Uncovering uncovered interest parity during the classical gold standard era, 1888–1905

This paper examines the uncovered interest parity hypothesis using the dollar-sterling exchange rate during the gold standard era. This period is interesting because the exchange rate was seasonal, because transactions costs were high, and because occasions when uncovered interest rate speculation did not occur can be identified. The paper shows UIP speculation frequently did not occur, that speculation was most active in response to expected exchange rate changes not interest differentials when it did occur, and that profitability varied systematically with interest rate differentials. The estimated UIP equations are substantially improved by distinguishing occasions when sterling was borrowed not lent.     

The impact of ADR activity on stock market liquidity: Evidence from Latin America

This paper examines the impact of ADR activity on liquidity of four major Latin American stock markets. We construct a measure of ADR activity in U.S. markets for a sample of ADRs trading during January 2003–December 2010, which is subsequent to the financial liberalization episodes and currency crises that shocked emerging markets in the 1990s. The sample lists 164 depositary receipt programs (Levels I, II, and III): 16 from Argentina, 81 from Brazil, 19 from Chile, and 48 from Mexico. Using System GMM methods to handle the potential effects from stock market development on economic growth and ADR issuance, we find that higher ADR turnover in U.S. markets has positive effects on domestic market turnover, particularly for issuance of exchange-listed (Levels II and III) ADRs. This positive relationship is not a statistical artifact created by the global financial crisis of 2008.     

THE ECONOMICS OF THE UNCOVERED INTEREST PARITY CONDITION FOR EMERGING MARKETS

Abstract Financial account liberalizations since the second half of the 1980s paved the way for the burgeoning literature that investigates foreign exchange market efficiency in emerging markets (EMs) via testing for the uncovered interest parity (UIP) condition. This paper is the first to provide a broad and critical survey on this recent literature. Specifically, we attempt to answer the following questions. First, are the EMs different from the developed economies in the context of the UIP condition? Second, to what extent can these differences contribute to the debate on the UIP literature? Third, what are the empirical challenges specific to the EMs in testing for the UIP condition?     

Currency depreciation effects on ADR returns: evidence from Latin America

We use seemingly unrelated regressions (SUR) and multivariate regression models (MVRM) in a panel sample of 74 American depository receipts (ADR) programs from Argentina, Brazil, Chile, and Mexico during the period May 1994 to May 2009 to analyze the behavior of ADR returns during the 300-day period surrounding the currency crises breakdown in the originator??s country. Controlling for the underlying stock and local and host country equity indices, we find that ADRs generate significant negative abnormal returns during currency crises, due to translation exposure. Abnormal returns remain statistically significant even in crises triggered by currency depreciations as small as 3.6%. The results persist after including exchange rate returns as a control variable and after an orthogonalization procedure of exchange rate against local country indices. In agreement with ADR literature, our results show that ADR prices are determined primarily by the underlying stock, exchange rates, and host country index, in that order. Moreover, we observe how market integration has become evident in more recent times as the coefficients for the U.S. stock market have increased its contribution to ADR price discovery.     

Technical efficiency and metatechnology ratios for dairy farms in three southern cone countries: a stochastic meta-frontier model

This paper compares technical efficiency (TE) and metatechnology ratios (MTR) for dairy farms from Argentina, Chile and Uruguay using the meta-frontier (MF) approach. The estimated average MTRs for Argentina, Chile and Uruguay are 83.8, 79.6 and 91.4%, respectively, and these results are significantly different from each other. The TEs estimated with respect to the MF are 72.8, 65.8 and 73.4% for Argentina, Chile and Uruguay, respectively. The average TEs for Argentina and Uruguay are not significantly different from each other but are significantly higher than the value for Chile. The production frontiers for Argentina and Uruguay are relatively close to the MF, which suggests that these two countries might need to increase investments to promote local research to generate new technologies and/or search for technologies to adapt from more distant areas. By contrast, Chile could benefit from adaptive research, designed to make borrowed technology from Argentina and/or Uruguay applicable to local conditions, which could be a cost effective way to improve dairy farm performance.     

