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 introduces a new historical database for studying financial crises dating back 800 years. The database covers 66 countries and includes variables like debt, GDP, inflation, exchange rates and more. The analysis yields several insights: 1) Serial default is nearly universal as countries develop, with major crises typically separated by decades; 2) Domestic debt is not new and ignoring it is risky; 3) Crises often involve inflation, currency crashes and banking crises alongside defaults. Periods of increased capital mobility frequently precipitate banking crises globally, as in recent times.
Effect of Euro on Income_Econometric PaperPatrick Hess
The document analyzes the economic impact of adopting the euro as a common currency on average income levels. Using panel data from 16 European countries from 1985-2005, the study finds that adopting the euro has had a statistically significant negative effect on average income. Specifically, the analysis shows that average income was $635 lower per year for countries that adopted the euro. Additionally, the negative impact was largest one year after adoption, with income $743-$1,006 lower. The study also finds the negative effect was greater for highly urbanized eurozone countries, possibly due to increased dependence on exporting outside the eurozone.
Global Research
1) Global rebalancing will weigh on risk assets like equities over the coming years as current account imbalances continue to narrow.
2) European and Asian equities excluding Japan are preferred to US equities for 2016.
3) Overweight defensive equity sectors, underweight government bonds, and prefer investment grade over high yield credit.
Fiscal multipliers and foreign holdings of public debt - working paperADEMU_Project
This paper explores the relationship between fiscal multipliers and foreign holdings of public debt. Using data from the US postwar period and a panel of 17 advanced economies, the paper finds that fiscal multipliers are larger when a higher share of public debt is held by foreign residents rather than domestic residents. This is because when debt is held by foreigners, fiscal expansions face weaker crowding-out effects on domestic private consumption and investment. The paper develops a model to explain this relationship and employs various empirical methods to estimate fiscal multipliers conditioned on the foreign share of public debt.
1) The document analyzes the relationship between currency intervention (official purchases of foreign assets by governments) and current account balances (trade imbalances).
2) Statistical analysis finds that currency intervention has a very large effect on current account balances, increasing them by 60-100 cents for each dollar spent on intervention. This effect is much larger than commonly assumed.
3) These results suggest that international financial markets are not efficient at equalizing returns across countries, and that current account imbalances could be more readily corrected through policy actions than generally believed.
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.
1) While fixed exchange rates provided stability after WWII, they collapsed as capital markets evolved and countries faced speculative attacks. Many developing countries still use fixed rates pegged to the dollar or euro.
2) Floating exchange rates allow independent monetary policy but introduce unpredictable volatility. Developed countries mostly use floating rates as their economies strengthen.
3) The debate continues on whether fixed or floating rates are superior, as countries transition between regimes and sometimes struggle, showing the challenges of both approaches. Effective management is key to success with floating rates.
Over the past thirty years the neutral real interest rate across developed economies has declined substantially. Evidence suggests that secular rather than transitory factors are driving its decline. A lower neutral interest rate implies that the cumulative amount of tightening required for monetary policy to become neutral is much smaller than previously thought.
This document introduces a new historical database for studying financial crises dating back 800 years. The database covers 66 countries and includes variables like debt, GDP, inflation, exchange rates and more. The analysis yields several insights: 1) Serial default is nearly universal as countries develop, with major crises typically separated by decades; 2) Domestic debt is not new and ignoring it is risky; 3) Crises often involve inflation, currency crashes and banking crises alongside defaults. Periods of increased capital mobility frequently precipitate banking crises globally, as in recent times.
Effect of Euro on Income_Econometric PaperPatrick Hess
The document analyzes the economic impact of adopting the euro as a common currency on average income levels. Using panel data from 16 European countries from 1985-2005, the study finds that adopting the euro has had a statistically significant negative effect on average income. Specifically, the analysis shows that average income was $635 lower per year for countries that adopted the euro. Additionally, the negative impact was largest one year after adoption, with income $743-$1,006 lower. The study also finds the negative effect was greater for highly urbanized eurozone countries, possibly due to increased dependence on exporting outside the eurozone.
Global Research
1) Global rebalancing will weigh on risk assets like equities over the coming years as current account imbalances continue to narrow.
2) European and Asian equities excluding Japan are preferred to US equities for 2016.
3) Overweight defensive equity sectors, underweight government bonds, and prefer investment grade over high yield credit.
Fiscal multipliers and foreign holdings of public debt - working paperADEMU_Project
This paper explores the relationship between fiscal multipliers and foreign holdings of public debt. Using data from the US postwar period and a panel of 17 advanced economies, the paper finds that fiscal multipliers are larger when a higher share of public debt is held by foreign residents rather than domestic residents. This is because when debt is held by foreigners, fiscal expansions face weaker crowding-out effects on domestic private consumption and investment. The paper develops a model to explain this relationship and employs various empirical methods to estimate fiscal multipliers conditioned on the foreign share of public debt.
1) The document analyzes the relationship between currency intervention (official purchases of foreign assets by governments) and current account balances (trade imbalances).
2) Statistical analysis finds that currency intervention has a very large effect on current account balances, increasing them by 60-100 cents for each dollar spent on intervention. This effect is much larger than commonly assumed.
3) These results suggest that international financial markets are not efficient at equalizing returns across countries, and that current account imbalances could be more readily corrected through policy actions than generally believed.
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.
1) While fixed exchange rates provided stability after WWII, they collapsed as capital markets evolved and countries faced speculative attacks. Many developing countries still use fixed rates pegged to the dollar or euro.
2) Floating exchange rates allow independent monetary policy but introduce unpredictable volatility. Developed countries mostly use floating rates as their economies strengthen.
3) The debate continues on whether fixed or floating rates are superior, as countries transition between regimes and sometimes struggle, showing the challenges of both approaches. Effective management is key to success with floating rates.
Over the past thirty years the neutral real interest rate across developed economies has declined substantially. Evidence suggests that secular rather than transitory factors are driving its decline. A lower neutral interest rate implies that the cumulative amount of tightening required for monetary policy to become neutral is much smaller than previously thought.
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.
However, what the actual record shows is that the impact on inflation stabilization, although starting a bit late, only by mid-1994, was in fact more drastic than anybody could have reasonably expected. Inflation fell spectacularly and has remained extremely low ever since. on the other hand, the growth performance was, to say the very least, extremely disappointing. this chapter will try to make sense of this experience using a combination of some features of the international situation and of particular policies followed by the Brazilian state.
Most Latin American economies followed more or less the same broad pattern of fast disinflation and slow growth with the notable exception of Chile and partial exception of Argentina. therefore the Brazilian story, in spite of its peculiarities, may arguably be seen to reflect a more general pattern.
We shall begin our discussion in the following section with a brief account of the operation of the current international monetary system, a system that we call the ‘floating dollar standard’, and of other salient features of the international trade and financial environment faced by the ‘emerging’ developing economies since the early 1990s. the third section shows how this new international environment affects and changes the nature of the balance
This document summarizes a report on currency valuations according to different metrics. It provides currency exchange rates and estimates of under or overvaluation based on purchasing power parity calculations, a 10-year moving average, and other models. The British pound and Asian currencies like the Singapore dollar appear most undervalued according to these analyses, while the Japanese yen seems overvalued versus other Asian currencies still. The document advocates focusing valuation discussions on exchange rate fundamentals and accumulation of foreign reserves rather than competitive devaluations.
This document provides a quarterly review of capital markets and the economy for the period ending December 31, 2009. It includes summaries of key economic indicators such as GDP, employment, consumer confidence, and inflation. It also reviews the performance of major asset classes and indexes. Expert commentary is provided on the economic outlook and investment strategy.
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.
"Show me the incentive and I'll show you the outcome" – Veripath Farmland Funds Q4 Investor Letter: Investing in a World of Financial Repression, Negative Real Rates, Valuation “Challenges” and Inflationary Forces.
Do G7 governments have an incentive to attempt to keep inflation higher for longer and real rates lower for longer? Negative real rates across a broad spectrum of credit assets are a graphic sign that we inhabit a world of financial repression orchestrated by central banks at the formal/informal behest of sovereign borrowers. In a normally functioning market, lenders do not provide capital to borrowers for negative yields – i.e., they do not pay for the privilege of lending. It goes without saying we are not in a normally functioning market.
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.
Covid19 Pandemic: Looming Global Recession and Impact on BangladeshMd. Tanzirul Amin
The document summarizes the economic impacts of the Covid-19 pandemic, including a potential global recession. It discusses indicators that a recession may occur, such as stock market declines and yield curve inversions. The pandemic has reduced global production and exports while increasing unemployment. For Bangladesh specifically, exports and remittances declined sharply, threatening employment and government revenue. The economic challenges for Bangladesh recovering are substantial in the face of an uncertain global economic outlook.
The World Economic Situation and Prospects 2012 Global economic outlook was pre-released on 1 December at UN Headquarters in New York. The report estimates growth of world gross product (WGP) at 2.8 per cent in 2011, and its baseline forecast projects growth of 2.6 per cent for 2012 and 3.2 per cent for 2013, well below pre-crisis pace of global growth. Risks for a double-dip recession have heightened, however.
World crisis of 2008 and its economic, social and geopolitical consequencesFernando Alcoforado
The global economic and financial crisis of 2008 had wide-ranging economic, social, and geopolitical consequences according to experts. The crisis originated from risky lending practices and over-complex financial innovations in the US that spread worldwide. It resulted in massive losses, a collapse in credit markets, and a severe global recession. Experts argue this could lead to prolonged fiscal deficits, protectionism, and a shift away from US dominance on the global stage. The crisis also hit developing economies hard through falling trade and commodity prices, with serious social impacts. It marked the end of the era of financial liberalization and globalization as governments intervened extensively to stabilize markets.
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.
- Forecasters underestimated fiscal multipliers in advanced economies early in the crisis. A 1 percentage point increase in planned fiscal consolidation was associated with about 1 percentage point lower growth than forecasted.
- This relationship was stronger early in the crisis but weaker in more recent years, possibly due to learning by forecasters and smaller actual multipliers over time.
- The results suggest multipliers were underestimated for both spending cuts and tax increases, with slightly larger underestimation for spending cuts. Unemployment and private consumption/investment forecasts also underestimated the negative impact of fiscal consolidation.
Global economic growth remains weak with many forecasts being revised downward. While talk of recession is overdone, growth of around 2.5-3.0% may be the new normal. Government leadership is lacking and central banks have limited policy tools remaining. The US economy has strengthened but China's transition to more sustainable growth has stalled. Monetary policy still has room for easing in some emerging markets.
Nov 1999_SG Europe Top 20 Fund Report_SGAMAlfred Park
The document analyzes valuation levels and market conditions for US and European equities. It finds several concerning factors, including that US government intervention against Microsoft signals limits on wealth concentration. Productivity growth may be slower than assumed. Current account deficits and falling US savings are at unprecedented levels. European telecom stocks seem fully valued. Overall it recommends a tactically underinvested position in equities given uncertainties around factors currently propping up prices like strong dollar and corporate earnings growth. It models fair valuation based on return on capital, cost of capital, and growth assumptions.
B416 The Evolution Of Global Economies Lecture 10 Recent Global Economic Cris...Pearson College London
This document summarizes a lecture on the global economic crisis that began in 2008. It discusses the origins and impacts of the crisis in different parts of the world. It also analyzes responses by governments and how their actions affected the crisis over time, particularly in Europe. Additionally, it provides an overview of financial crises generally, including definitions of currency crises, models of what causes them, the costs of crises, and the typical sequencing of currency and banking crises.
Ss china the us & currencies harvard kennedy school presentationMarcus Vannini
- The document discusses currency issues between China, the US, and the RMB. It argues that China should allow gradual appreciation of the RMB for several reasons, including avoiding overheating of the Chinese economy and making exchange rate policy an effective tool for balancing internal and external economic conditions.
- It also discusses criticisms of US twin deficits and theories around sustainable current account deficits. The global monetary system is shifting from a dollar-based system to one with multiple international reserve currencies.
