miércoles, 29 de julio de 2009
martes, 21 de julio de 2009
Should we rush to further regulate financial institutions?
Guillermo Calvo Rudy Loo-Kung29 June 2009
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The financial sector is prone to crises, which are typically associated with serious effects on output and employment. This column weighs the costs and benefits of financial deregulation that spurs temporarily high growth that then collapse and suggests that bubbles may be socially efficient.
‘Tis better to have loved and lost, Than never to have loved at all. Tennyson, 1850.
In times of systemic financial distress, hunting for culprits becomes a popular sport. The Madoffs of this world are easy targets because crisis makes crookery harder to conceal. While there is no question that crooks should be sent to jail, increasing financial regulation is a different issue and requires careful analysis. Rushing to impose tighter regulations may hamper recovery and growth. Empirical evidence strongly supports the view that growth and financial development go hand in hand (Demirgüç-Kunt and Levine 2008). Although it is much harder to establish that financial development causes growth, few would doubt that, at least temporarily, financial deregulation could promote higher growth. A genuine concern, however, is that the financial sector is prone to crises, which are typically associated with serious effects on output and employment.
We cannot reach definite conclusions about the desirability of risky financial arrangements in a short column. Our objective is much more modest. We examine the welfare implications of financial deregulations that result in higher growth but end in tears and perform the exercise in the context of a benchmark case in which consumption is the ultimate source of welfare, ignoring possibly relevant behavioural finance and political economy considerations. We base our analysis on estimates of the costs of financial crises in emerging market economies (since the 1980s), a cauldron of financial crises in the last thirty years. Our results support deregulation even under those dire circumstances.1
A model of growth, collapse, and welfare
More specifically, suppose that financial deregulation is implemented at time 0 and that, as a result, consumption grows at rate gH (where H stands for “high”); after T periods, there is a crisis that produces a (symmetric) collapse-recovery recession phase in consumption, resembling those observed in the 1990s’ Emerging Economies crises (see Figure 1) . That is, we assume that, starting at time T consumption decreases for a while and then begins to recover. The recession phase takes DT periods. During the first half of this phase, i.e., for DT/2 periods after time T, consumption declines at the rate g*; and then, for the next DT/2 periods, consumption resumes growth at the same rate g*. By construction, at time T + DT (end of the recession phase) consumption reaches its pre-crisis level (i.e., the level prevailing at time T). Afterwards, we assume that consumption grows at a lower rate gL (where L stands for “low”). We assume that gL is also the growth rate that would prevail if no financial deregulation had been implemented. Thus, this corresponds to a financial deregulation experiment in which when crisis hits authorities get cold feet and meekly go back to the old, low-growth, financial system forever. This extremely pessimistic scenario will allow us to make a stronger case for deregulation.
Figure 1. Consumption paths under alternative regimes for the average emerging economy
To calibrate DT and g*, we focus on average output collapse and recovery patterns (the recession phase) observed in emerging markets during times of systemic financial turmoil throughout the period 1980-2004, discussed in Calvo, Izquierdo and Talvi (2006).2 More specifically, we set DT equal to the time that it took for average output to recover its pre-crisis level. The growth rate g* is calibrated to match accumulated output loss, which is defined as the sum of the differences between the pre-crisis peak GDP and observed GDP within the recession phase. This procedure suggests setting g* = 3.11% per year and DT = 3.43 years.
Moreover, we set gH equal to the average GDP growth rate observed in emerging markets during 1992-97, a period in which many countries opened up to capital inflows. The low growth rate gL is set equal to the average growth rate observed in the previous ten years (1982-91). This leads us to set gH = 4.7% and gL = 2.7% per year.3
We focus on the following question: How long should the bonanza or high-growth period T last for financial deregulation to be socially desirable? To answer that question, we examine the benchmark case in which welfare can be expressed as the present discounted value of a utility index which depends on aggregate consumption.4
We define the break-even T as the number of bonanza years that would make deregulation welfare equivalent to not deregulating at all and generating low growth, gL, at all times. If the bonanza period exceeds break-even T, then financial deregulation is preferable to doing nothing, even though it results in a painful crisis. Table 1 and Figure 1 summarise the results (parameter σ is the coefficient of relative risk aversion).5
Emerging market episodes lasted 5 to 6 years on average, implying that the experiments were socially beneficial despite ending in large recessions. Admittedly, the boom-bust episodes are not identical across economies. To test for robustness, we perform the same exercise for two polar episodes in Latin American, namely, Argentina’s and Chile’s, for which the bonanza period was 4 and 13 years, respectively.6 In both cases, results point in favour of financial liberalisation for σ = 4. However, in the case of Argentina (and σ=1), the methodology yields borderline results (Chile passes the test with flying colours).7
Two points are worth making: (1) support for deregulation is stronger if the coefficient of relative risk aversion is more realistically set at 4, and (2) break-even T is the same if one assumes that the cycle is repeated as many times as desired (high growth-bust-high growth), and only after the last cycle the economy resumes low growth.8 This is more realistic because emerging markets returned to exhibiting high growth during 2003-2007.