International Business Environment in Mercosur Nations

Abstract

Mercosur is the latest common market in Latin America with Argentina, Brazil, Paraguay and Uruguay as its full members, along with Bolivia and Chile as associate members. Mercosur is an acronym for Mercado Comun Del Sur meaning the Southern Cone Common Market. Mercosur, with its original four member nations, has a total population of 200 million and a combined GDP of $1,000 billion (Fidler 1997, Pilling 1997). If Mercosur were a single country, this would make it the world's fourth most populous nation with the seventh largest economy.

Since the Treaty of Mercosur, also known as the Asuncion Treaty, the four full members have made tremendous strides towards achieving most of their objectives within the specified time periods. However, the agreement which called for the full implementation of a customs union by January 1, 1995, has not been fully realized. This has given rise to some concern among foreign investors about the practicality, and the attractiveness of the proposed Customs Union. The purpose of this paper is to evaluate the general business environment of the four Mercosur-member nations through an examination of the agreement itself, followed by a brief investment risk assessment using a country risk assessment model, and conclude with some implications for prospective investors. The analysis is limited to the economies of the four full member nations mainly because of two reasons: (1) the study focuses on issues concerning this group's transition to a customs union and eventually to a common market, and (2) there are continuing negotiations with countries such as Colombia, Mexico, Peru, Ecuador, and Venezuela for their accession into Mercosur as associate members. Therefore, the term Mercosur Nations in this paper refers to the four nations who are full members of Mercosur.     

Risk aversion and business cycles: An empirical analysis

Unlike investors, who tend to maintain highly-diversified portfolios, private entrepreneurs usually lack access to complete risk-pooling for idiosyncratic risks, thus more directly internalize the cost of volatility. Risk aversion, however, modifies the optimal contract between entrepreneurs and lenders by incorporating the risk premium that entrepreneurs demand for the uninsurable risk: the private equity premium. Consequently, real shocks tend to be amplified as changes in entrepreneurs’ net worth affect the private equity premium and so the rental rate of capital, investment and output. This theoretical framework suggests that economies where the private entrepreneurial sector is a relatively larger, and therefore more vulnerable to uninsurable risk, all else equal, should present higher volatility. I test this prediction by (1) conducting a simple reduced-form analysis that shows that output volatility is negatively associated with the relative importance of the corporate vs. the privately-held sector; and (2) estimating the model's structural parameters. Intuitively, countries where private entrepreneurs are predominant and so risk aversion is likely to impose stronger impacts, positive risk aversion coefficients should be found. Results suggest that risk aversion is empirically more relevant for economies like Argentina, Brazil, Chile, Korea, Mexico and Thailand than for Canada, France, Germany, the U.K. and the U.S.     

Bond market co-movements,expected inflation and the GBP-USD equilibrium real exchange rate

Since the end of the fixed rates in 1973 and after the European Monetary System (EMS) sterling dismissal in 1992, the value of the pound has undergone large cyclical fluctuations on average. Of particular interest to policy makers is the understanding of whether such movements are consistent with the lack or not of a correction mechanism to some long-run equilibrium. The purpose of the present study is to understand those dynamics, how the external value of the British sterling (GBP) relative to the US dollar (USD) evolved during the recent floating experiences, and what have been the driving forces. In this paper we assume the real exchange rate to be determined by forces relating to the goods and capital market in a general equilibrium framework. This entails testing the purchasing power parity (PPP) and the uncovered interest parity (UIP) together. In doing so, we model inflation expectations explicitly. Our findings have two important implications, both for monetary policy. First, we show that some of the observed changes in the bilateral real exchange rate cannot be solely attributed to changes in inflation rates, but, also to capital markets. Secondly, we find a weaker behavior of the US bond rate on international markets, possibly explained by the special US dollar status of World reserve currency.     

Assessing the impact of political unrest on currency returns: A look at Latin America

This study assesses the impact of major episodes of political unrest, such as assassinations, bombings, and coup attempts, on the currency returns of Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Using daily data for the 1990s and standard modeling from the efficient markets literature, we find that instances of political unrest lead to a significant drop in currency returns that lasts for up to twelve weeks. We discuss some implications of these results for investors, researchers, and practitioners.     

A multivariate GARCH in mean approach to testing uncovered interest parity: evidence from Asia-Pacific foreign exchange markets

The existence of time-varying risk premia in deviations from uncovered interest parity (UIP) is investigated based on a conditional capital asset pricing model (CAPM) using data from four Asia-Pacific foreign exchange markets. A parsimonious multivariate generalized autoregressive conditional heteroskedasticity in mean (GARCH-M) parameterization is employed to model the conditional covariance matrix of excess returns. The empirical results indicate that when each currency is estimated separately with an univariate GARCH-M parameterization, no evidence of time-varying risk premia is found except Malaysian ringgit. However, when all currencies are estimated simultaneously with the multivariate GARCH-M parameterization, strong evidence of time-varying risk premia is detected. As a result, the evidence supports the idea that deviations from UIP are due to a risk premium and not to irrationality among market participants. In addition, the empirical evidence found in this study points out that simply modeling the conditional second moments is not sufficient enough to explain the dynamics of the risk premia. A time-varying price of risk is still needed in addition to the conditional volatility. Finally, significant asymmetric world market volatility shocks are found in Asia-Pacific foreign exchange markets.     

Long-run monetary neutrality and the unit-root hypothesis: further international evidence

This paper re-examines recent international evidence on monetary neutrality based on long, low-frequency data and the reduced-form tests of Fisher and Seater [Am. Econ. Rev. 83 (3) (1993) 402]. Using three popular tests, we show that it is generally difficult to determine the order of integration of money in a robust and satisfactory way. We, therefore, base monetary-neutrality conclusions on tests for unit roots, constructed to have good size and power. Long-run neutrality holds for Brazil, Canada, Sweden and Mexico’s M2. For Argentina, Australia, Italy, Mexico’s M1, and the U.K., LRN does not hold. For the U.S. and Denmark monetary neutrality is not addressable.     

Carry-trades on the yen and the Swiss franc: are they different?

Using monthly data from 1986 to 2009 for 11 major currencies against the U.S. dollar (USD), we find that interest rate differentials between nine of these currencies are generally positive (sample mean of 0.86%) but are strongly negative for Japan (mean of ?2.78%) and for Switzerland (mean of ?2.22%). Investigating empirical models of nominal exchange rate changes we find for all panels that about 2% of real exchange rate misalignments are corrected in the following month. We also find important differences across samples and for the two carry-trade currencies the key results are as follows. First, interest rate differentials have a negative impact on exchange rates: higher paying currencies should appreciate, contrary to the ex-ante uncovered interest rate parity (UIP) condition. We find that this result is very robust to money supply (M1) differentials serving as instrumental variables to inflation rates. In addition, these two currencies depreciate slightly when money supply (M1) differentials increase. Second, dummy variables for periods of market turmoil suggest a particularly strong appreciation of these currencies against the USD, consistent with the unwinding of carry-trade activities.     

Policy Shocks, Market Intermediaries, and Corporate Strategy: The Evolution of Business Groups in Chile and India

Numerous countries have undergone rapid transitions in their economic environments. Yet, little is known about firms' responses to such transitions. We use field-collected data to study the evolution of eighteen large and diversified business groups in Chile (1987–1997) and India (1990–1997). The chosen periods correspond to significant deregulation in the primary markets in both countries. Conventional wisdom suggests that the intermediation roles played by business groups ought to decrease during these periods. However, we find an increase in group scope, an increase in the strength of the social and economic ties that bind together group firms, an increase in self-reported intermediation attempts by the groups, and some evidence that these actions are associated with improvements in accounting and stock-market performance of the group affiliates. We suggest that the slow development of market intermediaries, in a manner suggested by institutional economics, and the attendant lack of reduction in transaction costs in primary markets, can explain these findings.     