Jelena jankovic ( PDF) the fluctuation of us dollar and its effect toward wo...Fatfat Shiying
The document discusses the effects of fluctuations in the US dollar on the world economy. It focuses on the impacts to Asia, the Middle East, Australia, and Africa. Key points include:
1) Movements in the US dollar impact world economic growth as the US is a major export destination. An appreciating dollar boosts US imports and economic growth in other countries.
2) A sharply depreciating dollar could weaken world economic growth by reducing US import demand. The world remains dependent on the US as an economic engine.
3) Research will examine dollar fluctuations and effects on exchange rates, economies, imports/exports, commodities, financial markets in Asia, the Middle East, Australia, and Africa
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 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 document discusses economic growth trajectories and factors that cause growth breakdowns under different institutional systems. It analyzes differences in growth rates between countries and periods of crisis-induced slower growth. Institutional systems like socialism, quasi-socialism and crony capitalism tend to experience more severe shocks compared to arms-length capitalist systems, where concentrated political power rather than free markets typically cause the worst shocks. The effects of crises like output losses may not be fully recouped even after a return to growth.
Journal of Banking & Finance 44 (2014) 114–129Contents lists.docxdonnajames55
Journal of Banking & Finance 44 (2014) 114–129
Contents lists available at ScienceDirect
Journal of Banking & Finance
j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / j b f
Macro-financial determinants of the great financial crisis: Implications
for financial regulation q
http://dx.doi.org/10.1016/j.jbankfin.2014.03.001
0378-4266/� 2014 Elsevier B.V. All rights reserved.
q We would like to thank the Editor, an anonymous referee, Luc Laeven, Ross
Levine, Marco Pagano, Andrea Sironi, Randy Stevenson, Gianfranco Torriero,
Giuseppe Zadra and seminar participants at IFABS Conference and ISTEIN seminar
for helpful comments. This paper’s findings, interpretations, and conclusions are
entirely those of the authors and do not necessarily represent the views of the
World Bank and the Italian Banking Association.
⇑ Corresponding author. Tel.: +39 02 58362725.
E-mail addresses: [email protected] (G. Caprio Jr.), [email protected]
(V. D’Apice), [email protected] (G. Ferri), [email protected]
(G.W. Puopolo).
Gerard Caprio Jr. a, Vincenzo D’Apice b,c, Giovanni Ferri d,e, Giovanni Walter Puopolo f,⇑
a Williams College, United States
b Economic Research Department of Italian Banking Association, Italy
c Istituto Einaudi (IstEin), Italy
d LUMSA University of Rome, Italy
e Center for Relationship Banking & Economics – CERBE, Italy
f Bocconi University, CSEF and P. Baffi Center, Italy
a r t i c l e i n f o
Article history:
Received 15 April 2012
Accepted 4 March 2014
Available online 29 March 2014
JEL classification:
G01
G15
G18
G21
Keywords:
Banking crisis
Government intervention
Regulation
a b s t r a c t
We provide a cross-country and cross-bank analysis of the financial determinants of the Great Financial
Crisis using data on 83 countries from the period 1998 to 2006. First, our cross-country results show that
the probability of suffering the crisis in 2008 was larger for countries having higher levels of credit
deposit ratio whereas it was lower for countries characterized by higher levels of: (i) net interest margin,
(ii) concentration in the banking sector, (iii) restrictions to bank activities, (iv) private monitoring. The
bank-level analysis reinforces these results and shows that the latter factors are also key determinants
across banks, thus explaining the probability of bank crisis. Our findings contribute to extend the analyt-
ical toolkit available for macro and micro-prudential regulation.
� 2014 Elsevier B.V. All rights reserved.
1. Introduction ment (BCBS, 2010a), has focused more on the stability of the finan-
As much as it was known that the Great Depression of the 1930s
was the acid test for any reputable macroeconomic theory, the out-
break of the Great Financial crisis in 2008 has shaken not only
financial institutions, but also long-held beliefs and theories on
how the regulation of the financial system should be structured,
with renewed emphasis on macro-prudential supervision and
reforming micro-pr.
This document introduces the concept of financialization and its implications. It defines financialization as the increasing role of financial motives, markets, actors and institutions in domestic and international economies. Some key points:
1) Since the 1970s/1980s, structural shifts have led to increases in financial transactions, real interest rates, and the profitability and shares of national income going to financial firms and asset holders in countries like the US and France.
2) These trends reflect the phenomenon of financialization in world economies. Financialization has implications for economic stability, growth, income distribution, and political/economic policy.
3) While financialization has detrimental effects, the financial sector benefits from economic crises that hurt many
The purpose of this paper is to show that the interaction between large changes in the external conditions facing the Brazilian economy since 2003 and smaller changes in the orientation of domestic economic policy after 2005 explain the improved control of inflation, the recovery of more satisfactory rates of economic growth and the stronger improvement in income distribution and poverty reduction in the second half of the decade. The change in the orientation of economic policy also explains the relatively moderate contraction and strong recovery of the economy after the world crisis hit Brazil in late 2008.
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.
However, what the actual record shows is that the impact on inflation stabilization, although starting a bit late, only by mid-1994, was in fact more drastic than anybody could have reasonably expected. Inflation fell spectacularly and has remained extremely low ever since. on the other hand, the growth performance was, to say the very least, extremely disappointing. this chapter will try to make sense of this experience using a combination of some features of the international situation and of particular policies followed by the Brazilian state.
Most Latin American economies followed more or less the same broad pattern of fast disinflation and slow growth with the notable exception of Chile and partial exception of Argentina. therefore the Brazilian story, in spite of its peculiarities, may arguably be seen to reflect a more general pattern.
We shall begin our discussion in the following section with a brief account of the operation of the current international monetary system, a system that we call the ‘floating dollar standard’, and of other salient features of the international trade and financial environment faced by the ‘emerging’ developing economies since the early 1990s. the third section shows how this new international environment affects and changes the nature of the balance
This document summarizes a report on currency valuations according to different metrics. It provides currency exchange rates and estimates of under or overvaluation based on purchasing power parity calculations, a 10-year moving average, and other models. The British pound and Asian currencies like the Singapore dollar appear most undervalued according to these analyses, while the Japanese yen seems overvalued versus other Asian currencies still. The document advocates focusing valuation discussions on exchange rate fundamentals and accumulation of foreign reserves rather than competitive devaluations.
This document provides a quarterly review of capital markets and the economy for the period ending December 31, 2009. It includes summaries of key economic indicators such as GDP, employment, consumer confidence, and inflation. It also reviews the performance of major asset classes and indexes. Expert commentary is provided on the economic outlook and investment strategy.
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.
"Show me the incentive and I'll show you the outcome" – Veripath Farmland Funds Q4 Investor Letter: Investing in a World of Financial Repression, Negative Real Rates, Valuation “Challenges” and Inflationary Forces.
Do G7 governments have an incentive to attempt to keep inflation higher for longer and real rates lower for longer? Negative real rates across a broad spectrum of credit assets are a graphic sign that we inhabit a world of financial repression orchestrated by central banks at the formal/informal behest of sovereign borrowers. In a normally functioning market, lenders do not provide capital to borrowers for negative yields – i.e., they do not pay for the privilege of lending. It goes without saying we are not in a normally functioning market.
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.
Covid19 Pandemic: Looming Global Recession and Impact on BangladeshMd. Tanzirul Amin
The document summarizes the economic impacts of the Covid-19 pandemic, including a potential global recession. It discusses indicators that a recession may occur, such as stock market declines and yield curve inversions. The pandemic has reduced global production and exports while increasing unemployment. For Bangladesh specifically, exports and remittances declined sharply, threatening employment and government revenue. The economic challenges for Bangladesh recovering are substantial in the face of an uncertain global economic outlook.
The World Economic Situation and Prospects 2012 Global economic outlook was pre-released on 1 December at UN Headquarters in New York. The report estimates growth of world gross product (WGP) at 2.8 per cent in 2011, and its baseline forecast projects growth of 2.6 per cent for 2012 and 3.2 per cent for 2013, well below pre-crisis pace of global growth. Risks for a double-dip recession have heightened, however.
World crisis of 2008 and its economic, social and geopolitical consequencesFernando Alcoforado
The global economic and financial crisis of 2008 had wide-ranging economic, social, and geopolitical consequences according to experts. The crisis originated from risky lending practices and over-complex financial innovations in the US that spread worldwide. It resulted in massive losses, a collapse in credit markets, and a severe global recession. Experts argue this could lead to prolonged fiscal deficits, protectionism, and a shift away from US dominance on the global stage. The crisis also hit developing economies hard through falling trade and commodity prices, with serious social impacts. It marked the end of the era of financial liberalization and globalization as governments intervened extensively to stabilize markets.
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.
- Forecasters underestimated fiscal multipliers in advanced economies early in the crisis. A 1 percentage point increase in planned fiscal consolidation was associated with about 1 percentage point lower growth than forecasted.
- This relationship was stronger early in the crisis but weaker in more recent years, possibly due to learning by forecasters and smaller actual multipliers over time.
- The results suggest multipliers were underestimated for both spending cuts and tax increases, with slightly larger underestimation for spending cuts. Unemployment and private consumption/investment forecasts also underestimated the negative impact of fiscal consolidation.
Global economic growth remains weak with many forecasts being revised downward. While talk of recession is overdone, growth of around 2.5-3.0% may be the new normal. Government leadership is lacking and central banks have limited policy tools remaining. The US economy has strengthened but China's transition to more sustainable growth has stalled. Monetary policy still has room for easing in some emerging markets.
Nov 1999_SG Europe Top 20 Fund Report_SGAMAlfred Park
The document analyzes valuation levels and market conditions for US and European equities. It finds several concerning factors, including that US government intervention against Microsoft signals limits on wealth concentration. Productivity growth may be slower than assumed. Current account deficits and falling US savings are at unprecedented levels. European telecom stocks seem fully valued. Overall it recommends a tactically underinvested position in equities given uncertainties around factors currently propping up prices like strong dollar and corporate earnings growth. It models fair valuation based on return on capital, cost of capital, and growth assumptions.
B416 The Evolution Of Global Economies Lecture 10 Recent Global Economic Cris...Pearson College London
This document summarizes a lecture on the global economic crisis that began in 2008. It discusses the origins and impacts of the crisis in different parts of the world. It also analyzes responses by governments and how their actions affected the crisis over time, particularly in Europe. Additionally, it provides an overview of financial crises generally, including definitions of currency crises, models of what causes them, the costs of crises, and the typical sequencing of currency and banking crises.
Ss china the us & currencies harvard kennedy school presentationMarcus Vannini
- The document discusses currency issues between China, the US, and the RMB. It argues that China should allow gradual appreciation of the RMB for several reasons, including avoiding overheating of the Chinese economy and making exchange rate policy an effective tool for balancing internal and external economic conditions.
- It also discusses criticisms of US twin deficits and theories around sustainable current account deficits. The global monetary system is shifting from a dollar-based system to one with multiple international reserve currencies.
Jelena jankovic ( PDF) the fluctuation of us dollar and its effect toward wo...Fatfat Shiying
The document discusses the effects of fluctuations in the US dollar on the world economy. It focuses on the impacts to Asia, the Middle East, Australia, and Africa. Key points include:
1) Movements in the US dollar impact world economic growth as the US is a major export destination. An appreciating dollar boosts US imports and economic growth in other countries.
2) A sharply depreciating dollar could weaken world economic growth by reducing US import demand. The world remains dependent on the US as an economic engine.
3) Research will examine dollar fluctuations and effects on exchange rates, economies, imports/exports, commodities, financial markets in Asia, the Middle East, Australia, and Africa
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 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 document discusses economic growth trajectories and factors that cause growth breakdowns under different institutional systems. It analyzes differences in growth rates between countries and periods of crisis-induced slower growth. Institutional systems like socialism, quasi-socialism and crony capitalism tend to experience more severe shocks compared to arms-length capitalist systems, where concentrated political power rather than free markets typically cause the worst shocks. The effects of crises like output losses may not be fully recouped even after a return to growth.
