Salvador at the moment
it dollarized was already below the media by year 1999 (see Figure 1). The
inflation since 1999 began to follow a similar path as the US. By the year the
law was passed El Salvador’s inflation behave most likely to the US inflation,
with the exception that the “shocks” seems to affect more El Salvador. In figure
2 we can observe how after the US dollar was adopted as the main currency
the distance between the media is still the same as we can observe in figure 3.
The intention of this paper is to try to explain the reason why the distance
between the media is still the same.
The Universidad Centroamericana (UCA) analyzed the economic situation of
El Salvador during 2007 and they found out that 50.3% of Salvadorians
consider that dollarization is the responsible for the increase in the cost of life.
On the other hand, the next day the US dollar became the official currency rate,
1
Hoarau, Jean-François; Blancard, Stéphane; and Jean-Pierre Phillipe. Testing for nominal convergence
in the Central America area : evidence from panel data unit-root tests. Applied Economics Letters,
16:11, 1171 – 1174 (2009).
2
Hoarau, Jean-François; Blancard, Stéphane; and Jean-Pierre Phillipe. Testing for nominal convergence
in the Central America area : evidence from panel data unit-root tests. Applied Economics Letters,
16:11, 1171 – 1174 (2009).
4
5. the interest rate to lend money to consumption and mortgages fell from 17% to
11%.3
We will observe that the Salvadorian belief about the dollarization increasing
the cost of living is in reality that the prices of non-transactable goods have
been constantly increasing. Non-transactable are those that can only be
consumed in the economy they are produced; they can not be imported or
exported. In other words El Salvador has an “internal inflation” that if removed
from the calculation of the CPI we will observe how inflation is practically similar
to the US inflation. In this matter what the authorities in El Salvador should be
doing is to apply policies that are intentioned to control this internal inflation and
finally achieve the objective of removing the volatility of inflation in El Salvador.
In summary, the reasons why El Salvador adopted this monetary policy
strategy was because at that moment, it seemed to be the faster way to enter
into the globalization race, a fast technique to leave behind the poverty, and to
open itself to the world. It was a time that coffee, sugar, and cotton, the principal
goods that maintained the economy during the 90’s went down. The economy
needed a reengineering and the manufactured goods came to play. When the
law was approved, the intention was to create a high aggregated value of the
manufactured goods. Since El Salvador is a very small country, with very little
they could achieve what China has done until now, the problem was the world
crisis that appeared. We can say that the dollarization was the logical step to
follow same as when a man marries a woman after years of dating. After all the
peg of 8.75 colones for 1 US dollar was done years before the law was passed.
3
Tyler Maroney, Dolarización: Iniciativa para el Diálogo Político, International Journalists’ Network
5
6. Model
The way to proceed is to perform an ADF test to check for unit roots. As we
will prove, the inflation has a unit root and therefore is non-stationary. On the
other hand by performing the unit root test in 1st difference we will observe how
the series becomes stationary.
When all the variables are integrated of the same order, the second step is
to estimate the model, also called a "cointegrating equation," and test whether
the residual of the model is stationary.
The next step is to prove that the inflation is stationary if we eliminate the
non-transactable goods. Take a look for instance a figure 4. The inflation is
almost stationary when we leave out energy. In El Salvador we will show how
by applying a unit root test it is stationary at level difference.
The last step is to show if there is cointegration between El Salvador and US
inflation, even before the dollarization came into play. For this we will apply a
Johansen Cointegration Test and this will prove that the dollarization was the
logical step to follow. This will also explain why the distance between the media
of inflation is still the same even after the US dollar was adopted as the main
currency. The purpose of the cointegration test is to determine whether groups
of non-stationary series are cointegrated or not. EViews implements VAR-based
cointegration tests using the methodology developed in Johansen (1991, 1995).
Data
The data we will be working with consist of 175 variables corresponding to
the monthly inflation from January 1996 to July 2010. The data is obtained
from Reuters EcoWin where the logarithmic percent change between each time
period is applied. The data for the calculation of inflation in El Salvador by
groups is the logarithm percent change and was obtained from El Salvador’s
central bank. 4
4
FuenteDirección General de Estadística y Censos (DIGESTYC)
6
7. Results
When you are estimating a model that includes time series variables, the
first thing you need to make sure is that either all time series variables in the
model are stationary or they are cointegrated, which means that they are
integrated of the same order and errors are stationary, in which case the model
defines a long run equilibrium relationship among the cointegrated variables.