The analysis abstracts from the important issues of poverty and income distribution, which might alter our assessment of past deregulation episodes, but that does not make our analysis less relevant looking forward. . For example, for the type of social welfare function considered here, if income distribution remains fairly constant, one would reach the same pro-deregulation conclusions even if one entirely focused on the welfare of the poor, à la Rawls. This shows that financial deregulation would be desirable under the Rawlsian criterion if one can find suitable social protection mechanisms, and that the effectiveness of those mechanisms should be explored as part of the grand design of new financial regulations – especially before enacting new regulations that would stifle the dynamism of the financial sector.
Our analysis in this column may help explain why policymakers are hesitant to prick the bubble when it starts – they may simply be trying to maximise social welfare and realise that a potential crisis is not strong enough reason to prevent the bubble from developing (Tennyson’s verses ringing in their ears?). Of course, no policymaker likes crises. When crises strike, much of the discussion focuses on how to avoid them or lessen their impact in the future. This is quite understandable. However, this does not insure that “they are not going to fall in love again.” Therefore, the policy debate should give equal time to discussing what to do when crises happen and to developing institutions that help to assuage their blow.
In closing, we would like to point out that even though this note gives some support to financial deregulation, it does not rule out the existence of financial arrangements that are far superior to the ones currently available. A case in point would be the creation of a global lender of last resort. Central banks have successfully filled that role at the local level and likely prevented many serious self-fulfilling banking crises in the last seventy years. However, there is no equivalent to a lender of last resort at the global level. Its absence was clearly felt in emerging markets in the aftermath of the Russian August 1998 crisis. Even the subprime crisis suffered from the absence of a fully effective lender of last resort. To be sure, central banks stepped up to the plate early on in the current episode, but their coverage was and still is quite limited. Many central financial institutions were left without a safety net, or the net was stretched out after they hit the ground. We feel that the issue of a global lender of last resort should be given more weight in the current debate (see Calvo 2009).
Baldacci, Emanuele , Luiz de Mello, and Gabriela Inchauste (2002) "Financial Crises, Poverty, and Income Distribution" IMF Working Paper 02/4.Barro, Robert (2006) “Rare disaster and Asset Markets in the Twentieth Century”, Quarterly Journal of Economics, 121(3).Calvo, Guillermo (2009) “Lender of Last Resort: Put it on the agenda!”, VoxEU column, 23 MarchCalvo, Guillermo, Alejandro Izquierdo and Ernesto Talvi (2006) “Phoenix Miracles in Emerging Markets: Recovering Without Credit from Systemic Financial Crises,” National Bureau of Economic Research, Working Paper 1201, March.Demirgüç-Kunt, Asli and Ross Levine (2008), “Finance, Financial Sector Policies, and Long-Run Growth,” Commission on Growth and Development, Working Paper No. 11, World Bank, Washington, DCRancière, Romain, Aaron Tornell and Frank Westermann (2008) “Systemic Crises and Growth,” Quarterly Journal of Economics, pp. 359-406.