Journal of Banking & Finance 44 (2014) 114–129Contents lists.docxdonnajames55
Journal of Banking & Finance 44 (2014) 114–129
Contents lists available at ScienceDirect
Journal of Banking & Finance
j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / j b f
Macro-financial determinants of the great financial crisis: Implications
for financial regulation q
http://dx.doi.org/10.1016/j.jbankfin.2014.03.001
0378-4266/� 2014 Elsevier B.V. All rights reserved.
q We would like to thank the Editor, an anonymous referee, Luc Laeven, Ross
Levine, Marco Pagano, Andrea Sironi, Randy Stevenson, Gianfranco Torriero,
Giuseppe Zadra and seminar participants at IFABS Conference and ISTEIN seminar
for helpful comments. This paper’s findings, interpretations, and conclusions are
entirely those of the authors and do not necessarily represent the views of the
World Bank and the Italian Banking Association.
⇑ Corresponding author. Tel.: +39 02 58362725.
E-mail addresses: [email protected] (G. Caprio Jr.), [email protected]
(V. D’Apice), [email protected] (G. Ferri), [email protected]
(G.W. Puopolo).
Gerard Caprio Jr. a, Vincenzo D’Apice b,c, Giovanni Ferri d,e, Giovanni Walter Puopolo f,⇑
a Williams College, United States
b Economic Research Department of Italian Banking Association, Italy
c Istituto Einaudi (IstEin), Italy
d LUMSA University of Rome, Italy
e Center for Relationship Banking & Economics – CERBE, Italy
f Bocconi University, CSEF and P. Baffi Center, Italy
a r t i c l e i n f o
Article history:
Received 15 April 2012
Accepted 4 March 2014
Available online 29 March 2014
JEL classification:
G01
G15
G18
G21
Keywords:
Banking crisis
Government intervention
Regulation
a b s t r a c t
We provide a cross-country and cross-bank analysis of the financial determinants of the Great Financial
Crisis using data on 83 countries from the period 1998 to 2006. First, our cross-country results show that
the probability of suffering the crisis in 2008 was larger for countries having higher levels of credit
deposit ratio whereas it was lower for countries characterized by higher levels of: (i) net interest margin,
(ii) concentration in the banking sector, (iii) restrictions to bank activities, (iv) private monitoring. The
bank-level analysis reinforces these results and shows that the latter factors are also key determinants
across banks, thus explaining the probability of bank crisis. Our findings contribute to extend the analyt-
ical toolkit available for macro and micro-prudential regulation.
� 2014 Elsevier B.V. All rights reserved.
1. Introduction ment (BCBS, 2010a), has focused more on the stability of the finan-
As much as it was known that the Great Depression of the 1930s
was the acid test for any reputable macroeconomic theory, the out-
break of the Great Financial crisis in 2008 has shaken not only
financial institutions, but also long-held beliefs and theories on
how the regulation of the financial system should be structured,
with renewed emphasis on macro-prudential supervision and
reforming micro-pr.
This document introduces the concept of financialization and its implications. It defines financialization as the increasing role of financial motives, markets, actors and institutions in domestic and international economies. Some key points:
1) Since the 1970s/1980s, structural shifts have led to increases in financial transactions, real interest rates, and the profitability and shares of national income going to financial firms and asset holders in countries like the US and France.
2) These trends reflect the phenomenon of financialization in world economies. Financialization has implications for economic stability, growth, income distribution, and political/economic policy.
3) While financialization has detrimental effects, the financial sector benefits from economic crises that hurt many
The purpose of this paper is to show that the interaction between large changes in the external conditions facing the Brazilian economy since 2003 and smaller changes in the orientation of domestic economic policy after 2005 explain the improved control of inflation, the recovery of more satisfactory rates of economic growth and the stronger improvement in income distribution and poverty reduction in the second half of the decade. The change in the orientation of economic policy also explains the relatively moderate contraction and strong recovery of the economy after the world crisis hit Brazil in late 2008.
The document analyzes economic performance during the 2008-2009 global financial crisis across different regions and countries. It finds that while growth rates declined worldwide, output actually declined and turned negative on average only in advanced economies and Central and Eastern European countries. Other regions like Asia, Latin America and Africa saw similar or higher growth rates compared to pre-crisis periods. The crisis most severely impacted advanced nations, decreasing their share of global GDP, while Asia increased its share. The document emphasizes looking at changes in income levels rather than just growth rates to better assess crisis impacts on welfare.
This document summarizes a research paper that examines trends in rentier incomes and financial crises in some OECD countries between 1960 and 2000. The paper finds that rentier income shares, which include profits from financial firms and interest income, increased significantly in most countries starting in the early 1980s, coinciding with the rise of neoliberal monetary policies. However, rentier shares declined in some developing countries that experienced financial crises. The paper also finds little evidence that increases in rentier incomes came at the expense of non-financial corporate profits, suggesting no conflict between these groups.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
The Soundness of Financial Institutions In The Fragile Five CountriesCSCJournals
In recent years, economic globalization and technological development have contributed to a substantial rise in the integration of financial markets. Research findings in this area have indicated that a financial shock in one market can easily be transmitted to other markets globally. Especially, recent experiences showed that financial markets of some developing economies may even be more vulnerable to financial shocks than the emerging markets. There are several reasons, such as current account deficits, instability of local currencies, weaker financial institutions, for this situation. Contrary to the popular perception, this may be due to the lack of knowledge and prejudices of international investors about some emerging markets. This study evaluates and compares the financial soundness of 18 countries selected on the basis of the “Fragile Five” countries. The soundness of the financial structures of these countries has been evaluated based on the soundness of their financial institutions. The findings indicate that the countries with the weakest performance in the selected period are not the “Fragile Five” countries when compared with the countries in the whole sample.
What Drives Movements in Sovereign CDS Spreads?mymarketfair
We primarily aim to find the macroeconomic factors that drive the movements in Sovereign CDS prices using data from 35 countries around the world. We found no strong evidence of movements in sovereign CDS spreads related to three country-specific macroeconomic factors: exports, imports, and CPI. Since the onset of the financial crisis and the subsequent recovery from recession, we find that 61 percent of the variation in sovereign CDS spreads is explained by a single component. Similarly, a single component account for 54 percent of the variation in local stock market returns. We also find that sovereign CDS spreads are almost equally related to the US stock market, global equity premium, and local stock markets.
This document analyzes the link between domestic debt, financial repression, and external vulnerability in Venezuela from 1984 to 2013. It finds that while financial repression helped reduce the stock of domestic debt, it also accelerated capital flight, weakening Venezuela's net foreign asset position. Financial repression taxes, estimated using different methodologies, were on average similar to levels in OECD countries but the "tax rate" was significantly higher in years with exchange controls and interest rate ceilings. Measures of capital flight, including over-invoicing of imports, increased markedly in periods of exchange controls, indicating a link between domestic imbalances and capital outflows.
Informative content of macroeconomic fundamentals with respect to currency crisis prediction is reassessed for the period of 1990s on the panel of 46 developed and emerging economies.
In the first part the paper develops a model for currency crisis prediction. The distinction is made between variables emphasized by 'first generation' and 'second generation' models. Special attention is directed towards multiple equilibria and contagion phenomena. Considerable amount of predictability is found, particularly on behalf of standard leading crisis indicators, such as overvaluation of the real exchange rate and the level of foreign exchange reserves. Multiple equilibria don't get much support from the data while contagion effect is obviously working – apparently through various channels.
In the second part the relationship between model specification and the significance of coefficients is investigated in the attempt to ultimately evaluate what can be expected from empirical implementation of crisis prediction. An average predictive power of such models and employed variables is assessed.
Authored by: Marcin Sasin
Published in 2001
Non-monetary effects Employee performance during Financial Crises in the Kurd...AI Publications
This document summarizes a research paper on non-monetary factors affecting employee performance during financial crises in the Kurdistan region of Iraq. The researcher developed five hypotheses to test how factors like job security, training, compensation, job enrichment, and leadership style influence employee performance during crises. Simple regression analysis found that job security had the strongest positive association with performance. The document provides context on the 2014-2018 financial crisis in Iraq and reviews literature on defining and analyzing different types of financial crises, including banking crises.
This document discusses the origins and consequences of the 2007-2008 global financial crisis. It began in the US housing market with a rise in subprime mortgage defaults. Loose monetary policy and financial innovation like securitization contributed to overextension of credit. When housing prices declined and interest rates rose, many loans defaulted. This caused losses for financial institutions and a loss of confidence in the market. Major banks like Lehman Brothers collapsed, deepening the crisis. The consequences included a global recession, tightening financial regulation, and lessons about risks in the banking system like credit, market and liquidity risk.
This document is a senior thesis analyzing whether Mexico's transition to a floating exchange rate in 1994 accelerated illicit financial outflows, known as capital flight. It begins with an introduction outlining the purpose and structure of the paper. The literature review then discusses previous research on Mexico's illicit financial outflows over time, how these outflows have affected the currency and economy, and how exchange rate regimes impact investors' incentives to hedge currency risk. The paper will apply modern portfolio theory and Krugman's investment function to model investor behavior and how capital flight has impacted Mexico's floating exchange rate. It will use empirical analysis to support the conclusion that a floating exchange rate increases capital flight.
Cross country empirical studies of banking crisisAlexander Decker
1) The document analyzes factors associated with banking crises during periods of financial liberalization using a spatial Durbin model with panel data from 49 countries from 1989-1997.
2) The results suggest that financial liberalization increased the likelihood of banking crises, especially in emerging markets. Tighter restrictions on bank activities and entry also increased fragility.
3) Stronger institutions partly mitigated the effects of financial liberalization on crises. The impact of determinants differed between the full sample and emerging economies.
AnsA) When financial markets stood on the verge of collapse in th.pdfsutharbharat59
Ans:
A) When financial markets stood on the verge of collapse in the summer of 2008, two of the
worlds most important central banks, the US Federal Reserve and the Bank of England, began
considering unorthodox policy measures. They turned to Quantitative Easing, or QE: injecting
money into the economy by purchasing assets from the private sector, in the hope of boosting
spending and staving off the threat of deflation. These were desperate measures for desperate
times.
With signs of a fragile economic recovery gathering enough momentum to reassure
policymakers in the US, the policy was expected to be wound down. But in a move that caught
commentators off guard, the Fed instead committed to continue with its existing level of asset
purchases. For the foreseeable future, at least, QE is here to stay. What began as a short-term
crisis measure has now become a key component of Anglo-American growth strategies. Its
important, then, to take stock of QE and the central role it has played within the Anglo-American
response to the financial crisis.
The way the Fed led the policy response to the financial crisis is important in two ways. First, it
reflects the extent to which the Anglo-American economies have become financialised: credit-
debt relations are pervasive throughout all facets of contemporary economic activity and there
has been a deepening, extension and deregulation of financial markets commensurate with this
development. In that context, with the increased competitiveness, scale and global integration of
financial markets intensifying the risk of financial instability, the crisis management capacities of
central banks have become increasingly important.
Second, central bank leadership of the policy response also reflects a key feature of neoliberal
political economy in practice. Despite all the rhetoric of free markets, competition and
deregulation that has been the mainstay of neoliberalism, there is a central contradiction at its
heart: neoliberalism has been extremely reliant upon the active interventions of central banks
within supposedly free markets.
The crisis has been warehoused on the expanding balance sheets of central banks, demonstrating
just how much scope for policy manoeuvre there is when governing elites want it. Government
debt and private assets, including toxic mortgage-backed securities, have been indefinitely
transferred onto central bank accounts. This strategy highlights the role of arbitrary accounting
processes, shaped by state institutions, at the heart of supposedly free market economies.
Given this room for manoeuvre, there is no doubt that a much more expansionary fiscal policy
and a progressive taxation system could have been implemented in response to the crisis, but that
response is foreclosed by the ideological confines of the prevailing neoliberal orthodoxy. Instead,
we have monetary expansion and fiscal austerity.
Incubated within the crisis conditions of the 1970s, the neoliberal revolution in the West.
This document discusses a study examining the relationship between banking sector development and economic growth in Lebanon from 1992-2011. The study uses regression analysis to test whether greater banking sector development, as represented by factors like private credit levels and banking efficiency, leads to increased economic growth. Preliminary analysis includes a Granger causality test to determine the direction of the relationship between financial development and GDP growth. Key banking sector variables analyzed are private credit levels, interest rate spreads, banking assets, concentration levels, and deposit growth rates. The goal is to evaluate how Lebanon's banking-centered financial system impacts economic activity and development.
This document summarizes an analysis of economic growth patterns in Brazil between 1970 and 2006. It finds that Brazil experienced high growth rates from the 1950s through the 1980s, but then saw a substantial decline in growth. The decline was caused by both low domestic demand growth and unstable, inconsistent contributions from the external sector. Fundamental causes included changes in commercial and financial external engagement, worsening income distribution, and macroeconomic policy regimes from 1999 onward.
Growing wage dispersion, rather than declining labor share of income, has been the primary driver of rising income inequality according to a new IMF study. Using household surveys and macroeconomic data from 81 countries over 40 years, the study found that the largest factor contributing to increasing income inequality was growing disparity in wages, particularly at the top of the wage distribution. Rising financial globalization, decreasing unionization, and a shrinking state sector were also found to associate with wider wage dispersion. To curb undesired distributional effects, policymakers need to focus on labor market outcomes and wage differences through policies that promote inclusive growth and minimize market distortions.
This document discusses financial restructuring in the Organization of Eastern Caribbean States countries. It notes that as economies develop, non-bank financial institutions have begun competing with banks by offering similar retail and wholesale services. This has led to a shift away from bank dominance in financial intermediation to non-banks. The document examines this process of financial restructuring and discusses some associated policy issues regarding the development of financial systems in these countries.
Similar to Country-Risk Premium in the Periphery and the International Financial Cycle 1999-2019 (20)
Atualmente, diversos economistas das mais variadas origens e tendências argumentam que o Banco Central deve imprimir dinheiro para financiar o déficit público e zerar a taxa básica de juros para fazer políticas monetárias não convencionais, chamadas lá fora de Quantitative Easing (QE) e que consistem na compra de ativos privados e talvez até divida pública de prazos mais longos.
1) O artigo discute a evolução do conceito de Lei de Say no pensamento econômico, desde a versão original de Jean Baptiste Say até as interpretações clássicas, neoclássicas e da escola de Cambridge.
2) A versão original de Say tratava da identidade entre produção e consumo, onde toda produção gera demanda equivalente através dos salários pagos e do poder de compra gerado. Isso pressupunha a neutralidade da moeda e ausência de entesouramento.
3) Posteriormente, interpretações cl
The purpose of this paper is to contribute to an interpretation of Ricardo’s theory of foreign trade following the lead of Sraffa ́s own 1930 critique of Ricardo ́s alleged error and recently developed by other Sraffians. We argue that Ricardo assumed that trade happened at natural prices in each country. And once we take the process of gravitation towards those prices into account it follows that : (i) Ricardo’s theory is not incomplete, but fully determined so there is no need for price elastic demand functions, contrary to what John Stuart Mill argued; and (ii) in the simple cases of the examples of chapter 7 of Ricardo ́s Principles, the terms of trade are determined by the ratio of the given actually traded levels of reciprocal effectual demands.
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 analyzes Brazilian National Treasury primary auctions from the 2000s using a Modern Monetary Theory interpretation. It finds that:
1) The Brazilian government was always able to sell its treasury bonds and was not pressured into higher interest rates by bond markets or rating downgrades.
2) Downgrades by international rating agencies did not cause persistent pressure on auction rates or changes in bond sales volumes.
3) The Central Bank ensured liquidity for treasury bonds through repo operations, maintaining interest rate targets and guaranteeing demand for government bonds.
This paper extends the analysis of Haavelmo (1945), which derived the multiplier effect of a balanced budget expansion of public spending on aggregate demand and output. We first generalize Haavelmo's results showing that a fiscal expansion can have positive effects of demand and output even in the case of a relatively small primary surplus and establishing the general principle that what matters for fiscal policy to be expansionary is that the propensity to spend of those taxed should be lower that of the government and the recipients of government transfers. We also show that endogenizing business investment as a propensity to invest makes the traditional balanced budget multiplier to become greater than one. Moreover, if this propensity to invest changes over time and adjusts capacity to demand as in the sraffian supermultiplier demand led growth model, the net tax rate that balances the budget will tend to be lower the higher is the rate of growth of government spending, even in the presence of other private autonomous expenditures.
This paper extends the analysis of Haavelmo (1945), which derived the multiplier effect of a balanced budget expansion of public spending on aggregate demand and output. We first generalize Haavelmo´s results showing that a fiscal expansion can have positive effects of demand and output even in the case of a relatively small primary surplus and establishing the general principle that what matters for fiscal policy to be expansionary is that the propensity to spend of those taxed should be lower that of the government and the recipients of government transfers. We also show that endogenizing business investment as a propensity to invest makes the traditional balanced budget multiplier to become greater than one. Moreover, if this propensity to invest changes over time and adjusts capacity to demand as in the sraffian supermultiplier demand led growth model, the net tax rate that balances the budget will tend to be lower the higher is the rate of growth of government spending, even in the presence of other private autonomous expenditures.
Thirlwall’s law, given by the ratio of the rate of growth of exports to the income elasticity of imports is a key result of Balance of Payments (BOP) constrained long run growth models with balanced trade. Some authors have extended the analysis to incorporate long run net capital flows. We provide a critical evaluation on these efforts and propose an alternative approach to deal with long run external debt sustainability, based on two key features. First, we treat the external debt to exports ratio as the relevant indicator for the analysis of external debt sustainability. Second, we include an external credit constraint in the form of a maximum acceptable level of this ratio. The main results that emerge are that sustainable long run capital flows can positively affect the long run level of output, but not the rate of growth compatible with the BOP constraint, as exports must ultimately tend to grow at the same rate as imports. Therefore, Thirlwall’s law still holds.
(1) O documento discute a análise de Lara Resende sobre as ideias da Teoria Monetária Moderna (MMT) e propõe um arcabouço teórico alternativo baseado na abordagem do excedente.
(2) A análise de Lara Resende aceita o modelo do Novo Consenso, mas reconhece que não há restrições monetárias ou fiscais. No entanto, suas implicações de política econômica não decorrem desse modelo.
(3) O arcabouço teórico alternativo propõe
1. O documento apresenta um modelo matemático para analisar sistemas econômicos representados por matrizes que indicam insumos e horas de trabalho necessárias para a produção.
2. É definido o conceito de matrizes redutíveis e irredutíveis e apresentados teoremas sobre propriedades de matrizes irredutíveis como tendo um autovalor máximo único.
3. Explica como representar sistemas de preços com e sem excedente usando esse modelo, encontrando soluções relacionadas a autovalores e autovetores das matriz
1) O documento é uma tese de doutorado apresentada à Universidade Federal do Rio de Janeiro que analisa o crescimento liderado pela demanda na economia norte-americana nos anos 2000 a partir da abordagem do supermultiplicador sraffiano com inflação de ativos.
2) No primeiro capítulo, a tese faz uma crítica à abordagem da macroeconomia dos três saldos proposta por W. Godley, argumentando que ela tem inconsistências contábeis.
3) Em seguida, a tese apresenta o arcabouço teórico do
1) O documento discute as contribuições teóricas de Piero Sraffa à teoria do valor e distribuição.
2) Sraffa propôs retomar a abordagem clássica do excedente e criticou a abordagem marginalista neoclássica.
3) Ele mostrou que há uma relação inversa entre salário real e taxa de lucro para qualquer número de bens, confirmando os resultados clássicos.
Este documento é uma dissertação de mestrado que analisa criticamente os modelos neo-kaleckianos sobre como a competitividade internacional influencia a taxa de crescimento de uma economia aberta. O autor argumenta que esses modelos restringem excessivamente a relação entre taxa de câmbio e distribuição de renda e omitem fontes alternativas de desvalorização cambial. Além disso, eles podem permitir déficits comerciais permanentes sem mecanismos de ajuste e sugerem que a desvalorização pode piorar o déficit comercial.
1) O documento discute modelos pós-keynesianos de crescimento e distribuição de renda, comparando-os com a teoria da distribuição de Cambridge.
2) Nos modelos iniciais, o nível de produção e utilização da capacidade dependem negativamente da parcela de lucros, enquanto a taxa de lucro realizada é constante.
3) A teoria de Cambridge argumenta que a parcela de lucros é determinada endogenamente no longo prazo, variando positivamente com o grau de utilização da capacidade.
(1) Keynes criticou a suposição neoclássica de que a taxa de juros é flexível, argumentando que ela é determinada monetariamente e não se ajusta automaticamente para manter o pleno emprego. (2) Sraffa criticou a ideia de que há sempre substituição entre fatores, mostrando que com capital heterogêneo a intensidade do uso de um fator não se correlaciona necessariamente com seu preço. (3) Ambas as críticas questionam se os mecanismos propostos pela teoria neoclássica são suficientes para garant
This paper examines the semiconductor’s industry growing importance
as a strategic technology in the modern industrial system and in contemporary war
-
fare. It also analyzes this industry’s evolution in China and the Chinese semiconduc-
tor industrial policy over the last years. We review the Chinese interpretation of the
‘revolution in military affairs’ and China’s perception of its backwardness as well as
the possibilities of catch-up and evolution in the most sophisticated segments of this
productive chain through domestic firms and indigenous innovation.
1) O documento discute a Hipótese de Estagnação Secular (HES) e suas inconsistências teóricas ao analisá-la a partir de perspectivas neoclássicas e heterodoxas da teoria do crescimento econômico.
2) A HES sugere que economias avançadas enfrentam tendência de estagnação devido a fatores como baixo crescimento populacional, tecnológico e da produtividade que limitam o investimento.
3) O documento mostra que a HES apresenta inconsistências tanto na abordagem neo
O objetivo deste trabalho é discutir as causas principais da interrupção, a partir de 2015,do processo de crescimento com inclusão social que ocorreu na economia brasileira a partir de meados dos anos 2000, processo que chamaremos de “Breve Era de Ouro” da economia brasileira em alusão ao processo semelhante, porém bem mais longo e intenso, que ocorreu nos países centrais depois da Segunda Guerra Mundial até o inicio da década de 70 do século passado. Nossa analise se baseia em duas hipóteses centrais. A primeira é de que, por uma série de razões estruturais operando tanto no lado da oferta quanto da demanda de trabalho, este processo gerou, a despeito das taxas de crescimento da economia não terem sido muito elevadas,uma “revolução indesejada” no mercado de trabalho brasileiro entre 2004 e 2014, que reforçou muito o poder de barganha dos trabalhadores (particularmente os menos qualificados).Esta “revolução indesejada” gerou uma tendência dos salários reais crescerem continuamente acima do crescimento da produtividade, o que acirrou progressivamente o conflito distributivo e reduziu as margens e taxas de lucros das empresas.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
The Universal Account Number (UAN) by EPFO centralizes multiple PF accounts, simplifying management for Indian employees. It streamlines PF transfers, withdrawals, and KYC updates, providing transparency and reducing employer dependency. Despite challenges like digital literacy and internet access, UAN is vital for financial empowerment and efficient provident fund management in today's digital age.
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A toxic combination of 15 years of low growth, and four decades of high inequality, has left Britain poorer and falling behind its peers. Productivity growth is weak and public investment is low, while wages today are no higher than they were before the financial crisis. Britain needs a new economic strategy to lift itself out of stagnation.
Scotland is in many ways a microcosm of this challenge. It has become a hub for creative industries, is home to several world-class universities and a thriving community of businesses – strengths that need to be harness and leveraged. But it also has high levels of deprivation, with homelessness reaching a record high and nearly half a million people living in very deep poverty last year. Scotland won’t be truly thriving unless it finds ways to ensure that all its inhabitants benefit from growth and investment. This is the central challenge facing policy makers both in Holyrood and Westminster.
What should a new national economic strategy for Scotland include? What would the pursuit of stronger economic growth mean for local, national and UK-wide policy makers? How will economic change affect the jobs we do, the places we live and the businesses we work for? And what are the prospects for cities like Glasgow, and nations like Scotland, in rising to these challenges?
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"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
In a tight labour market, job-seekers gain bargaining power and leverage it into greater job quality—at least, that’s the conventional wisdom.
Michael, LMIC Economist, presented findings that reveal a weakened relationship between labour market tightness and job quality indicators following the pandemic. Labour market tightness coincided with growth in real wages for only a portion of workers: those in low-wage jobs requiring little education. Several factors—including labour market composition, worker and employer behaviour, and labour market practices—have contributed to the absence of worker benefits. These will be investigated further in future work.
Understanding how timely GST payments influence a lender's decision to approve loans, this topic explores the correlation between GST compliance and creditworthiness. It highlights how consistent GST payments can enhance a business's financial credibility, potentially leading to higher chances of loan approval.
Fabular Frames and the Four Ratio ProblemMajid Iqbal
Digital, interactive art showing the struggle of a society in providing for its present population while also saving planetary resources for future generations. Spread across several frames, the art is actually the rendering of real and speculative data. The stereographic projections change shape in response to prompts and provocations. Visitors interact with the model through speculative statements about how to increase savings across communities, regions, ecosystems and environments. Their fabulations combined with random noise, i.e. factors beyond control, have a dramatic effect on the societal transition. Things get better. Things get worse. The aim is to give visitors a new grasp and feel of the ongoing struggles in democracies around the world.
Stunning art in the small multiples format brings out the spatiotemporal nature of societal transitions, against backdrop issues such as energy, housing, waste, farmland and forest. In each frame we see hopeful and frightful interplays between spending and saving. Problems emerge when one of the two parts of the existential anaglyph rapidly shrinks like Arctic ice, as factors cross thresholds. Ecological wealth and intergenerational equity areFour at stake. Not enough spending could mean economic stress, social unrest and political conflict. Not enough saving and there will be climate breakdown and ‘bankruptcy’. So where does speculative design start and the gambling and betting end? Behind each fabular frame is a four ratio problem. Each ratio reflects the level of sacrifice and self-restraint a society is willing to accept, against promises of prosperity and freedom. Some values seem to stabilise a frame while others cause collapse. Get the ratios right and we can have it all. Get them wrong and things get more desperate.
Country-Risk Premium in the Periphery and the International Financial Cycle 1999-2019
1. 1
Country-Risk Premium in the Periphery and the International Financial
Cycle 1999-20191
Gabriel Aidar2
Julia Braga3
Abstract
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.
1 The authors thank Franklin Serrano, Maryse Farhi and Carlos Bastos for their valuable
comments and suggestions. All errors are our own.
2 PhD student at Institute of Economics – Federal University of Rio de Janeiro.
gabriel.aidar@ppge.ie.ufrj.br
3 Professor at the Department of Economics – Fluminense Federal University (UFF).
jbraga@id.uff.br
2. 2
1. Introduction
Since the 1990s, the reintegration of some developing countries (that had been
excluded after the debt crises of the 1980s) to international financial markets has
been a key feature to understand its economic cycles. Medeiros (2008) shows
that from 1990 on, the economic cycles of peripheral countries, usually correlated
to commodity prices, regain a financial aspect related to their integration to
international financial markets. The liberalization of capital accounts and the
consequent flow of capital became a new source of instability for these countries.
From an empirical perspective, the data from the 1990s raised a great debate
over the main factors behind the flow of capital to developing economies
(Hannan, 2018; Koepke, 2018). Indeed, the inspiration for this debate was the
return of developing economies to international markets at the end of the 1980s
(Calvo et al., 1993) and the first findings stressed the major role of external factors
related to global liquidity (the also called "push" factors). This view was reinforced
in the 2000s when impressive flows of capital to developing economies are
observed again (Rey, 2015).
The aim of this article is to inquire empirically to what extent the push factors
linked to global liquidity play a major role (compared to country-specific factors)
on the changes in the risk premium of a set of developing or “peripheral”
economies in the period 1999-2019. The empirical motivation for the current
investigation is given by Figure 1, which presents a strong correlation between a
general measure of risk spread expressed by the EMBI+ and the specific EMBI
Brazil4 risk premium. This apparent strong correlation is remarkable because the
EMBI+ is composed by very different countries such as Brazil, Egypt and
Malaysia.
We test this connection between risk premium indicators by employing the
Principal Component Analysis (PCA) as presented in Johnson and Wichern
(2002) and Jolliffe (2002). According to this methodology, we try to find the
fraction of the total variance of a set of sovereign risk series which can be
explained by a subset of one or two principal components. We use the group of
4 The Emerging Bond Index (EMBI+) is a market index calculated by JP Morgan that measures
the difference between the interest rate on dollar denominated sovereign bonds issued by
emerging economies and the US Treasuries of the same maturity. We will return to this definition
in the next sections.
3. 3
countries considered in the EMBI+ index for the period between January 1999 to
January 2019. Depending on the size of this fraction, we may show the relative
importance of common factors as determinant of the sovereign risk despite the
differences in country-specific countries. The original use of this approach is
found in Calvo et al. (1993).
We also note in Figure 1 that both the EMBI+ and EMBI Brazil risk spreads seem
to have been significantly reduced after 2003 (in spite of a spike around the time
of the global financial crisis). So, we apply a structural break test in order to test
for changes in the pattern of sovereign risk spreads in the 2000s. Moreover, we
provide evidences that the common factors behind the our set of country-risk
premium can be explained by financial variables, namely the US interest rate, oil
price and the VIX.
Figure 01 – EMBI+ x EMBI Brazil
Source: Authors based on JP Morgan data.
As the country risk premium can be considered as part of the floor to feasible
domestic interest rates under international capital mobility (Serrano and Summa,
2015), our results on its main determinants of sovereign risk may be relevant to
assess the level of financial dependency of developing economies regarding
international financial cycles. Therefore, our empirical results reinforce the push
literature in the period 1999-2019 and confirm empirically that the expansionary
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4. 4
financial cycle in the 2000s (Akyüz, 2017; Freitas et al., 2016; Serrano, 2013)
largely explain the fall in country-risk for selected developing economies.
The paper is organized into five sections. After this introduction, the following
section details the debate on pull-push factors on capital flows and the
determinants of country-risk. In the third section, we discuss our main findings on
country-risk determinants through the Principal Component Analysis. The fourth
section provide an economic interpretation of the previous results and how the
changes in the selected country-risk premium are related to changes in external
financial conditions in the 2000s. The final section concludes the paper.
2. Country risk determinants
2 .1. The pull-push literature
Calvo et al. (1993) note that the resumption of the flow of foreign capital to Latin
American countries in the early 1990s occurs broadly, after the interruption in the
middle of the previous decade. This fact seemed puzzling for these authors,
since capitals return to flow into different developing countries, not just those who
had supposedly adopted the reform agenda advocated in the period5. The
amount of capital that flowed into the Latin American countries in the form of
direct foreign investments and investments in portfolios reached US$ 670 billion
in the period 1990-94 and it was five times the same amount that flowed in the
period 1984-89 (Calvo et al., 1996). When analyzing the dynamics of variables
such as international reserves, real exchange rate and inflation for ten Latin
American countries6, Calvo et al., (1993) found that the common factors to these
countries explain from 69% to 88% of the total variation of these indicators. The
authors also found correlation among the co-movement of these factors and the
recession of the US economy in the early 1990s, as well as the FED interest rate
reduction process initiated in the second half of 1989.
Based on Calvo et al. (Ibid.) findings, Fernandez-Arias (1996) and Taylor and
Sarno (1997) proposed to control the inflow of capital in the emerging economies
by domestic factors. Calvo et al. (1993) also inspired
several empirical studies with the aim to measure the role of external or internal
factors prevailing in explaining the resumption of capital flows to Latin America in
5 The reform agenda, such as privatizations, financial liberalization, and fiscal adjustment were
part of the conditionalities of the IMF and World Bank lending packages. For a review see
Taylor (1997).
6 Namely: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, and
Venezuela.
5. 5
the 1990s – also known as pull-push debate. As described by the survey of
Koepke (2018) for those who defended the prevalence of push factors, the
reasons for the resumption of the capital flow would be the fall of the Fed's interest
rate and the recession in the US economy at the beginning of the 1990s.
However, over the same decade, the Fed's interest rate has risen again, and the
US economy recovered, but the capital flows to Latin America did not fall. In this
context, those who defend the predominance of domestic factors to determine
the attraction of capital gained some space. Associated with these factors would
be the situation of the external accounts, the commercial and financial opening
and, according to them, the adjustment of the public accounts. However, the
indiscriminate capital inflows to different Latin American economies throughout
the 1990s suggests that domestic factors hardly explain the capital flow on their
own (Koepke, 2018). Moreover, throughout the literature, the domestic factors
commonly found as being empirically significant were those associated with the
situation of the external accounts of each country, which reflect the external
vulnerability of developing economies. Hannan (2018) lists the domestic factors
often put forth by the pull literature: trade liberalization, international reserves,
exchange rate regime, institutional quality, per capita income, capital account
opening and financial market development - and none of them are associated
with fiscal policy choices.
In the 2000s, after the international financial crisis and the consequent monetary
easing in the US and Europe, the push side regained strength, as seen, for
example, in Bruno and Shin (2013) and Rey (2015). For these authors, the
monetary policy of the central economies is the main determinant of the global
financial cycles. Thus, these studies seek to measure empirically the
consequences of FED interest shocks on global risk perception and the
international liquidity levels. An initial negative (positive) shock in the US interest
rate may change the perception of global risk by itself and this movement triggers
a wave of capital inflows (outflows) in emerging economies. This type of analysis
is strongly connected with the sharp fall of interest rates in the central economies
after 2009.
It is worth noting that the pull-push literature was concerned not only with the
measurement of capital flow determinants but also with its impact on the
macroeconomic variables in the countries analyzed. This literature, from Calvo et
al. (1993) to Rey (2015), sought to observe the impact of the international capital
flow in the series of foreign exchange, reserves, bank credit, asset prices, and
stock market performance. Hence, it was tried to evaluate how the global
financial cycle could impact the national economies. The main concern of these
authors was also to propose a policy recommendation for countries with external
6. 6
vulnerability related to financial cycles. Rey (2015) argues that the supposed
impossible trinity (or trilemma) is in fact a dilemma: given that global liquidity is
the main factor determining the flow of external capitals to developing countries,
the choice is simply between the autonomy of monetary policy or the free mobility
of capital, regardless of the exchange rate regime adopted. For this literature, the
way in which international financial cycles are absorbed locally imposes the need
for capital control in developing economies.
The pull-push debate interests us to the extent that the sovereign risk premium
reflects the appetite of non-resident investors to apply their resources in
developing economies. Since the country-risk premium, in addition to the foreign
interest rate and the expected devaluation of the exchange rate, define the floor
for the domestic interest rate, its variation is central to understand the
inflow/outflow of capital in developing economies. Therefore, we approach the
pull-push controversy through the analysis of the determinants of the country-risk
premium.
The literature on the determinants of sovereign risk for Latin America countries is
much influenced by Blanchard (2004), which proposes a link between domestic
factors (fiscal indicators) and the level of country risk. Gupta et al. (2008)
recognizes that the empirical literature linking country risk to fiscal policy is
limited, but they try to demonstrate from a panel of thirty countries between 1997
and 2007 that levels of public deficit and debt are indicators of
sovereign default. Thus, the authors try to show that these fiscal variables
negatively affect the level of country risk. Using a panel data from 1998 to 2002
with 66 countries, Canuto et al. (2012) seeks to identify the variables that can
explain the risk assessment by rating agency scores7. As a result, the authors
find statistical significance in the gross public debt variable as a percentage of
public revenues to explain the country risk scores.
