WORKING PAPERS

· A Regime Switching Analysis of the Exchange Rate Pass-through (with Kolver Hernandez)

Abstract: We investigate the stability of the pricing policies of exporters. This includes the stability in the exchange rate pass-through coefficient as well as the stability in the response to variables that affect the firm's markup. The model assumes that in every period exporters set prices by following either a “high pass-through” or a “low pass-through” pricing policy. The transition from one policy to the other is governed by a Markov process whose transition probabilities depend on economic fundamentals. For the choice of the economic fundamentals we rely on the theoretical literature on determinants of the optimal choice of the exchange rate pass-through. We estimate the model using collected data on 35 lines of imported cars to the US from seven exporting countries for the 1980-2004 period. Our estimations suggest that the low pass-through regime is characterized by: a low exchange rate pass-through; a low response to misalignments in the firm's relative price; a low volatility of technology and preference shocks; and a higher duration than the high pass-through regime. We identify the significant factors behind the choice of a pricing policy as US inflation, country market share, and market concentration. We also find that US inflation and the volatility of the exchange rate account for the 60-78% of the decline in the decline in the average exchange rate pass-through in the automobile industry.

· Financial Integration, Credit Market Imperfections and Consumption Smoothing

Abstract: Contrary to standard theoretical reasoning, recent empirical research shows that financial integration is associated with higher consumption volatility in developing countries. This paper provides one possible explanation as to how international financial integration can yield higher consumption volatility in a developing country facing credit market imperfections. I use a two country international real business cycle model where the non-traded sector in the small country faces borrowing constraints due to contract enforceability problems. If the international risk-sharing opportunities are nonexistent, households can secure themselves against the shocks in the non-traded sector only by adjusting their labor effort, which leads to changes in sectorial output and terms of trade. The deterioration of the terms of trade acts as a dampening effect on consumption, causing it to be less volatile under financial autarky relative to financial integration. Under financial integration, international financial assets provide the insurance against domestic productivity shocks without affecting the relative prices, hence allowing the consumption to react more.

· Capital Accumulation and Growth: A New Look at the Empirical Evidence (with Steve Bond and Fabio Schiantarelli)

Abstract: We present evidence that an increase in investment as a share of GDP predicts a higher growth rate of output per worker, not only temporarily, but also in the long run. These results are found using pooled annual data for a large panel of countries, using pooled data for non-overlapping five-year periods, allowing for heterogeneity across countries in regression coefficients, and allowing for cross-section dependence. They are robust to model specifications and estimation methods, particularly for our full sample and for the sub-sample of non-OECD countries. The evidence that investment has a long-run effect on growth rates is consistent with the main implication of some endogenous growth models.

WORK IN PROGRESS

· Real Exchange Rate Uncertainty, External Exposure and Investment: Evidence from Colombian Manufacturing Plants (with Ivan Kandilov)

Abstract: This paper empirically investigates the relationship between exchange rate uncertainty and investment using plant level data for Colombia. Previous studies have shown that the nature of the relationship depends on a number of different factors, such as the asymmetry of adjustment costs and imperfect competition. We explore how this relationship might further be affected by external exposure. The degree of external exposure faced by firms depends on the percentage of inputs they import, and the percentage of revenue generated by export. First we set up the firm’s problem and solve it numerically to study the theoretical implications of external exposure for the investment-real exchange rate uncertainty relation. Then, we estimate the relationship using dynamic panel data techniques.

· Regime Switching Country Spreads and Emerging Market Business Cycles (with Kolver Hernandez)

Abstract: We estimate a regime switching process for the emerging market bond spreads in order to study their relationship to business cycles and global financial and macroeconomic conditions. Assuming that the inter-regime shocks follow a Markov process with time varying transition probabilities, which are functions of economic fundamentals, we investigate the factors that are important in determining the level and the volatility of the real interest rates.