1 Our results, thus, give further support to the line of research advanced by Aaron Tornell and Frank Westermann since 2002, which is inspired by the conjecture that financial liberalisation may be socially desirable despite the booms and busts that it may generate. See Rancière, Tornell and Westermann (2008) and their recent VoxEU column.2 The paper focuses on episodes in which GDP peak-to-trough contraction is greater than the median fall in the sample. Note that including only the most severe collapses in the calibration constitutes a more difficult test for the case of financial deregulation.3 Countries included are those tracked by the J.P. Morgan’s EMBI Global Index: Argentina, Belize, Brazil, Bulgaria, Chile, China, Colombia, Côte d'Ivoire, Dominican Republic, Ecuador, Egypt, El Salvador, Gabon, Ghana, Hungary, Indonesia, Iraq, Jamaica, Lebanon, Malaysia, Mexico, Morocco, Pakistan, Panama, Peru, Philippines, Poland, Romania, South Africa, Sri Lanka, Thailand, Trinidad and Tobago, Tunisia, Turkey, Uruguay, Venezuela, and Vietnam.4 More concretely, we assume that the utility index exhibits constant relative risk aversion, σ, and the instantaneous rate of discount equals 3% per year. 5 If parameters are calibrated on the basis of GDP per capita (instead of its level) yields similar results, due to the high correlation between the two series.6 In both cases, we set gL to average GDP growth rates during 1951-1970. The parameter gH is set to the average GDP growth rates during 1991-94 for Argentina and 1984-97 in the case of Chile; The values and DT and g* are calibrated to match the characteristics of the Argentine crisis of 2002 and the Chilean crisis of 1998.7 In an exercise in which the collapse in growth is modeled as a stochastic event with constant probability, following Barro (2006), we also find support for financial deregulation. In both cases, the break-even expected frequency of these events is lower than the ones observed in the data8 It follows that T will be the same if the cycle is repeated an infinite number of times.9 The empirical work of Baldacci, de Mello, and Inchauste (2002) suggests that the financial crises that struck developing countries between 1960 and 1998 had severe effects on poverty and, in some cases, income inequality
domingo, 19 de julio de 2009
Le dejo a quien le interese un breve trabajo que tuve que realizar sobre el federalismo fiscal argentino. Es mayormente una compilación de otros trabajos, algunos muy interesantes y que fueron publicados en muy buenos journals. El mismo no es muy “técnico” porque fue para una materia que no era de economía, por lo cual es fácil de entender. Sldos.
jueves, 9 de julio de 2009
Cristina no para de dejar en evidencia su incompetencia económica. Vi unos minutos de su conferencia en Tucumán por el 9 de Julio y fue penosa. Hablando del superávit de la balanza comercial como si fuese algo bueno, con una caída en Junio de las importaciones del 49%. Me pregunto si los nuevos datos que adelanto, una caída de “solo” el 30% para Julio, serán verdaderos. En fin, así no vamos a ningún lado por nuestros medios y seguiremos dependiendo exclusivamente del viento de cola. Viento que no sabemos si vendrá e igualmente si viene, lo aprovecharemos parcialmente por tener velas llenas de agujeros. Somos como un equipo de futbol que ya no depende de el mismo, esta esperando los resultados de los demás equipos para ver si clasifica o, más acorde a nuestro caso, no desciende.
Pablito Krugman dice lo siguiente sobre los precios del petróleo:
Oil speculation is back in the news. Last year I was skeptical about claims that speculation was central to the price rise, because what I considered the essential signature of a speculative price rise — physical withholding of oil from the market, in the form of high inventories — just wasn’t showing.
This time, however, oil inventories are bulging, with huge amounts held in offshore tankers as well as in conventional storage. So this time there’s no question: speculation has been driving prices up.
Now, “speculation” isn’t a synonym for “bad”. If the underlying assumptions that seem to have been driving oil markets were right — namely, that a vigorous recovery is just around the corner, and demand will shoot up soon — then it would be perfectly reasonable to accumulate oil inventories right now. But those assumptions are looking less reasonable by the day.
Anyway, the moral of this post is that the oil story this time looks very different: this time, the signature of large-scale speculation is clearly visible.
¿Parecido a lo que dije acá no? No es idéntico, las causas son otras, pero la deflación en EEUU sigue dando el indicio de que los muchachos se adelantaron. Por algo el petróleo cayo casi U$S 10 los últimos seis días.Capaz implica que el precio del petróleo caerá más que el de los alimentos. Igualmente, sigo creyendo que el precio de estos últimos caerá en parte por lo que dije.
lunes, 6 de julio de 2009
Les recomiendo leer este artículo de Miguel Ángel Boggiano, es muy interesante. A mi lo que más interesante me resulto es el párrafo que copio a continuación, en el cual el autor habla del futuro de los precios de los commodities.