On the other side, there are authors who find co-movements for different series
of country risk in emerging economies, which can be interpreted as
push factors for the flow of capital. McGuire and Schrijvers (2003), using the
factorial decomposition methodology, find that a single common factor explains
about 80% of the common variance of the country risk premium for a basket of
15 countries8. Moreover, these authors observed a negative correlation of the
7 Our focus is to investigate country-risk determinants derived from market indices, which seek to
reflect the risk priced perceived by sovereign bond investors. We discard in this work the analysis
of risk ratings classified by rating agencies for two main reasons: (i) these agencies have
commercial strategies that often do not translate the truly perceived market risk; (ii) these
strategies also tend, in a longer run, to pursue market priced country risk, with no relevant
difference between risk ratings and country risk indices.
8 The authors use EMBI Global as an indicator of the country risk premium. We will discuss these
indicators later.
7. 7
common primary factor with interest rates indicators in the US and positive
correlation with global markets volatility indicator. Accordingly, the co-
movements of the sovereign risk series is linked to the global financial cycles, as
in the pull-push debate. In the same way, Longstaff et al. (2011) conduct a
principal component analysis and find that the first three principal components
account for more than 50% of the common variance of the Credit Default
Swap (CDS) series for a group of 26 countries. After this exercise, the authors
run regressions of the monthly variations of the CDS series against local factors
and external indicators. The average result is that the local factors chosen (local
stock exchange volatility, official reserve variance, and nominal exchange rate
variation) explain, on average, one-third of the CDS variation. The remainder
would be explained mainly by indicators of return on the US stock
market and return of US Treasury bonds.
The existing empirical evidence on co-movements of sovereign risk series
for developing countries supports the intuition behind our Figure 1 in the
introduction. More specifically, we examine a set of developing economies
between 1999 and 2019 and try study to what extent common (push) factors
explain the variation in country-risk. Therefore, we will analyze the co-movements
of the sovereign risk series of the economies that are part of the JP Morgan’s
EMBI+. Before our empirical exercise, we briefly explain the country-risk
indicators that we use in this paper.
3.2. EMBI + x CDS
The Emerging Market Bond Index (EMBI+) is one of the most widespread country
risk indicators and began to be calculated in 1993 by JP Morgan Chase. The
index reflects the weighted average of the difference between the daily returns of
sovereign debt instruments of emerging countries and the difference in yield of
US Treasury securities of the same maturity. Originally, the index
consisted of three types of debt instruments from emerging countries: Bradies,
Eurobonds and external loans from sovereign entities. The weight of each is
given by the fractions of its emission on the total issued. On March 31, 2016, the
EMBI+ included 155 instruments from 16 emerging countries with a face value of
US $ 309.2 billion and a market value of US $ 325.4 billion. JP Morgan Chase
still makes the EMBI+ index available separately for each country participating in
the index. The EMBI+ for Brazil is called EMBI+br. Its spread is known as Brazil’s
country-risk and corresponds to the weighted average of the premiums paid by
Brazilian foreign debt in relation to US Treasury of the same maturities.
8. 8
Typically, another widely used country risk indicator is the Credit Default
Swap (CDS). The CDS is a credit derivative and has, in theory, the function of
protecting its buyer in relation to the default risk of securities. In fact, the CDS is
the main instrument in the credit derivative market, accounting for 89.3% of the
credit derivatives transacted in the North American market9. The spread of the
CDS corresponds to the premium paid for the derivative of the buyer and
its swap occurs only in a situation of "credit events": bankruptcy, prepayment
obligations, missed payments, default and restructuring (Farhi, 2009). This
premium is ultimately equivalent to the country risk premium because, by
arbitrage, the insured's premium is directly correlated with the implicit risk in the
differential of the remuneration between the sovereign debt and Treasury
bills. Thus, it is expected by arbitrage that the trends of the EMBI+ and CDS
series will converge.
Farhi (2009) argues that in the last years of the first decade of 2000, the country
risk, measured by the EMBI+, had begun to lose its significance as an indicator
of risk, due to two factors: (i) lower liquidity in the secondary markets and (ii)
stronger volatility of US Treasury bills. CDS, on the other hand, had a strong
growth in its trade rate in the same period, becoming an important indicator of the
investors’ risk perception. Farhi (Ibid.) points out that the greater liquidity of the
CDS would justify its greater use by market analysts since its spread would better
reflect the perception of country risk by investors.
However, the perception that the CDS reflects better the perception of risk than
the EMBI+ may not be true. Since the CDS correspond to the purchases and sale
of default insurance in exchange for the payment of a premium, this market can
grow unconnected with the growth of the stock of bonds negotiated. In the
Brazilian case, for instance, there was a negative net variation of the securities
available abroad in the years 2000 (stock of the federal external public debt fell
from US$ 166 billion in January 2016 to US$ 148 billion in December
2018). CDS’s faster reaction dynamic would be due to its greater liquidity despite
the stagnation of issued sovereign bonds. However, the greater liquidity makes it
possible for the CDS buyer to earn profits even without the occurrence of a "credit
event" since the CDS can be resold if there is an increase in its price (which
translates into a CDS rise for a specific country). Therefore, investors can earn
profits if they choose a short position whenever the CDS of a given country starts
to rise. In this example, as it becomes clear the profitability of the short position,
investors may buy more CDS and contribute to its increase. This very speculative
9 Data updated for the third quarter of 2018, according to the Quarterly Report on Bank Derivatives
Activities (https://www.occ.gov/topics/capital-markets/financial-markets/derivatives/derivatives-
quarterly-report.html)
9. 9
movement can cause the elevation of the CDS of this given country. It is not
difficult to conclude that this dynamic makes the CDS a highly speculative
derivative.
Despite the greater liquidity of the CDS, in this work we consider the EMBI+ as
the main indicator of sovereign risk. First, because both have a very similar
trend. It is worth noting that the CDS is consistently below the EMBI+ level during
the last decade (Figure 2). This is explained by the fact that this instrument is
normally linked to shorter maturities operations than EMBI+ (Central Bank of
Brazil 2007). Second, as we have argued, the CDS can respond to strong
speculative movements that do not reflect variations in the external fragility
position of a country. Third, the EMBI+ has a longer track record than the CDS,
as well as being made available to a larger number of countries.
In our empirical study, we consider the EMBI+ country risk series for the following
countries: Argentina, Brazil, Bulgaria, Colombia, Egypt,
Ecuador, Philippines, Malaysia, Mexico, Panama, Peru, Russia, Venezuela,
Ukraine, and Turkey10. The older series available begin in January 1998, but
some countries have series starting later, as in the case of Malaysia, which has
data only from July 2010 on. All series end in January 2019.
Figure 02 – EMBI+ x CDS (Brazil)
Source: JP Morgan and Bloomberg.
10 South Korea was excluded from the sample because since May 2004, it is no longer part of
the EMBI+.
10. 10
Figure 03 – Sovereign Risk (EMBI+)
Source: JP Morgan.
3.3. Principal component analysis results
The Principal Component Analysis (PCA) goal is to summarize the information
present in numerous time series in fewer time series that will contain the essential
information of this original set of series (Jolliffe, 2002). It models the variance and
covariance structure of a set of time series from linear combinations of the original
series (their principal components). The principal components are then
generated from the variance-covariance matrix derived from the series of original
random variables, without requiring any assumption about the original distribution
of these variables11 . The smaller number of components able to explain the
greater variability of the original set of time series is interpreted as common
factors that explain the variation of these series.
In this paper, we will follow this interpretation to infer the degree of relevance of
common factors in explaining the country risk premium variables of different
developing countries. These common factors are usually linked to factors
external to these countries in the push literature (Calvo et al., 1993). According
to Johnson and Wichern (2002), the scalars associated with each time series in
11
See Johnson and Wichern (2002) to a formal presentation.
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2,000
3,000
4,000
5,000
98 00 02 04 06 08 10 12 14 16 18
Equador
0
200
400
600
800
98 00 02 04 06 08 10 12 14 16 18
Filipinas
50
100
150
200
250
300
98 00 02 04 06 08 10 12 14 16 18
Malásia
0
200
400
600
800
1,000
98 00 02 04 06 08 10 12 14 16 18
México
0
200
400
600
800
98 00 02 04 06 08 10 12 14 16 18
Panamá
0
200
400
600
800
1,000
98 00 02 04 06 08 10 12 14 16 18
Peru
0
2,000
4,000
6,000
8,000
98 00 02 04 06 08 10 12 14 16 18
Venezuela
0
1,000
2,000
3,000
4,000
98 00 02 04 06 08 10 12 14 16 18
Ucrânia
0
200
400
600
800
1,000
1,200
98 00 02 04 06 08 10 12 14 16 18
Turquia
0
1,000
2,000
3,000
4,000
5,000
6,000
98 00 02 04 06 08 10 12 14 16 18
Rússia
11. 11
the eigenvalues obtained in the analysis are very similar in numerical terms to the
correlation of the original series with the main component. It is also possible to
address the correlation of the main components with exogenous variables. For
example, it is possible to evaluate the correlation between one or more main
components obtained with an indicator such as the VIX (Volatility Index), which
measures the volatility of stock options in the S&P 500.
As noted in Figure 03, the trajectories of the country risk premium curves have in
common a sharp decline after 2004 and to rise in the years of the subprime
financial crisis. The matrix of simple correlations among the country risk series
reinforces the suspicion that there are common generating factors in these series.
It is worth mentioning that Table 1 does not include Bulgaria, whose series ended
in March 2014, and Malaysia, whose series began only in July 2010.
Table 01 – Correlation Matrix of the EMBI+ Country Series
Source: Authors.
Simple correlation is greater than 0.50 in most cases. Negative correlations are
observed, especially in the cases of the series of Egypt and Venezuela. In the
case of the former, this is due to an abrupt rise of country risk during the Arab
Spring, in which the central power was forcibly overthrown, and a new
government was reestablished. This increase in country risk in 2010 was not
accompanied by other countries. In the case of Venezuela, the country risk has
raised since 2017, due to the current political crisis and recurrent coup threatens
over these years. Again, this movement was not accompanied by other countries.
It is worth mentioning, therefore, that situations of extreme political crisis, which
threatens the current authority of central power, is, in fact, an idiosyncratic factor
that affects the country risk premium of an economy without necessarily being
linked to an external factor.
When dealing with common factors there is also a possibility of contagion.
