Book Description
This thesis deals with one obsession: the role of external factors in generating boombust cycles in Latin American countries. In the first chapter, I employ a Markov switching model to statistically validate the claim that the region is currently experiencing a combination of unprecedented favourable external conditions: high commodity prices and low global real interest rates. Based on this evidence, I introduce a model of a resource-rich small open economy with financial frictions in which external conditions switch stochastically between two regimes: "windfall" and "shortfall". The model is calibrated to Argentina to study how changes in external conditions give rise to boom-bust cycles. I contribute to the current debate on the desirability of controls on capital inflows by studying, from a positive perspective, the effects of introducing a regime contingent tax rate on debt holdings. I conclude that the welfare effect, albeit always very small, is determined by the strength of the domestic financial frictions. The third chapter attempts to empirically evaluate the model by performing an event study. I assess the ability of the model to reproduce the behaviour of the economy during a five-year window period centered around the Great Recession of 2008/09. To capture the external environment following Lehman Brothers' collapse, I introduce a regime switch in global financial conditions: normal and panic periods. I conclude that the model captures remarkably well the dynamic in this period and that its main weakness is the inability to reproduce the large swings observed in asset prices. The second chapter presents and studies a novel mechanism through which low-frequency fluctuations in foreign interest rates can generate different boom-bust patterns in an internationally borrowing constrained small open economy: intertemporal spillovers via collateral markets. When interest rates are low, the presence of a binding international borrowing constraint creates an intertemporal wedge that spills over into the intertemporal equation for capital due to its dual role as physical capital and financial collateral. As a result, in economies where the main source of collateral is reproducible capital, the spillover effect resembles an investment subsidy and fluctuations are smooth since there are no valuation effects. In contrast, when non-reproducible capital is posted as collateral, the disturbance resembles a financial service dividend and the interest rate fluctuations cause ample swings in macro aggregates due to their strong impact on asset valuations. It is my belief that in these chapters, I have contributed to our understanding of medium-run macroeconomic fluctuations in "semi-peripheral" countries.