Causality between taxes and expenditures: Evidence from Latin American countries

The paper applies the techniques of cointegration and Hsiao’s version of the Granger causality method to examine the causality between taxes and expenditures for eight Latin American countries. The findings of bidirectional causality between taxes and expenditures in Chile, Panama, Brazil, and Peru indicate that taxes and expenditures are jointly determined. This study, however, detects causality running one way from taxes to expenditures in Columbia, the Dominican Republic, Honduras, and Paraguay. Taken together, this study strongly rejects the spend-and-tax hypothesis. (JEL C320, E620)     

Exchange rate dynamics and US dollar-denominated sovereign bond prices in emerging markets

Using data on Brazil, Colombia, Mexico, the Philippines, Russia and Turkey, our empirical results show that the exchange rates of their currencies have adequate explanatory power in explaining their US dollar-denominated sovereign bonds, particularly in the post-global financial crisis period. We develop a two-factor pricing model with closed-form solutions for the sovereign bonds in which the correlated factors are foreign exchange rates and US risk-free interest rates that follow a double square-root process relevant in the low interest rate environment. The numerical results and associated error analysis show that the model credit spreads can broadly track the market credit spreads.     

SPECIFYING AND TESTING OUTPUT AND PRICING STRUCTURES OF ALTERNATIVE MACROECONOMIC MODELS

ABSTRACT This paper puts forward a framework for choosing between alternative macroeconomic models. It is shown that a three-sector model with importables, exportables and non-traded goods can be specified so as to encompass both the Keynesian one-sector imperfect substitutes model and the two-sector dependent economy model with traded and non-traded goods as special cases. A two-stage test procedure is suggested in order to let the data determine which of these alternative models is the most appropriate. The use of this procedure is illustrated for the case of Argentina, Brazil and Mexico.     

Production networks and international trade: China,Brazil and Mexico

In this paper, we examine and contrast the production networks in China, Brazil and Mexico. We highlight three results. First, over the last two decades, China's intensity of trade in parts and components has shifted from other members of Greater China to South Korea and ASEAN countries. Second, even though China's production network is mainly Asian, its parts and components trading partners are increasingly global. Brazil also increasingly trades its parts with China and East Asia, while Mexico is still focused on its trade with the United States. Third, Greater China has become a major source of parts and components to Mexican and Brazilian imports. We highlight the importance of such a pan-Pacific link and anticipate that the joint China–Brazil–Mexico production network will continue to grow.     

Individual, organizational and environmental determinants of new firm employment growth: evidence from Latin America

New ventures are increasingly playing an important role in Latin American economies. However, little is known about the determinants of new firm growth in this context. The purpose of this study is to gain an understanding of the factors influencing new firm growth in Argentina, Brazil, Mexico and Peru. Individual, organizational and environmental factors are included in an empirical model, which is tested using data collected by face-to-face interviews with 582 entrepreneurs. Different specifications of employment growth and regression approaches are employed. Results suggest that growth strongly depends on the characteristics of the entrepreneur. National environment and firm-related factors are also important factors in determining growth.

British Factory, Japanese Factory and Mexican Factory: An International Comparison of Front-Line Management and Supervision

This paper presents a case study of a Japanese-owned electronics firm, presenting a comparative analysis of the company's supervisory systems in three of its plants located in different countries – Japan, Mexico and Britain. Comparative analysis is enabled through use of the concept of a supervisory system of control, which allows us to match the relative positions of managers, supervisors and workers across the three sites. The case study data enables us systematically to examine questions of the transferability of a Japanese supervisory system – a central component of Japanese manufacturing – outside of Japan. The results suggest that 'Japanese' supervisory systems have been established with more success in Mexico than in Britain, and the main factors that explain this are varying local labour market conditions, limits to managerial control on the shopfloor, the relationship between the product market and the organization of production, and local and expatriate management commitment to a Japanese system.     

Mean Reversion of Interest Rates in the Eurocurrency Market

One stylised fact to emerge from the empirical analysis of interest rates is that the unit-root hypothesis in nominal interest rates cannot be rejected. However, using the panel date unit-root test IM, Pesaran and Shin (1997), we find support for the mean-reverting property of Eurocurrency rates. Thus, neither a vector-error-correction model nor a vector autoregressive model in differences is appropriate for modelling Eurocurrency rates. Instead, conventional modelling strategies with level data are appropriate. Furthermore, the finding of stationary interest rates supports uncovered interest parity, and hence the convergence hypothesis of interest rates. This in turn suggests a limited role for a monetary authority to affect domestic interest rates.