Extreme situations associated with insolvency in foreign currency, as was the
case of Argentina in 2001, can be transmitted to the premium country risk of other
South Africa Argentina Brazil Colombia Egypt Ecuador Filipines Mexico Panama Peru Venezuela Ukraine Turkey Russia
South Africa 1,00 0,59 0,81 0,88 0,34 0,73 0,55 0,95 0,80 0,81 0,35 0,50 0,86 0,75
Argentina 0,59 1,00 0,21 0,47 0,20 0,67 0,66 0,57 0,70 0,65 0,18 0,48 0,46 0,71
Brazil 0,81 0,21 1,00 0,87 0,31 0,59 0,26 0,84 0,64 0,68 0,40 0,50 0,67 0,59
Colombia 0,88 0,47 0,87 1,00 0,02 0,84 0,68 0,92 0,91 0,92 0,13 0,54 0,72 0,77
Egypt 0,34 0,20 0,31 0,02 1,00 0,10- 0,36- 0,27 0,08- 0,02- 0,42 0,10 0,26 0,06
Ecuador 0,73 0,67 0,59 0,84 0,10- 1,00 0,76 0,78 0,88 0,86 0,03- 0,53 0,60 0,80
Filipines 0,55 0,66 0,26 0,68 0,36- 0,76 1,00 0,56 0,85 0,84 0,38- 0,31 0,50 0,68
Mexico 0,95 0,57 0,84 0,92 0,27 0,78 0,56 1,00 0,82 0,84 0,33 0,59 0,84 0,80
Panama 0,80 0,70 0,64 0,91 0,08- 0,88 0,85 0,82 1,00 0,97 0,16- 0,58 0,64 0,85
Peru 0,81 0,65 0,68 0,92 0,02- 0,86 0,84 0,84 0,97 1,00 0,13- 0,55 0,64 0,85
Venezuela 0,35 0,18- 0,40 0,13 0,42 0,03- 0,38- 0,33 0,16- 0,13- 1,00 0,13 0,45 0,07
Ukraine 0,50 0,48 0,50 0,54 0,10 0,53 0,31 0,59 0,58 0,55 0,13 1,00 0,34 0,76
Turkey 0,86 0,46 0,67 0,72 0,26 0,60 0,50 0,84 0,64 0,64 0,45 0,34 1,00 0,61
Russia 0,75 0,71 0,59 0,77 0,06 0,80 0,68 0,80 0,85 0,85 0,07 0,76 0,61 1,00
12. 12
countries. There was a direct contagion, as can be seen in the curves of Latin
American countries that seem to be affected by the Argentine shock, as well as
by an indirect contagion mediated by the deterioration in the perception of
global risk, which would be damage the risk premiums of countries such as the
Philippines and Turkey.
In addition to correlation, the principal component analysis indicates that it is
possible to explain the EMBI+ series of developing economies with a few
common factors. We present four different groupings of countries in order to verify
if the results of the principal component analysis were robust. Moreover, although
we have chosen to carry out the present analysis from the EMBI+ series, as
explained previously, we apply the principal component analysis also to two
groupings of countries from their CDS. The results are summarized in Figure 04,
which shows the cumulative proportion of the global variance explained by the
first and second major components.
As can be seen in Figure 04, except for one group, all the others present at least
70% of the global variance explained by the first component. Jolliffe (2002) points
out that this percentage would be enough to choose only one principal component
to summarize the original set of series. When aggregating the second major
component, the explained percentage jumps to 91% in one of the clusters. This
indicates, as we shall see, that consideration of the two main components will
suffice for economic interpretation. It is worth noting that results are maintained
when the CDS is considered as a country risk indicator. The results found here
confirm others works with the same methodology (Longstaff et al., 2011) and are
in line with the push literature on capital flows. Annex I to this Article contains the
individual and cumulative proportions of all the major components for each
grouping.
13. 13
Figure 04 – Principal Components
Source: Authors.
In Group 1, the emerging economies that currently make up the EMBI + index
were included, excluding Bulgaria, Malaysia, Morocco, Nigeria and Poland due
to the unavailability of data in the period considered. In addition, we excluded
Egypt and Venezuela due to an extreme political crisis, as already mentioned. In
Group 1.1 we removed Ukraine from the sample, allowing the analysis to begin
in July 1999 and capture, for example, the Argentine crisis of 2001. Group 1
comprises 10 countries with very different realities such as Russia and
Philippines, and the principal component analysis indicates that 86% of the
original variance of the risk premium can be explained by two main components
(71% is explained by only the first principal component). In Group 2, only Latin
American economies were selected, while Group 2.1 excluded Venezuela to
control how this country could change the outcome. The intent of applying the
main component analysis only in Latin American economies was to check
whether the common factors become more relevant to a subset of economies
that may be more subject to the contagion effect. The result indicates that there
is slightly greater relevance of the first two main components in explaining the
original variances of the series.
So far, we showed the relevance of the first and second principal components in
explaining the total variance of the original series is a strong evidence of common
factors determining the country-risk premium. In the next section, we will evaluate
in more detail the economic interpretation of these results.
72% 71%
66%
75%
70% 71%
83%
86%
81%
91%
83%
86%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Group 1 Group 1.1 Group 2 Group 2.1 Group 1 Group 2
1º CP 2º CP
CDSEMBI
14. 14
4. An economic interpretation of the main component analysis results:
international liquidity in the years 2000 and its developments for analyzed
developing economies
4.1. The international liquidity expansion the 2000s
Medeiros (2008) claims that the reintegration of Latin America countries to the
financial markets in the late 1980s and early 1990s preceded an era of financial
instabilities associated with commodity prices cycles. Crises arising from
disruptions to the financial flow were frequent in the 1990s and particularly
affected those countries that did not have any effective capital controls. In our
principal component analysis, we showed that the country-risk premium, which is
an important constraint to domestic interest rate in terms of external financing, is
largely determined by common factors among developing economies. Now we
explore the link among the common factors and the international liquidity cycles.
According to Freitas et al. (2016) and Akyüz (2017), in the 1990s, the greater
integration of the developing world led to a synchronization of cycles and, from
the 2000s, this integration, together with changes in economic policies of a large
number of developing countries, also contributed to a decoupling of the growth
trend of the developing economies relative to the advanced countries. This
movement would be strongly linked to the change in the external financing pattern
of developing economies, expressed both by the large inflow of foreign capital to
these countries and by the new trend of a substantial accumulation of
international reserves.
Figure 05 – Balance of Payment– Latin America (US$ billions)
Source: Elaborated by authors based on World Economic Outlook e International Financial
Statistics (FMI).
-1.000
-500
0
500
1.000
1.500
2.000
2.500
3.000
3.500
-250
-200
-150
-100
-50
0
50
100
150
200
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Net FDI Net Portfolio Investment Current Account Official Reserves - excluding gold (right axis)
15. 15
Accoding to Serrano (2013) and Freitas et al. (2016), four factors help to explain
the changing pattern observed in developing economies since the 2000s: (i) the
maintenance of low interest rates in central countries; (ii) the large flow of capital
to peripheral countries; (iii) the increase in the relative prices of the main mineral
and agricultural commodity; and (iv) the rapid expansion of the domestic market
and imports of the Chinese and other large developing economies in the period.
Factors (i) and (ii) are strongly associated to the expansion of international
liquidity in the search for higher yields. Thus, in addition to the low-interest rates,
there is a general movement of improved risk perception of developing
economies (Frenkel and Rapetti, 2011).
This new pattern of external financing to developing economies is reflected in
Figure 05. As Frenkel and Rappetti (2011) point out, the Latin American
economies taken together presented a surplus in the current account between
2003 and 2007. After that, deficits have returned to the negative field, but the
inflow of capital by the financial account more than compensated the deficit in
current transactions. Serrano (2013) adds that many developing countries took
advantage of this window of opportunity and improved the management of their
balance of payments (and particular their financial accounts), something that
contributed to this new and more positive external financing scenario. Many of
these economies achieved to pay its official foreign debt stock, accumulated
international reserves (Figure 05) and some established (or increased the assets
in) Sovereign Funds. Central Banks also adopted a "dirty" managed floating
exchange rate regime, in other to mitigate speculative attacks. These measures
made developing countries more resilient to international shocks and allowed
growth not be interrupted by the Balance of Payments constrain. This also led to
a tendency to appreciate the exchange rate, with the exception of some Asian
countries, in the period from 2004 until the 2008 international crisis, with a
resumption of this movement in 2010. The general exchange appreciation
movement of commodity exports, in its turn, contributed to the upward trend of
commodity prices, exported by developing countries. Eichengreen (2016)
identifies a sharp fall in the number of episodes of exchange rate crisis from 2003
onwards (Figure 06).
16. 16
Figure 06 – Foreign Exchange Crisis (number of episodes)
Source: Eichengreen (2016)
4.2. Structural breaks for the country-risk premium
This changing pattern in global liquidity translated into a fall of the country-risk
premium (EMBI+) from an average of 864 from 1998 to 2002 to a level of around
350 in 2003 onwards. In the case of Brazil, which motivated our present work,
the same movement occurred simultaneously at the EMBI Brazil and the CDS
Brazil, from 2004 on (figure 07).
Figures 07 – Structural breaks at EMBI+, EMBI Brazil and CDS Brazil.
Source: Authors
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-98
Apr-99
Jul-00
Oct-01
Jan-03
Apr-04
Jul-05
Oct-06
Jan-08
Apr-09
Jul-10
Oct-11
Jan-13
Apr-14
Jul-15
Oct-16
Jan-18
EMBI+
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
Oct-01
Nov-02
Dec-03
Jan-05
Feb-06
Mar-07
Apr-08
May-09
Jun-10
Jul-11
Aug-12
Sep-13
Oct-14
Nov-15
Dec-16
Jan-18
CDS Brazil
0
500
1000
1500
2000
2500
Jan-98
Apr-99
Jul-00
Oct-01
Jan-03
Apr-04
Jul-05
Oct-06
Jan-08
Apr-09
Jul-10
Oct-11
Jan-13
Apr-14
Jul-15
Oct-16
Jan-18
EMBI Brazil
17. 17
This structural change was captured by Bai and Perron (2003) structural break
tests, in its different versions, as shown in Table 2. Additionally, it was performed
two unit roots with structural breakpoints tests12. These tests are not consensual
about the existence of the unit root in this series, but this was not the purpose of
this exercise. The interest is only to corroborate the results of the test Bai Perron,
showing that possible break dates match those found by Bai-Perron test.
Tests indicate then an important change in the behavior from the second half of
2002, both for the specific series to Brazil and for the EMBI+, the year from which
the risk had a significant drop and 2004/2005 as the year from which the settles
down to a lower level. In the case of the CDS, whose series started in 2002, tests
indicated a break in 2004, a year from which the series was significantly lower
(Figure 07). Our empirical results reinforce both our central argument about
external factors determining country-risk premium and the impact of international
liquidity expansion in the 2000s on the external financing of developing countries.
In other words, the liquidity expansion in advanced economies increased the
capital flows to the periphery, and the combined effect of faster growth in South-
South trade, better terms of trade and the massive accumulation of foreign
reserves in a large number of developing countries contributed to a fall in the
country-risk premium spreads.
Table 02 – Structural Breaks
Source: Authors
12 Minimum Dickey-Fuller as discussed by Vogelsang and Perron (1998) and the test of Lee and
Strazicich (2003).
Structural Breaks Tests
EMBI Brazil EMBI+ CDS Brazil**
Lee Strazicich*
One Break 2002 Nov 2002 Nov 2004 Aug
Two Breaks
1o break 2002 Sep 2002 Nov na
2o break 2004 Aug 2005 May na
Dickey Fuller minimum t test 2002 Out 2002 Nov 2003 Mar
Bai Perron (Break type: )
Bai tests of breaks in all recursively determined partitions 2002 Aug 2002 Nov 2004 Aug
Fixed number of globally determined breaks 2002 Aug 2002 Nov 2004 Aug
Compare information criteria for 0 to M
globally determined breaks selected by Schwarz criterion 2002 Aug 2002 Nov 2004 Aug
Bai-Perron tests of L+1 vs. L sequentially determined breaks 2002 Aug 2002 Nov 2004 Aug
Bai-Perron tests of L+1 vs. L globally determined breaks 2002 Aug 2002 Nov 2004 Aug
Fixed number of sequentially determined breaks
One Break 2002 Aug 2002 Nov 2004 Aug
Two Breaks
1o break 2002 Jul 2002 Nov na
2o break 2005 Sep 2007 Nov na
*Maximum lag chosen by Schwert's (1989) principle
** Sample from Out 2001 to Jan 2019
18. 18
4.3. Country risk-premium and the international liquidity variables
Following Calvo et al.(1993), we show the correlation among the first principal
component – which we interpret as “common factors” to developing economies –
and three key variables for determining the global financial cycle (in particular for
developing economies): the interest rate corresponding to the Federal Fund Rate
(FFR) and the interest rate corresponding to the 5-year Treasury Notes as an
indicator of international reference interest rates, the Brent oil barrel price as a
commodity price indicator and the VIX index as an indicator of risk perception.
