Economics Research Works
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Item Testimony on Dollarization(2000-06-22) Calvo, Guillermo A.I was invited here to explain about Dollarization, the benefits and costs for the US and the countries that adopt it. Before I start my formal presentation, I would like to state, in no uncertain terms, that I am a firm supporter of such system for many Emerging Market economies, EM, especially if it is done within the context of a Treaty with the US (as in Senator Connie Mack’s proposal). Moreover, I believe global dollarization will have direct economic benefits for the US, and enhance its role as a worldwide leader. Dollarization is the decision to abandon the national currency and replace it by the US Dollar (or some other hard currency like the Euro). This is a major economic and political decision. By default, a dollarized country adopts US monetary policy, even though the two countries could be going through different phases of the business cycle. Moreover, a dollarized country gives up the option of assisting banks by printing money in the case of a systemic bank run. In the first, and more substantive, part of my presentation I will argue that EM have already given up those functions. Therefore, dollarization is a win-win proposition except possibly for some fiscal costs (called seigniorage in the technical jargon). In the second part of the presentation I will evaluate the advantages of regional dollarization, and argue that dollarization is a winning proposition for the US. I will start the discussion by focusing on two key themes: Fear of Floating, and Lender of Last Resort.Item Understanding The Russian Virus, with special reference to Latin America(1998-10-13) Calvo, Guillermo A.Although Tequila and Asian crises took the world by surprise and had global repercussions, after a short while financial turmoil remained somewhat regionally confined. Tequila crisis started in Mexico and claimed Argentina as a victim, but the rest of the world was virtually unscathed. Similarly, the Asian crisis began in Thailand and spread all over Asia but did not cause major capital outflows in Latin America. Advanced economies’ financial sectors were little touched by either. Early results, however, strongly suggest that the recent Russian crisis may have more serious implications. Negative effects seem deeper, credit to emerging markets economies, EMs, has frozen, and a major recession in those economies is becoming more likely. Why? This is the central issue addressed in the present note. I will argue that the world capital market is populated by essentially two types of investors: informed, and non-informed (or less-informed). As a general rule, the former lead and the latter follow, and there is no major difference of opinion between the two groups. This system works reasonably well as long as there is no need for one group to carry out a significant portfolio recomposition. For, in that case, one group will have to sell and the other buy. This is precisely what, in my view, happened after Russia’s debt repudiation: the capital loss suffered by Russia’s bond holders, triggered ‘margin calls’ on highly leveraged informed investors, forcing them to sell some of their EM holdings to the other group, i.e., the non-informed (for whom leveraging was less attractive due to their poorer information). This is a complicated operation because the informed investors’ sellout makes the non-informed think that there must be some fundamental problem with EMs. As a result, EM security prices drop by more than can be accounted for by conventional fundamentals. This is key for the explanation offered in this note.Item Notes on Price Stickiness: With Special Reference to Liability Dollarization and Credibility(2000-12-23) Calvo, Guillermo A.This paper is motivated by trying to understand the implication of price stickiness in Emerging Market economies, EMs. The issue is important because EMs are subject to significantly higher volatility of fundamentals than advanced countries (see Hausmann and Rojas-Suarez (1996)). Thus, full-equilibrium relative prices are also likely to exhibit large volatility in EMs, making price stickiness an even more critical issue in EMs than in advanced countries.