Working Pappers
Abstracts

2006

N° 75. Monetary Policy and the Informal Sector. Atanas Kolev, Jesús E. Morales P. Working Pappers N° 75.
Keywords : Informal sector; Shadow economy; Monetary policy.
JEL clasification: O17, O23, E52

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Abstract:
In this paper we examine the importance of institutional arrangements and factors related to the economic structure to explain inflation outcomes in Latin America. We perform a dynamic panel data analysis with an ample set of variables that allowed us to consider the temporal dimension of the data, and to control for endogeneity. Results lead us to believe that institutional arrangements –other than central bank independence– have played an important role in terms of inflation outcomes in Latin America. Variables that may affect inflation via time consistency problems seem somewhat more relevant than those suggested by optimal tax considerations. In particular, the negative correlation between political constraints to changes in public policies and inflation in Latin America is quite suggestive. We find that less flexible exchange rate regimes, advances in structural policies, and better government institutions have contributed to the reduction in inflation rates in the region. Faster growing countries exhibited lower inflation rates. Openness to trade seems to be positively correlated with inflation, suggesting that more open economies are more exposed to external shocks, allowing countries to benefit in terms of importing lower international inflation rates in recent years. Other variables did not prove to be significant.

N° 74. Macroeconomic Risk Evaluation of International Reserves in Venezuela. Carolina Pagliacci y Elizabeth Ochoa. Working Pappers N° 74.
Keywords: uncertainty and risk, international reserves, currency crisis, optimal reserves, forecasting and simulation
JEL clasification: D81, C51, F31, F32, F41, F47

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Based in an operational definition of risk, this paper presents a methodology that will allow decision makers to synthesize and analyze information about international reserves, in an environment with high uncertainty. In particular, we suggest the construction of three dynamic indicators to summarize available information more efficiently: the forecasted path of international reserves, the likelihood of a currency crisis, and an indicator of optimality of reserves. Probability distributions of these variables over which risk is measured, are obtained by simulations of stochastic shocks in a Venezuelan external sector model. The model describes the path of the nominal exchange rate using the definition of the exchange market pressure, and the behavior of the main components of the balance of payments, i.e. net exports and private capital movements. It also includes some features to capture the dynamics of the economy under exchange rate controls. The estimation of the model helps to evaluate and interpret the nature of the risks faced by policy makers

N° 73. Income and Consumption Insurance in Latin America: The Role of Transfers, Fiscal Policy and Indebtedness. Adriana Arreaza Coll. Working Pappers N° 74.
Keywords: Latin America, Income Insurance, Risk Sharing, Government Deficits, International Capital Markets.
JEL clasification: E21, G15, H60, F20

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This paper measures how much income and consumption smoothing is attained in Latin American economies. We find that international transfers play a relevant role in cross-country income insurance, particularly among Central American countries. Private saving carries out most of the smoothing, while fiscal policy does not play an effective role in buffering income shocks. Fiscal discipline and access to international capital markets in the nineties may have increased creditworthiness and reduced cross-border borrowing costs for privates, while limiting the scope for countercyclical fiscal policy. The degree of financial openness does not seem to aid external insurance.

2005

N°68. Interest rate rules Vs money growth rules: some theoretical issues and an empirical application for Venezuela. Víctor Olivo. Working Pappers N° 68.
Keywords: Monetary policy, Interest rate rules, Monetary aggregates rules, Inflation variance, Output variance.
JEL clasification: E52

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This paper main theme is that the arguments against the use of money (i.e. money growth rate rules) in the conduct of monetary policy are not so strong, particularly for less developed economies. I analyze this topic in two ways: i) using some simple theoretical forward-looking macro models and evaluating their inflation and output variance under interest rate and monetary aggregates rules; ii) setting up models similar to the theoretical ones, but with more complex dynamics, assigning values to the parameters, and solving them for different kind of shocks under interest rate and monetary aggregates rules.

N°67. The bank lending channel in venezuela: evidence from bank level data. Adriana Arreaza Coll, Eduardo Torres, Eugenia Santander. Working Pappers N° 67.
Keywords: Monetary transmission mechanism, Bank loan supply, Informational frictions
JEL clasification: E44, E52, C33.

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In this paper we empirically tested the presence of the bank-lending channel in Venezuela. Bank characteristics such as size, liquidity and specialization were taken as proxies for sources of informational asymmetries within the domestic financial sector. If relevant, such asymmetries should imply that monetary policy has distributional effects. As long as a policy tightening leads to a reduction in deposits that some banks may not be able to offset, loan supply will fall accordingly. Results in this paper do not support the presence of a bank-lending channel in Venezuela. Bank characteristics (size, liquidity or loan specialization) do not seem to be sources of cross-sectional differences in the response of loan supply to changes in monetary policy.

