The Latin American Journal of Economics - formerly Cuadernos de Economía - is an open-source journal published by the Economics Institute for over 47 years.
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We estimate a dynamic panel data model to assess the relationship between different levels of instability—proxied by growth volatility and inflation— and growth in Latin America from 1960 to 2011. Outlying observations could be mistakenly treated as thresholds or regime switch. Hence we use k-median clustering to mitigate the outlier problem and properly identify “scenarios” of instability. Our key findings are that while high inflation is harmful, low inflation is in fact positively related to growth. Volatility is also found to be significant and negative, but with no differential effect— between low and high levels—on growth.
This study contributes to the literature on FDI in Latin America using cluster analysis, a technique rarely employed in studies on this topic, to examine the FDI performance of Latin American countries. The empirical findings reveal three clusters in 2011, compared to just two in 2005. The cluster with better FDI performance (Chile, Panama, Uruguay, and Costa Rica) also performs better in terms of variables such as market size, trade openness, and human capital. Between 2005 and 2011 Argentina left the best-performing cluster and the cluster with poorer performance split into two, indicating heterogeneous evolution of economies in the region.
Competition for foreign direct investment (FDI) among developing countries has intensified in recent years. Using a sample of 68 developing countries across different regions, with data from 1975-2005, this paper investigates whether Latin America and the Caribbean (LAC) differs from non-LAC regions in regard to determinants of FDI; the evidence suggests that there are differences. In particular, the stock of infrastructure attracts FDI to LAC and constraints on the executive and high debt discourage FDI to non-LAC. These findings are robust to sample size, different estimators, endogeneity, and country fixed effects.
The S-curve hypothesis postulates that the correlation coefficient between the current exchange rate and past trade balance values may be negative. However, the correlation between the current exchange rate and future values of the trade balance may be positive. Previous research using aggregate trade flows between Brazil and rest of the world find weak support for the curve. When we disaggregate Brazil’s trade flows with the U.S. and investigate 95 industries that trade between the two countries, we find support for the S-curve in 51 industries. Small and large industries and durable and non-durable commodities are found to benefit from currency devaluation.
This paper examines the effects of U.S. monetary policy on Latin America’s production structure before two economic crises, specifically the effects of monetary policy on the real economy at the industrial level. Changes in the federal funds rate produce uneven effects on output trends across sectors and industries that are more capital-intensive and involved in relatively long-term projects are more sensitive to changes in the federal funds rate. Periods of loose monetary policy result in resource misallocation that is costly to correct during a bust if investment is irreversible, with a particular pattern of economic distortion during an unsustainable boom.
This paper summarizes the findings in this special issue of the Latin American Journal of Economics on entrepreneurship’s role in upward social mobility in Latin America, especially for the middle class, often considered the cradle of entrepreneurship. The income-persistent coef ficients estimated with pseudo-panel data for Colombia, Ecuador, and Uruguay indicate that entrepreneurship is a channel of intergenerational mobility, while asset persistence estimates for Mexico show that entrepreneurship increases mobility across generations. Although persistence coef ficients don’t indicate the direction of such mobility, estimates of income dif ferentials between entrepreneurs and non-entrepreneurs for Ecuador and Mexico support the hypothesis that upward mobility dominates.
We estimate the relationship between parents’ education and income and children’s schooling in Uruguay (1982-2010), interpreting this as a measure of intergenerational social mobility. Using three methodologies we report that such mobility has decreased over time. Improvements in education in the 1980s and 1990s were unevenly distributed. Computing an index of inequality of opportunity, we show that for mandatory education, this has remained constant, and for non-mandatory education, the increasing trend in inequality observed during the 1990s stagnated in the early 2000s. Finally, using instrumental variables we find that entrepreneurship is associated with greater social mobility.
In this paper we follow an income-based, time-dependence approach to measure the impact of entrepreneurship on social mobility in Uruguay. The working definition of entrepreneur is business owners with employees. Using household surveys from 1982 to 2010 we show that their income level, income volatility, and evolution over the business cycle are consistent with them being opportunity entrepreneurs. Self-employed workers are more similar to necessity entrepreneurs. We find significant evidence that entrepreneurship is associated with greater social mobility while self-employment is not.
The 2006 ESRU Survey on Social Mobility in Mexico is used to identify determinants of the decision to become an entrepreneur and analyze entrepreneurs’ intergenerational (i.e., respondents-parents) household wealth mobility. Entrepreneurs are distinguished from own-account workers. First, we find that entrepreneurship is strongly determined by the father being an entrepreneur and not necessarily by the individual’s initial wealth or educational attainment. Second, the mean ef fect of entrepreneurial activity on individual income is positive and greater for those whose parents belonged to the extreme ends of the socioeconomic distribution. Third, it is more likely for entrepreneurs to experience greater upward wealth mobility than non-entrepreneurs.
This paper explores whether Colombia’s middle class is a cradle of entrepreneurship that drives innovation and business growth and fosters social mobility. Microeconomic data are used to characterize entrepreneurs by income group and business characteristics. While entrepreneurs appear to enjoy more income mobility than the average worker, it is not clear whether this is true for middle-class entrepreneurs in particular or if it is a result of entrepreneurship. Nor is there evidence that middle-class entrepreneurs’ activity boosts economic growth. Instead, the findings suggest that businesses run by these entrepreneurs are characterized by low productivity.
Does entrepreneurship contribute to improving social mobility in Ecuador? This paper constructs a pseudo-panel to analyze the dynamic ef fect of entrepreneurship on Ecuadorian household incomes during the period 2002- 2010. Using dynamic panel estimation techniques and three estimation scenarios, the paper finds a significant level of unconditional mobility and an important ef fect of entrepreneurship (conditional mobility).
This paper explores the direct ef fect of an education expansion on the level of earnings inequality by carrying out microsimulations for most Latin American countries. We find that the direct ef fect of the increase in years of education in the region in the 1990s and 2000s was unequalizing; this result is expected to hold for future expansions if increases in education are not highly progressive. Both facts are closely linked to the convexity of returns to education in the labor market. On average, the estimated impact of the education expansion remains unequalizing when allowing for changes in returns to schooling, although the ef fect becomes smaller.
An optimal monetary policy Taylor rule is developed for an open economy, which we then estimate following a Markov regime-switching model for quarterly data from Colombia during 1990-2011. We find two opposite monetary regimes characterized by different policy rules: until October 2000 the Central Bank of Colombia reacted only statistically to output gap changes while after October 2000, when inflation targeting was of ficially adopted, monetary policy reacted only statistically to changes in the inflation rate. The latter regime is consistent with the Taylor principle as shown analytically and verified empirically by a unit root test for a Markov regime-switching model.
In 1992, Mexico’s federal government signed the ANMEB agreement as part of a series of strategic public education reforms. The agreement decentralized the education system, making state governments directly responsible for providing basic public education, in an attempt to reduce marked regional disparities in educational levels. Now that sample sizes are large enough to allow reasonable empirical analysis, I examine several indicators used to measure the characteristics of education in each state. The aim is to assess whether there is suf ficient empirical evidence to af firm that the agreement has contributed to improving education levels and reducing disparities among the states.
We analyze the consequences of a teenage pregnancy event in the short and long run in Mexico. Using longitudinal and cross-section data, we match females who became pregnant and those who did not based on a propensity score. In the short run, we find that a teenage pregnancy causes a decrease of 0.6-0.8 years of schooling, lower school attendance, fewer hours of work and a higher marriage rate. In the long run, we find that a teenage pregnancy results in a 1-1.2-year loss in years of education, which implies a permanent ef fect on education, and lower household income per capita.
This paper provides the first empirical evidence for Mexico about relative wage dif ferences between college-educated and high-school-educated workers across five-year age groups. Rotating panel surveys are used to implement an imperfect substitution model for similar male workers between dif ferent age groups and between the two education groups. For the period 2005-2012, the results suggest a partial elasticity of substitution of 1.7 for college- and high-school-educated workers and a partial elasticity of substitution of about 3 across age groups. Remarkably, the wage gap between younger and older workers with the same education level increased after the economic crisis of 2008.
This paper provides an overview of the real options approach to valuation mainly from the point of view of the author who has worked in this area for over 30 years. After a general introduction to the subject, numerical procedures to value real options are discussed. Recent developments in the valuation of complex American options has allowed progress in the solution of many interesting real option problems. Two applications of the real options approach are discussed in more detail: the valuation of natural resource investments and the valuation of research and development investments.
Using a panel of 16 countries during the 1961-2010 period, we find that financial development has a positive significant ef fect on economic growth in the long run for high-income countries but a negative significant ef fect for low-income countries. When studying the determinants of financial development, we find that higher financial openness and lower country risk are associated with greater financial development. The financial risk index has a positive significant ef fect on financial development, while the economic risk index has a negative significant ef fect. In addition, lower foreign debt and better socioeconomic conditions increase financial development.
The purpose of this article is to determine the impact of foreign direct investment (FDI) on a country’s overall economy rather than simply the sectors receiving such investment. The strategy consisted of adopting a crowding-in/crowding-out approach to Mexico’s total capital volume in the 1993-2010 period. The substitutability of foreign and local capital implies a lower-than-expected economic dynamism. Using a dynamic panel analysis, a negative relationship was found between FDI and the general wage. Throughout the analysis, firm size stands out as a key variable in explaining the impact of FDI.
We estimate the elasticity of the long-run relationship between energy consumption and GDP for 10 countries in Latin America from 1971 to 2007. We employ Pedroni’s (1999, 2004) panel cointegration test to determine if such a long-run relationship exists. Westerlund’s (2006) cointegration test for panel data is used to estimate the slopes of the long-run relationship variables. These findings provide empirical guidance for policies to promote energy conservation and ef ficiency. Cointegration between the two variables is found to exist in both directions. This paper discusses the energy dependence of some countries and describes potential implementation of energy conservation policies in others.
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