Content area
Abstract
This collection of papers study several aspects of the development process of Latin America.
Chapter two studies the optimal exchange rate policy when the economy is under a process of reform. During the last two decades, many Latin American countries engaged in disinflation programs based on both exchange rate management and fiscal reforms. However, in most instances, part of the fiscal reform was delayed or not implemented completely, so the fiscal deficit increased and the program had to be abandoned. The aftermath of these programs is not encouraging, since most of these policies turned out to be failures, lowering reserves and causing higher inflation rates. Given this record, it is worth asking why governments start a disinflation program even though the fiscal equilibrium is not guaranteed. In this chapter, I show that, if the reform process is uncertain and inflation has welfare costs, the optimal exchange rate policy implies the initiation of a disinflation program at the announcement of the fiscal reform.
Chapter three analyzes alternative sources of volatility in the region. It has been shown that Latin American economies are more volatile than industrialized countries. In this chapter, it is proved that when the source of uncertainty is the quality of the government, a capital account opening increases output variability. For suitable calibrations in the case of Latin American, it was possible to explain as much as 30 percent additional volatility.
Chapter four investigates the transition mechanism of international interest rates through the banking sector. It has been widely argued that learning is an important aspect of the credit market, both in the development of lender-firm relationships as well as in the formation of reputation. This chapter studies how the propagation mechanism of the interest rate changes when learning takes place in the credit market. I show that several facts reported in the credit market literature can be accounted by the model. (Copies available exclusively from MIT Libraries, Rm. 14-0551, Cambridge, MA 02139-4307. Ph. 617-253-5668; Fax 617-253-1690.)