2004

N° 58 . A new approach to the natural resource curse: growth or income effects? Reinier A. Schliesser. Working Pappers N° 58.
Keywords: Recursos Naturales, Crecimiento económico
JEL clasification: O13, Q32, Q33

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This paper suggests there is little evidence for what have been called the “Natural Resource Curse”. In fact, the empirical result linking natural resource abundance and poor economic performance is reflecting the effect of negative shocks on commodity markets (both, in terms of prices and of total demand), that during the estimation period, affected many natural resource rich economies´ income levels, as a consequence of these economies greater exposure to shocks. This paper shows that the empirical link between natural resource richness and economic growth disappears once controlled for shock incidence. Therefore, the empirical result know as “Natural Resource Curse” cannot be interpreted as a growth handicap of natural resource rich economies but as a reflection of their greater vulnerability to shocks.

N° 56 . Sources of Macroeconomic Fluctuations in Venezuela. Adriana Arreaza, Miguel Dorta. Working Pappers N° 56.
Keywords: Volatilidad y descomposición de varianza
JEL clasification: E32, E37, C32

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The aim of this paper is to determine whether macroeconomic fluctuations in Venezuela can be explained by oil income shocks or by domestic supply or demand shocks. We conduct an empirical study based on the Blanchard and Quah method, using quarterly data for the period 1984-2003. We find that domestic shocks seem to explain around 70% of non-oil output growth volatility. In particular, supply shocks seem to be the main source of non-oil output growth volatility. Nominal shocks, on the other hand, seem to account for over half of inflation variability. Domestic supply and demand shocks may be policy related, but with the methodology used in this paper we cannot determine whether these shocks are the outcome of weak institutions resulting from the nature of a resource abundant economy, prone to external shocks and a rent-seeking behavior. But taking such institutions as given, it seems the impact of oil income fluctuations is limited, although not negligible. These findings are robust to different specifications.

N° 53. Testable implications of subjective expected utility theory. Eduardo Zambrano. Working Pappers N° 53
Keywords: Intertemporal decision theory under uncertainty, testable implications, Savage-Bayesian rationality.
JEL clasification: C11, D81, D83

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I show that the predictive content of the hypothesis of subjective expected utility maximization critically depends on what the analyst knows about the details of the problem a particular decision maker faces. When the analyst does not know anything about the agent´s payo.s or beliefs and can only observe the sequence of actions taken by the decision maker any arbitrary sequence of actions can be implemented as the choice of an agent that solves some intertemporal utility maximization problem under uncertainty.

2003

N° 45 . Inconsistency of policies and oil shocks: dynamics according to the monetary regime. Harold Zavarce, Luis A. Sosa. Working Pappers N° 45
Palabras clave:Consistencia, Política monetaria y Fiscal, Reglas, Deuda
Keywords: Consistency, monetary and fiscal policy, rules, debt
JEL clasificationL: E42, E52, E61, F34, E63.

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The main goal of this paper is to analyze the inconsistency between monetary and fiscal policy for an oil economy. In particular, we study the dynamics caused by a permanent oil revenue reduction when fiscal corrections are not implemented and the respective intermediate monetary policy variable is maintained at its original level. We examine the effects of a permanent oil shock under two alternative monetary regimes. These regimes are, according to the election of the intermediate variable, a monetary rule and the exchange rate anchor. For the purposes of our study, we assume a small open economy for which oil constitutes an important source of public revenue. Also, we assume perfect capital mobility, perfect foresight, full employment, and flexible prices. The inconsistency arises with a permanent reduction in oil revenues. In this paper, we offer the following two contributions. First, we show that, under any of the previous monetary regimes, keeping policies at preshock levels generates an unstable growth of government indebtedness. This unstable growth causes both, the abandonment of the monetary regime and higher future inflation rates. Second, we demonstrate that delaying the implementation of an adjustment program causes increasing inflationary and indebtedness costs.

N° 44 . Human consumption capital, time preference and dynamics. Harold Zavarce. Working Pappers N° 44.
Keywords:Consumo, Impaciencia observable, Distribución del ingreso, Riqueza, Consumo de capital.
JEL clasification: E20, E21, E22, D31.

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We define observable impatience as an individual behavior with decreasing consumption over time. This paper analyzes the observable impatience for an individual and for a dynasty of individuals that derives satisfaction only from human consumption capital and invests in it through consumption either to increase the stock or to hinder forgetting. As a consequence, at low levels of human consumption capital an agent moves future into present consumption to secure higher future flows of satisfaction. Intuitively, the agent is not willing to delay consumption. First, we show that observable impatience arises in an environment where the agent can trade financial and physical assets in a perfect capital market. In particular, we establish conditions under which an agent undertakes a decreasing consumption path when the rate of time preference and the rate of interest are set to be zero and prove that the smaller the level of income, of initial wealth and of initial human consumption capital, the greater observable impatience. The model rationalizes the belief that wealth induces patient behavior. Second, we consider dynasties with and without altruistic linkages. Without altruistic linkages we show that observable impatience may switch to patience if income is sufficiently high. With altruistic linkages the framework accounts for observable impatience and for intergenerational transmission of patience. Parent behaves as if they were impatient but become less impatient in each successive generation. We analyze the consequences for observable impatience in an altruistic dynasty that faces the expectation of having a selfish member A dynasty with this expectation in the near future tends to be more impatient observationally than one that expects it in the distant future. Third, we show that the framework explains the boom recession cycle of private consumption and the U-shape behavior of the real exchange rate observed in exchange rate-based stabilization programs.

N° 43 . A small scale macroeconomic Model for Venezuela. Adriana Arreaza, Enid Blanco, Miguel Dorta. Working Pappers N° 43.
Keywords: Macroeconomic models, forecasting and simulation, monetary policy, Central Banking
JEL clasification: E1, E17, E50.

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In this paper we build a small scale macroeconomic model for Venezuela. The model consists of four building blocks: a price equation, an aggregate demand equation (IS curve), an exchange rate equation (UIP) and a policy rule. The first two equations are estimated using quarterly data for the period 1989-2001. The exchange rate is determined as an asset price by the uncovered interest rate parity condition and the policy rule is calibrated for alternative preferences of the central bank authorities. All the equations in the model are forward looking, which is an innovation for the Venezuelan case that allows us to include the effect of agent’s expectations. We conduct simulation experiments to analyze the effect of different shocks on inflation, output, exchange rate and interest rates. We examine the impact of a permanent reduction of the inflation target with different degrees of credibility for the central bank, and alternative specifications for the interest rate rule. Then we look at the effect of a temporary public expenditure shock, and a temporary increase in the policy rate.

N° 41 . Taylor rules and inflation targeting do not work with systematic foreign exchange market intervention. Víctor Olivo. Working Pappers N° 41.
Keywords: Reglas de Taylor, Inflación objetivo, Mercado cambiario, Régimen de flotación.
JEL clasification: E52, F31, E40, E31

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Abstract
This paper examines how the systematic attempt to influence directly the path of the nominal exchange rate due to “fear of floating” affects the conduct of monetary policy under a Taylor rule and inflation targeting.
The paper demonstrates that implementing a Taylor rule or an inflation-targeting scheme simultaneously with policies that try to moderate the rate of depreciation of the nominal exchange rate may result in an inconsistent monetary policy. In addition, the paper shows in a relatively simple framework the close theoretical connection between a Taylor rule and inflation targeting.

N° 40 . Investigating the differential impact of real interest rates and credit availability on private investment: Evidence from Venezuela. Omar A. Mendoza Lugo. Working Pappers N° 40.
Keywords: Inversión, Tasas de interés, Crédito privado, Teoría de la liberación financiera, Modelos con transición suave
JEL clasification: O16, E22, C32, C51, C52

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Abstract
The theory of financial repression or liberalization establishes that the relationship between private investment and financial variables -real interest rates and credit availability- is nonlinear. That is, at very low or negative interest rates, a positive shock in such rates has a positive effect on the volume and quality of private investment due to its stimulus to the accumulation of resources in a world where self-finance is important. At higher rates, a positive shock in the real interest rates induces economic agents to accumulate financial assets rather than to invest in physical capital. At higher rates, therefore, this relationship is expected to be negative. On the other hand, one expects that at low real interest rates credit constraints are more severe than at higher rates. Credit availability, therefore, should have a higher impact on private investment decisions when real interest rates are low. We investigate this issue using a logistic smooth transition vector error correction (LSTVEC) model in which private investment, public investment, bank lending real interest rates, gross domestic product generated by the private sector and bank loans to the private sector are considered as endogenous variables. We use data from Venezuela for a period that coincides with administrative controls and decontrol of nominal interest rates. Despite the fact that we found evidence of asymmetries between the growth rate of private investment and financial variables, we did not find evidence for a positive effect of positive shocks to changes in the real interest rate on private investment even in periods of credit contraction. In addition, when the economy faces a credit constraint, a negative shock to our indicator for credit availability causes a higher contractionary effect on the growth rate of private investment. Thus, our findings are not totally in line with the predictions of the financial liberalization theory.