A Threshold Model of the US Current Account
(Current version: October 15, 2014) [pdf]
What drives US current account imbalances? Is there solid evidence that the behavior of the current account is different
during deficits and surpluses or that the size of the imbalance matters? Is there a threshold relationship between the US
current account and its main drivers? We estimate a threshold model to answer these questions using the instrumental
variable estimation proposed by Caner and Hansen (2004). Rather than concluding that the size or the sign of (previous)
external imbalances matters, we find that time is the most important threshold variable. One regime exists before and
another one exists after the third quarter of 1997, a period that coincides with the onset of the Asian financial crisis
and the Taxpayer Relief Act of 1997. Statistically significant determinants in the second regime are the fiscal surplus,
productivity, productivity volatility, oil prices, the real exchange rate, and the real interest rate. Productivity has
become a more important driver since 1997.
Do Good Institutions Promote Countercyclical Macroeconomic Policies?
(with C. Calderón and K. Schmidt-Hebbel)
[Working paper version]
The literature has argued that developing countries are unable to adopt counter-cyclical
monetary and fiscal policies due to financial imperfections and unfavorable political-economy
conditions. Using a world sample of 115 industrial and developing countries for 1984-2008,
we nd that the level of institutional quality plays a key role in countries' ability to implement
counter-cyclical macroeconomic policies. The results show that countries with strong
(weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, re
ected in extended
monetary policy and scal policy rules. The threshold level of institutional quality
at which monetary and scal policies are a-cyclical is found to be similar.
Does the US Current Account Show a Symmetric Behavior over the Business Cycle?
(Current version: October 2014) [pdf]
Traditionally, the literature that attempts to explain the link between the current account
and output finds a linear negative relationship (e.g., Backus et al., 1995). Using
nonparametric regressions, we find a U-shaped relationship between the US current account
and the GDP cycle. That is, when output is above (below) its trend, the current
account and detrended output are positively (negatively) correlated. This finding is robust to
different measures of external imbalances and cyclical components, sample periods, type of
estimator, and econometric specifications. With the exceptions of Japan and the United Kingdom,
the U-curve is not observed in the rest of G7 countries. We argue that this nonlinearity might
be caused by non-variance-preserving productivity shocks or the presence of occasionally binding
Institutional Quality, the Cyclicality of Monetary Policy and Macroeconomic Volatility
(Journal of Macroeconomics, March 2014, 39: 113-155) [pdf]
In contrast to industrialized countries, emerging market economies
are characterized by pro- or a-cyclical monetary policies and high output volatility. This paper
argues that those facts can be related to a long-run feature of the economy -namely, its
institutional quality (IQL). The paper presents evidence that supports the link between an
index of IQL (law and order, government stability, investment profile, etc.), and (i) the
cyclicality of monetary policy, and (ii) the volatilities of output and the nominal interest rate.
In a DSGE model, foreign investors that choose a portfolio of direct investment and lending to
domestic agents, face a probability of partial confiscation which works as a proxy that captures
IQL. The economy is hit by external shocks to demand for home goods and productivity shocks while
its central bank seeks to stabilize inflation and output. In the long run, a lower IQL tends to
discourage external liabilities. If there is a positive external demand shock, we observe an
increase in output and real appreciation. The latter operates through two opposite channels.
First, it directly increases the opportunity cost of leisure generating incentives to expand
labor supply. Second, it reduces the real value of the debt denominated in foreign currency which
stimulates consumption but contracts the labor supply. If the IQL is low, the economy attracts
fewer loans for domestic consumers and shows a lower debt-to-consumption ratio in the steady state.
This implies that the reduction of the real value of the debt caused by the real appreciation is
smaller. Given this low wealth effect, the real appreciation leads to an expansion of the labor
supply. Wages drop and inflation diminishes. The central bank reacts by cutting its policy rate
to stabilize inflation and generates a negative comovement between output and the nominal interest
rate (pro-cyclical policy). As a corollary, negative correlations between policy rates and output
are not necessarily an indicator of destabilizing polices even in the presence of demand shocks.
[Working paper version]
Financial Liberalization, Low World Interest Rates, and Global Imbalances: A Note with a Simple Two-Country Model
(Applied Economics Letters, April 2014, 21(14): 1025-1029) [pdf]
We can understand the role of the liberalization of capital outflows on the global imbalances, the increasing share of
US equities in foreign investors' portfolio, and the decline in the world interest rate and the S&P dividend-price ratio,
facts observed during the last three decades, when taxes on international assets holdings are reduced in a simple
two-country model with costs of portfolio adjustment.