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Working Paper
Capital account liberalization and disinflation in the 1990s
As a way of addressing arguments in the literature (Rodrik, 1998) that the act of capital account liberalization leads to inflation, we present a simple theoretical model in which capital account liberalization raises the absolute value of the elasticity of money demand because agents have broader money holding options than under a closed capital account. The central bank maximizes seigniorage, balancing the benefits of higher inflation against potential losses of foreign currency reserves. The optimum seigniorage-maximizing rate of inflation falls when capital controls are loosened, as a ...
Working Paper
Capital account liberalization and disinflation in the 1990s
This paper addresses the potential link between two relatively surprising international economic trends of the 1990s. The first is global disinflation. Why did inflation fall so quickly, even in countries with long histories of high inflation? Latin America?s average inflation rate, for example, fell from over 400% in 1990 to under 10% in 1999. A second puzzle is why so many countries opened their capital accounts in the 1990s, despite warnings regarding the risk of currency and banking crises. Are these two developments related? Does capital account liberalization facilitate disinflation by ...
Working Paper
Currency competition and inflation convergence
All agree partial dollarization or currency substitution is a legacy of past inflation and exchange rate instability. Some argue partial dollarization contributes to exchange rate instability. However, if Central Banks respond to dollarization by lowering money growth and maximizing seigniorage revenue, inflation falls and converges on dollar inflation rates. We present a simple model of currency competition with open capital markets to illustrate these points. Empirical tests for Latin America and about twenty other countries suggest that dollarization is both a legacy of past inflation and ...
Working Paper
The openness-inflation puzzle revisited
Dynamic panel estimates show the negative relation between trade openness and inflation found by Romer (1993) but questioned by Terra (1998) became more robust in the 1990s, both among high income OECD and developing countries. Also during the 1990s, openness was associated with less variable inflation and had a stronger disinflation effect in economies with floating exchange rates.
Working Paper
Is foreign-currency indexed debt a commitment technology? some evidence from Brazil and Mexico
We examine the effects of foreign currency-indexed debt upon inflationary expectations in Brazil and Mexico. Conjecturing that markets will view increasing overhangs of foreign currency-indexed debt as a commitment technology that fiscally punishes devaluation ? we test whether increasing such overhangs will attenuate the effect of monetary growth upon inflationary expectations. We find some econometric confirmation of these conjectures in both the Brazilian and Mexican cases. Finding that the results are consistent with the notion that increasing the share of dollar indexed debt may also ...
Conference Paper
Real exchange rates and investment booms in Mexico
Working Paper
Is foreign-currency indexed debt a commitment technology? Some evidence from Brazil and Mexico
We examine the effects of foreign currency-indexed debt upon inflationary expectations in Brazil and Mexico. Conjecturing that markets will view increasing overhangs of foreign currency-indexed debt as a commitment technology that fiscally punishes devaluation, we test whether increasing such overhangs will attenuate the effect of monetary growth upon inflationary expectations. We find some econometric confirmation of these conjectures in both the Brazilian and Mexican cases. Finding that the results are consistent with the notion that increasing the share of dollar indexed debt may also ...