Therefore, a cointegration test generally takes two steps. The first step is to
conduct a unit root test on each variable to find the order of integration. In this
exercise the unit test root will be perform through an Augmented Dickey-Fuller
Test. As we will observe some variables are non-stationary then we will have to
perform a first difference in order to fix the problem of stationarity.
The ADF statistic value is -2.540701 and the associated one-sided p-value
is 0.1077. In addition, EViews reports the critical values at the 1%, 5% and 10%
levels. Notice here that the t-statistic value is greater than the critical values so
that we do not reject the null at conventional test sizes.
As we can observe, all the ADF statistic value is higher than the respective
critical values at all levels. Then we do not reject the null hypothesis so we say
that the time series variables are non-stationary (see table 1). We must do
differences of first or second degree until we are able to find stationarity (see
table 2).
As we observe in the tables by running the ADF test using the first difference
for each variable the ADF test statistic is smaller than the critical values at all
levels. Then we can say that the variables were integrated of first order.
Engle and Granger (1987) pointed out that a linear combination of two or
more non-stationary series may be stationary. If such a stationary linear
combination exists, the non-stationary time series are said to be cointegrated.
The stationary linear combination is called the cointegrating equation and may
be interpreted as a long-run equilibrium relationship among the variables.
7
8. The purpose of the cointegration test is to determine whether groups of non-
stationary series are cointegrated or not. EViews implements VAR-based
cointegration tests using the methodology developed in Johansen (1991, 1995).
As we can observe in table 3, the first block reports the so-called trace
statistics and the second block reports the maximum eigenvalue statistics. For
each block, the first column is the number of cointegrating relations under the
null hypothesis. In our case we do not reject the null hypothesis that the series
are cointegrated. Both, trace test indicates 1 cointegrating eqn(s) at the 0.05
level and Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level.
8
9. Conclusion
The adoption of the US dollar as the main currency in El Salvador was a
measure proposed by the executive power and approved by the legislation in
less than 10 days. Historically the country has a trajectory of economic stability
interrupted only during the 80s by a social crisis that ended up in a civil war.
Nevertheless when in 1992 the peace agreements were signed, the economy
has enjoyed economic and financial stability. In other words, the dollarization
was presented as a way to participate in the globalization race, leaving back
poverty and was not imposed by market “forces”.
As we can observe, there existed a cointegration between the inflation of El
Salvador and the US. In fact, the exchange rate has been pegged for about 7
years before the monetary integration law was passed. The dollarization was a
way to “take the next step”. The economic cycles of El Salvador and the United
States are pretty much the same. As every inflation index, stationality is very
similar in both countries. The cointegration that existed before the law was
passed led to both inflations to behave similarly. When in January 2001 the US
becomes the official currency, one of the consequences was the supposedly
reduction in the volatility of inflation for El Salvador and consequently, the
reduction in distance between the media of inflation for El Salvador and the US,
nevertheless by observing figure 3 and 4 we can see how the distance
continues to be the same. Then we can say the there has not been a structural
change in the behavior of the volatility of inflation for El Salvador.
The reduction in volatility is a necessary condition to attract more foreign
direct investment and more secure and valid information in order to make
previsions and therefore plans. In figure 4 we can observe how the behavior of
the inflation in the US without taking into account the energy leads to almost a
complete stationary series. In El Salvador something similar happens. In figure
5 we can observe the behavior of inflation by groups in El Salvador. The groups
consist of:
9
10. 1 Food and non-alcoholic beverages 7 Transportation
2 Alcoholic beverages, tobacco, and
8 Communications
stupefacient
3 Clothing 9 Recreation and Culture
4 Shelter, water, electricity, gas, and other fuels 10 Education
5 Furniture, articles for the home and ordinary
11 Restaurants and Hotels
conservation of the home
6 Health 12 Diverse Services
As we can observe in the graph, since the US was adopted in 2001, the
goods that have increase the most in a year have been twice: transportation,
communications and education. While alcoholic beverages, tobacco, and
stupefacient; shelter, water, electricity, gas, and other fuels; and furniture,
articles for the home and ordinary conservation of the home have increased at
the most once. This means that El Salvador in order to have an almost perfect
stationary series will need to take out the non-transactable goods in the
calculation of the CPI. In other words, since dollarization appeared El Salvador
has encountered itself with an “internal inflation” due to the increase in prices of
non-transactable goods. It could be that the exchange of “colones” to US dollars
is the guilty of this increase in prices, but is a fact that the common feeling of
Salvadorians have about the increase in the cost of living comes from the fact
that non-transactable goods are more expensive than before. This is why the
distance of media between El Salvador and US inflation is the same, because in
some things dollarization has actually helped to reduce the uncertainty and
therefore the volatility while it has created an internal inflation.
It is still early to conclude if dollarization is good or bad. As mentioned
before, dollarization is something new and it is very few things we know about it.
What we can say for sure is that during the actual crisis, El Salvador has
suffered more than others because of the lack of its monetary tool. The lost of
seigniorage is an important loss of income to El Salvador’s central bank and the
FED is not willing to share the revenues. Volatility of transactable goods has
been reduced while an internal inflation of non-transactable goods has
appeared; which is very harmful to local industry. The information made to do
previsions is now better and more secure. Finally, foreign direct investment has
been constantly increasing since El Salvador became dollarized.
10
11. Tables and Figure
Figure 1. Consumer Price Index of El Salvador and the United States
Consumer Price Index
30
27
24
21
18
15
12
9
6
3
0
19 07
19 01
19 01
20 7
20 07
20 01
20 01
20 01
20 7
20 07
20 1
19 1
19 01
19 07
19 7
20 07
20 01
20 01
20 1
20 07
20 1
20 07
20 07
20 7
20 7
20 01
20 01
20 1
20 07
7
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
96
98
99
01
05
06
07
08
96
97
97
98
99
00
00
01
02
02
03
03
04
04
05
06
07
08
09
09
10
10
19
SV [log 12 months] USA [log 12 months] SV Media [12.167795] USA Media [7.60054778]
Figure 2. Consumer Price Index of El Salvador and the United States after monetary integration law was passed
11
12. Figure 3. Consumer Price Index of El Salvador and the United States before monetary integration law was passed
Figure 4. Consumer Price Index of the United States, total and without energy
12
13. Figure 5. Consumer Price Index of El Salvador by groups
0.7
0.65
0.6
0.55
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
-0.05 2001 2002 2003 2004 2005 2006 2007 2008 2009
-0.1
-0.15
-0.2
-0.25
-0.3
-0.35
1.1 Alimentos y Bebidas no Alcohólicas 1.2 Bebidas Alcohólicas, Tabaco y Estupefacientes
1.3 Prendas de Vestir y Calzado 1.4 Alojamiento, Agua, Electricidad, Gas y Otros Combustibles
1.5 Muebles, Artículos para el Hogar y para la Conservación Ordinaria del Hogar 1.6 Salud
1.7 Transporte 1.8 Comunicaciones
1.9 Recreación y Cultura 1.10 Educación
1.11 Restaurantes y Hoteles 1.12 Bienes y Servicios Diversos
13
14. Table 1. Unit test root in level difference for using ADF for El Salvador’s inflation
14
15. Table 2. Unit test root in first difference for using ADF for El Salvador’s inflation
15
16. Table 3. Johansen Cointegration Test for inflation in El Salvador and the United States
Date: 09/01/10 Time: 02:53
Sample (adjusted): 2 175
Included observations: 174 after adjustments
Trend assumption: Linear deterministic trend
Series: SV_CPI USA_CPI
Lags interval (in first differences): No lags
Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.088868 18.25844 15.49471 0.0187
At most 1 0.011796 2.064683 3.841466 0.1507
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.088868 16.19375 14.26460 0.0245
At most 1 0.011796 2.064683 3.841466 0.1507
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
16