Economia dei Paesi Emergenti

Fabrizio Coricelli

Università di Siena

2009

Topics Covered

• Growth and crises in Developing and Emerging Markets

• Globalization and crises in Emerging Markets

• Financial Integration and Capital flows to Emerging Markets

• Some considerations on current global crisis

1. Growth and crises in Developing and Emerging Markets

• Dynamics of output in Developing and Emerging Markets: implications of crises

• Empirical evidence*Cerra, V. and S. Chaman Saxena (2008), "Growth Dynamics: The Myth of

Economic Recovery", American Economic Review, Vol.98, No.1, pp.439-57

• Growth theory*Jones C.I., Introduction to Economic Growth, Second Edition, 2001

Welfare implications of crises:Ranciere, Romain, Aaron Tornell, and Frank Westermann, 2006,

“Decomposing theEffects of Financial Liberalization: Crises vs. Growth”, NBER Working Paper No.12806.

2. Globalization and external imbalances

• Integration in the global economy: current account dynamics

*Obstfeld, Maurice and Kenneth Rogoff, 2004, Foundations of International Macroeconomics (MIT Press): chapter 2

• International portfolio diversification

*Krugman and Obstfeld, Economia Internazionale, chapter 21

3. Globalization and crises in Emerging Markets

• Balance of Payments and Currency Crises: Third Generation

• *P. Krugman, Balance Sheets, the Transfer Problem, and Financial Crises, International Tax and Public Finance, Volume 6, Number 4, November 1999 , pp. 459-472(14)

• Aghion, Philippe, Philippe Bacchetta and Abhijit Banerjee, 2001, “Currency crises and monetary policy in an economy with credit constraints” , European Economic Review 45 (2001) 1121–1150

4. Vulnerability to financial crises in Emerging Markets

• (i) Varieties of Capital market Crises

• (ii) The Economics of Sudden Stops in Capital Flows: Theory and Empirics

• (iii) Rational Contagion

*Calvo Guillermo, 2005, “Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?”, MIT Press, Section III

5. Financial Integration and Capital flows to Emerging Markets

• Measuring Financial Integration

• Lane, Philip R., and Gian Maria Milesi-Ferretti, 2001, “The External Wealth of Nations:Measures of Foreign Assets and Liabilities for Industrial and Developing Nations,” Journal of International Economics, Vol. 55, pp. 263–94.

• *———, 2006, “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004,” IMF Working Paper 06/69 (Washington:International Monetary Fund).

6. International Capital Flows: Puzzles and Gains from Financial Integration

• Lucas, Robert E., Jr., 1990, “Why Doesn’t Capital Flow from Rich to Poor Countries,” American Economic Review, Vol. 80, pp. 92–6.

• Gourinchas, Pierre-Olivier, and Olivier Jeanne, 2008, “Capital Flows to Developing Countries: The Allocation Puzzle”, mimeo

• *Krugman-Obstfeld, chapter 21

Some facts (stylized)

Crises and trend-growth

Reversion to trend or permanent output loss?

Switching regimes, in levels

1 1

2 1

t t t

t t t

y c y

y c y

Switching regimes, cont.ed

• c can be deterministic, switching at a known date t or stochastic, with s being a random variable

1tt s t ty c y

Switch in levels, but return to the old trend line

Y(t)

Y(t-1)

ab

Return to trend line

• Between a and b growth rate is higher than trend

Comparing countries• Falling behind means staying behind unless the trend growth rate is

high enough to offset the impact of the negative shocks or if there are compensating positive shocks.

• If countries with more frequent contractions have stronger expansions or shallower recessions, then they may still have higher long-run growth.

• For example, neoclassical theory would predict that countries open to international capital flows would have a high potential for growth as external savings would facilitate investment in projects with high marginal returns.

• On the other hand, international capital flows have been volatile, particularly in the last decade. These arguments would suggest a positive relationship between volatility and growth.

More frequent recessions lower long-term growth (higher volatility lower growth)

Are deep recessions preceded by strong, unsustainable booms?

• If a recession is triggered as an adjustment to an excessively strong economic boom, then there may be no need for a strong recovery following the recession.

• This hypothesis could explain the scarcity of strong recoveries in the data. Is this true?

Convergence?

Poor vs rich country dynamics

Factors explaining recessions

Economic and policy variables

• For us the interesting episodes are those that can be affected by economic policy:

• Currency crises, financial crises

Can crises be helpful?

• Tornell et al.

• Idea is that there are two different growth paths: Safe and risky

• Safe paths do not imply sharp crises, but at the cost of lower average growth

• Risky paths affected by boom and bust, but deliver higher average growth

Cont.ed

• The story is similar to the standard finance story: equity premium

• Stocks are more volatile (higher risk) but on average they ensure a rate of return that is higher than that on riskless bonds

Safe and risky paths

• India safe growth path

• Thailand risky growth path

Credit cycles

Skewness

3 3_ _

1 1

3 32 2_

1

1 1

1

n n

i ii i

n

ii

Y Y Y Yn n

sk

Y Yn

Negative skewness

• In the picture above the series is left or negative skewed: the left tail is much longer than the right.

• The mass of the distribution is on the right: few but large negative deviations from the mean

Frequency of crises

• Crises are occasional

• Low probability of their occurrrence but

• Large effects on output

Volatility/variance

• The standard deviation or variance are not sufficient statistics for distinguishing safe from risky growth paths

• We need to distinguish risky paths from abundance of random shocks