Table 03 presents the simple correlation analysis for the first principal component
generated by Group 1.1 with each one of the above economic indicator of the
global financial cycle. Due to the lack of consensus of unit root tests, and the
possibility of structural breaks, we also tested the hypothesis of cointegration by
using Lütkepohl et al. (2003) procedure. The test indicates that these four
variables cointegrate as a group. Additionally, the test for the first component and
each of one of three variables indicates the rejection of the null hypothesis of no
cointegration (annex). We then estimate a cointegrated regression, supposing
exogeneity for Brent Oil price, the VIX and the 5 years T note in explaining the
first component, using Dynamics OLS. The estimation confirms the statistical
significance of the explanatory variables (as shown p-value bellows each
coefficient estimated) suggested by individual correlations in equation (1).
1st Principal Component = -0.02*BRENT + 0.15*VIX + 0.13*T_NOTE_5 (1)
(0.0) (0.03) (0.03)
The empirical exercise suggests then that an increase in the international interest
rate coincides with a greater common perception of risk, as well as the increase
in the VIX volatility index. It is worth mentioning that the correlation is higher with
the 5 years rate and the volatility indicator. A possible explanation for this
relationship is the fact that these variables carry implicitly the perception of market
agents about the possible future trajectory of the US basic rate. The main
principal factor is also negatively correlated with the oil price, which is expected,
given the large weight of primary goods in exports.
The series representing the two main components of Group 1.1. of our study
(composed of 10 emerging economies) are represented in Figure 0813. The
13 The main components are generated from the normalized eigenvalues. For a more detailed
discussion, see Johnson and Wichern (2002).
19. 19
numerical calculation for obtaining the principal components alone is devoid of
economic significance since they represent only the factors common to different
time series. However, as the first principal component curve suggests this major
component of the country-risk series coincides with the change in the pattern of
external financing observed from 2004 onwards. This may explain, even, its
correlations with interest variables, market volatility, and commodity prices
expressed in Table 02 and Equation (1). Put in another way, the first principal
component replicates the changes in the global liquidity scenario.
Figure 08 – Principal Components of Group 1.1 and EMBI+ Brazil
Source: Authors.
The curve of the first major component also highlights two particular moments
that reflect a deterioration in the perception of risk in the emerging economies.
The first one refers to the 2008 international financial crisis and, in this case, the
curve quickly returns to the previous level. The second one was also a large rise
in the risk level in 10 emerging economies in 201414. Akyüz (2017) shows that
this period was characterized by a strong exchange devaluation in some
14
It is worth noting that the second principal component presented in Figure 08 is also relevant,
accounting alone for explaining about 15% of the total variance of 10 original series of country
risk. This component seems to reproduce the effect of Argentina's external debt default on the
perception of country risk of the emerging countries in 2001 and 2002. This effect would last until
2005, suggesting a memory of default episodes on the trajectory of country risk. The second
principal component also seems to counterbalance the more general rise observed in the risk
premium at the time of the international financial crisis in 2008. This is because some countries,
notably Argentina and Brazil, experienced a relatively small increase in their country-risk premium
in this period.
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
jul/99
fev/00
set/00
abr/01
nov/01
jun/02
jan/03
ago/03
mar/04
out/04
mai/05
dez/05
jul/06
fev/07
set/07
abr/08
nov/08
jun/09
jan/10
ago/10
mar/11
out/11
mai/12
dez/12
jul/13
fev/14
set/14
abr/15
nov/15
jun/16
jan/17
ago/17
mar/18
out/18
1º PC 2º PC EMBI+ Brazil - normalized
20. 20
emerging countries, such as South Africa, Brazil, Mexico, and Turkey. The flow
of capital to Latin American countries and their reserves also ceased to grow,
although there is no loss of reserves. The author addresses this inflection in the
path of the risk to the perception of a crisis in the Euro Zone and, back in 2013,
with the signaling by the Fed that the cycle of liquidity expansion could be coming
to an end. These two factors are highlighted by Figure 09, which points to the
increase in the VIX volatility index at the end of 2014 and the US future interest
rate (T-Note of 5 years) in May 201315.
Therefore, the rise in country-risk premium during the years of 2013-2015 was
largely due to a reversal in the international liquidity despite domestic economic
or political facts. In this regard, Naqvi (2018) conducted 41 interviews with
participants of the sovereign bond markets in Hong Kong and Singapore between
January and April 2013, in parallel with a detailed analysis of the specialized
media in the period. His conclusion is that the perception of risk of market players
on the domestic fundamentals of the emerging economies is strongly influenced
by international liquidity conditions. According to the author:
“Relying on extensive interviews with market participants and examination of the
financial press, this paper argues that not only was the post-global financial crisis
(GFC) investment boom into EM sovereign bonds driven by push factors,
including some not emphasized in existing literature such as crisis in unrelated
markets that offered a similar risk/return profile, but also that investors’
perceptions of domestic fundamentals (the pull factors) were themselves
influenced by these push factors, and so became divorced from reality. In addition
to the macro-level push factors themselves, the micro-foundations of investors’
decision making, including investors’ reliance on heuristics and shortcuts, the
ways in which investors used market data to predict market reactions to changes
in the push and pull factors, and the investment mandates and business models
of institutional investors, made investors even more susceptible to the influence
of push over pull factors.” (Naqvi, 2018, p. 2).
The rapid reversal of country risk growth, observed in the first half of 2016 in
several developing countries, is correlated with the fall in external volatility and 5
15 It is worth noting that despite the threat of a tightening of monetary policy by the FED, which
automatically triggered an escalation of future interest rates, it only actually occurred in 2016.
Since the emerging risk perception seems more correlated to future interest than to basic interest,
this effect had already been felt in 2013/14 by emerging economies.
21. 21
years T-Note interest rates (Figure 09). The rise of 14% in the commodity prices
in 2017, after a falling from 2012 to 2016 (40% drop in metal and agricultural
commodities measured by the IMF), also help to explain the improvement in
external conditions.
Figure 09 – Reversal of International Liquidity
Source: Authors based on FED and Bloomberg data.
6. Final Remarks
The present paper sought to investigate the role of financial integration of
developing economies to international markets in the variability of the country risk
variable. We recalled the pull-push debate on determinants of capital inflows in
order to contextualize our empirical analysis. Our Principal Component Analysis
of the country-risk spread series of ten emerging economies from 1999 to
revealed that 86% of the total volatility of the original series can be represented
by only two components, suggesting the prevalence of common factors in
determining country risk. This evidence, reinforced by the correlation of the first
major component with global liquidity indicators, corroborates our hypothesis that
the sovereign risk trend is driven by external factors, in line with the push
literature.
0,0
5,0
10,0
15,0
20,0
25,0
30,0
35,0
40,0
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
jan/10
abr/10
jul/10
out/10
jan/11
abr/11
jul/11
out/11
jan/12
abr/12
jul/12
out/12
jan/13
abr/13
jul/13
out/13
jan/14
abr/14
jul/14
out/14
jan/15
abr/15
jul/15
out/15
jan/16
abr/16
jul/16
out/16
jan/17
abr/17
jul/17
out/17
jan/18
abr/18
jul/18
out/18
jan/19
T-Note 5 years FFR VIX - right axis
22. 22
Our contribution is to strengthen the thesis, expressed in Medeiros (2008), about
the subordination of cycles in developing economies to global financial cycles.
This in effect imposes an (asymmetric) constraint for the management of
domestic monetary policy. To avoid capital outflows and/or successive exchange
rate devaluations , the domestic interest rate should not remain lower than the
international reference interest rate added to its risk premium (Serrano and
Summa, 2015). This constraint, as we have seen, has changed significantly in
the 2000s. In the recent expansionary cycle of global liquidity, many developing
economies seems to have taken advantage of this window of opportunity to
simultaneously grow more and reduce their external vulnerability. These two
movements ended up having the combined effect of lowering the collective
external fragility of the developing economies (Freitas et al., 2016; Serrano,
2013). As a result of this change, developing economies experienced a virtually
unprecedented period of reduction of Balance of payments crises.
As we have shown above, these favorable developments led to a once for all
structural break at the level of sovereign risk spreads, that have fallen significantly
after 2002. This seems to be the reason why the risk has not risen again to the
levels prevailing in the 1990s. Although the risk spreads continued to respond to
international financial indicators and has risen both during the 2008/2009 world
financial crisis, and in 2014/15, when the FED threatened to raise the interest rate
and cut the nonconventional monetary policies mechanisms, developing
economies are in a better position to deal with those changes. This is what we
read in current patter of risk premium spreads that, although still vary in response
to changes of the relevant international financial indicators, do it around a
significantly lower average.
23. 23
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ANNEX
1. Principal Component Analysis
1.1. EMBI
1.2. CDS
2. Cointegration test
Grupo 1 CP Proportion Accumulated Proportion Grupo 1.1 CP Proportion Accumulated Proportion
South Africa 1 0,724 0,724 oct/2006 to jan/2019 Argentina 1 0,713 0,713 july/1999 to jan/2019
Argentina 2 0,104 0,828 148 obs Brazil 2 0,152 0,864 235 obs
Brazil 3 0,069 0,897 Colombia 3 0,047 0,911
Colombia 4 0,046 0,942 Ecuador 4 0,035 0,947
Ecuador 5 0,021 0,963 Filipines 5 0,025 0,971
Filipines 6 0,014 0,977 Mexico 6 0,013 0,984
Mexico 7 0,009 0,987 Panama 7 0,008 0,992
Panama 8 0,005 0,992 Peru 8 0,003 0,996
Peru 9 0,004 0,996 Russia 9 0,003 0,998
Russia 10 0,002 0,998 Turkey 10 0,002 1,000
Ukraine 11 0,002 0,999
Turkey 12 0,001 1,000
Grupo 2 CP Proportion Accumulated Proportion Grupo 2.1 CP Proportion Accumulated Proportion
Argentina 1 0,658 0,658 may/1999 to jan/2019 Argentina 1 0,746 0,746 may/1999 to jan/2019
Brazil 2 0,155 0,813 237 obs Brazil 2 0,161 0,907 237 obs
Colombia 3 0,112 0,925 Colombia 3 0,050 0,956
Ecuador 4 0,042 0,967 Ecuador 4 0,019 0,976
Panama 5 0,015 0,983 Panama 5 0,016 0,992
Mexico 6 0,011 0,994 Mexico 6 0,005 0,997
Peru 7 0,004 0,997 Peru 7 0,003 1,000
Venezuela 8 0,003 1,000
Grupo 1 CP Proporção Proporção Acumulada Grupo 2 CP Proporção Proporção Acumulada
South Africa 1 0,700 0,700 june/2005 to jan/2019 Argentina 1 0,7061 0,706 june/2005 to jan/2019
Argentina 2 0,128 0,828 143 obs Brazil 2 0,1581 0,864 143 obs
Brasil 3 0,081 0,909 Colombia 3 0,0794 0,944
Colombia 4 0,043 0,952 Peru 4 0,0443 0,988
Mexico 5 0,027 0,978 Mexico 5 0,012 1,000
Peru 6 0,010 0,989
Russia 7 0,007 0,996
Turkey 8 0,004 1,000
Component, Brent, VIX and Tnote5
Trace statistic, with shift correction
test 10pct 5pct 1pct
r <= 3 | 5.38 5.42 6.79 10.04
r <= 2 | 14.61 13.78 15.83 19.85
r <= 1 | 31.33 25.93 28.45 33.76
r = 0 | 57.09 42.08 45.20 51.60
Component and Brent
test 10pct 5pct 1pct
r <= 1 | 5.97 3.00 4.12 6.89
r = 0 | 31.32 10.45 12.28 16.42
Component and VIX
test 10pct 5pct 1pct
r <= 1 | 17.64 3.00 4.12 6.89
r = 0 | 41.14 10.45 12.28 16.42
Component and Tnote5
test 10pct 5pct 1pct
r <= 1 | 4.38 3.00 4.12 6.89
r = 0 | 29.75 10.45 12.28 16.42