Contagion Effects from the 1994 Mexican Peso Crisis: Evidence from Chilean Stocks

The contagion, or informational spillover, effects of the 1994 peso crisis from the Mexican market to the Chilean market, and to the Chilean American Depository Receipts (ADRs) trading in the U.S., are examined. Significant excess returns are observed for Chilean stocks for the event dates of the Mexican Peso crisis, providing evidence of contagion effects. Significant excess returns on these Chilean ADRs are also observed for each of the five event dates associated with the Peso crisis, suggesting that the contagion effects spilled over to the ADRs. A multiple regression model shows that the spillover contagion effects were very efficiently transmitted from the Mexican market to the Chilean market to the Chilean ADRs. Multifactor regressions show that the most significant influence on the pricing of Chilean ADRs is the raw Chilean Index, rather than the Chilean Index expressed in U.S. dollars.     

Engines of Growth in China: The Limits of Informal Institutions

Abstract:

Since the 1978 reforms, China has experienced rapid economic and social development. GDP growth has been in the double digits on average yearly, creating the fastest sustained economic growth recorded by a major economy in history. Not only did this transform the economy and society at large, China reached important milestones in terms of reducing poverty and creating prosperity in a short period of time. This article uses the conceptual framework of new institutional economics to examine China’s economic growth and how growth has been achieved largely by ‘informal institutions’ that are grounded in culture, customs, and private interactions that emerge spontaneously. The trajectory by which these informal institutions left their imprint on China’s complex economic landscape and how they can constrain future economic growth are also of central importance. After examining decentralization and risk management practices, property rights, and the legal system, we emphasize the importance of creating formal institutions necessary for long-term growth, most importantly innovation. Preliminary evidence shows total factor productivity is tapering off which may reflect the constraints of China’s institutional environment. This ought to be reversed if China is to enjoy long-term sustained growth.     

The Behavior of the Real Exchange Rate Under Fixed and Floating Exchange Rate Regimes

This article investigates the behavior of real exchange rates under fixed and flexible exchange rates. Using data from both the Bretton Woods and the modern floating periods, we decompose real exchange rate movements into components attributable to supply shocks, real demand shocks, monetary shocks, capital flows shocks, and real oil price shocks. Empirical results show that real demand shocks are an important source of real exchange rate movements under both fixed and flexible rates, while monetary shocks are negligible. Supply and oil price shocks seem to be more important under Bretton Woods, while capital flows shocks seem to explain a relatively higher proportion of real exchange rate movements under the modern floating period.     

Persistence and non-linearity in US unemployment: A regime-switching approach

This article examines persistence and nonlinearity in the US unemployment rate in the post-war period by using a regime-switching unit root test. The empirical results indicate that a regime-switching unit root test outperforms conventional unit root tests and describes unemployment behavior better over the business cycle in the sample. While shocks to US unemployment dissipate in expansions, shocks to the unemployment rate seem to be persistent in recessions, supporting the hysteresis hypothesis. This is consistent with the usual explanation of hysteresis that workers may lose valuable job skills in protracted recessions.     

Income inequality and the business cycle: A threshold cointegration approach

This paper investigates the impact of various socio-economic variables on various cohorts of the income distribution. We use asymmetric cointegration tests to show that unemployment and immigration shocks have real impacts on income inequality. In addition, using threshold test results we are able to show that positive and negative shocks to the economy do not have symmetric effects nor do the impacts of these shocks impact income quintiles uniformly.     

Relationships among U.S. oil prices and oil industry equity indices

The cointegration analysis suggests that the pure oil industry equity system and the mixed oil price/equity index system offers more opportunities for long-run portfolio diversification and less market integration than the pure oil price systems. On a daily basis, in the oil price systems all oil prices with the exception of the 3-month futures can explain the future movements of each other. In the mixed system, none of the daily oil industry stock indices can explain the daily future movements of the New York Mercantile Exchange (NYMEX) futures prices, whereas these prices can explain the movements of independent companies engaged in exploration, refining, and marketing. The spillover analysis of oil volatility transmission suggests that the oil futures market has a matching or echoing volatility effect on the stocks of some oil sectors and a volatility-dampening effect on the stocks of others. The policy implication is that, during times of high oil volatility, traders should choose the S&P oil sector stocks that match their tolerance for volatility and use the right financial derivative to hedge against or profit from this volatility. The day effect for volatility transmission suggests that Friday has a calming effect on the volatility of oil stocks in general. The effect for Monday is not significant.     

Do retail gasoline prices rise more readily than they fall?: A threshold cointegration approach

This paper revisits the controversy over whether retail gasoline prices respond to increases in upstream prices more rapidly than decreases. Using threshold and momentum models of cointegration and daily data at different stages in the distribution chain, we find that transmission between upstream and downstream prices is mostly asymmetric in the momentum model: increases in upstream prices are passed on to downstream prices more quickly than decreases. We distinguish between small and large shocks and show that the asymmetry is more pronounced for small shocks, which may be due to consumer search costs.     

Welfare cost of inflation in a stochastic balanced growth model

There is a large and growing literature on the welfare cost of inflation. However, work in this area tend to find moderate estimates of welfare gains. In this paper we reexamine welfare costs of inflation within a stochastic general equilibrium balanced growth model paying a particular attention to recursive utility, portfolio balance effects, and monetary volatility and monetary policy uncertainty. Our numerical analysis shows that a monetary policy that brings down inflation to the optimum level can have substantial welfare effects. Portfolio adjustment effects seem to be the dominant factor behind the welfare gains.     

AGGREGATE SUPPLY,DOMESTIC ABSORPTION,AND TERMS OF TRADE: A STRUCTURAL DECOMPOSITION OF THE U.S. TRADE BALANCE

Using an intertemporal model as a reference, this article decomposes U.S. trade balance movements into parts driven by supply shocks, demand shocks, and relative price shocks. In identifying structural shocks, we propose a new type of long-run restriction that extends the previous structural Vector Autoregression (VAR) literature, and demonstrate its relationship to other identifying schemes. Empirical results indicate that relative price shocks and demand shocks are important in the short run while demand and supply shocks dominate in the long run in explaining the U.S. trade balance.