Browsing by Author "Mendoza, Enrique G."
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Item Empirical Puzzles of Chilean Stabilization Policy(The World Bank Publications, 1998-03-05) Calvo, Guillermo A.; Mendoza, Enrique G.This paper reviews Chilean stabilization policy during the 1990s and argues that, while the merits of Chilean policy should be praised, there are four puzzles in conventional interpretations of the Chilean experience worth studying. First, the policy of targeting indexed interest rates does not coincide with a policy of targeting real interest rates. Second, there is no systematic link between the decline in inflation and the upward adjustments in indexed interest rates. Third, changes in the exchange rate and in the performance of the external sector help explain the decline in inflation. Fourth, the strong cyclical growth of the real economy was influenced in part by the large and persistent increase in the world price of Copper. We provide statistical evidence favoring these arguments using recursively-identified vector-autoregression models, and sketch a model of staggered pricing under indexation that sheds some light on the Chilean case.Item Rational Contagion and the Globalization of Securities Markets(Elsevier, 2000-06) Calvo, Guillermo A.; Mendoza, Enrique G.This paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios. In the presence of short-selling constraints, the gain of gathering information at a fixed cost may diminish as markets grow. Moreover, if a portfolio manager’s marginal cost for yielding below-market returns exceeds the marginal gain for above-market returns, there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows. Numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets.