Why are we obsessed with volatility and what have we done about it?

  • Published on
    06-Jan-2016

  • View
    24

  • Download
    3

DESCRIPTION

Why are we obsessed with volatility and what have we done about it?. Ugo Panizza Research Department Inter-American Development Bank. Volatility is costly. It leads to lower growth Negative effect on productivity Low investment in both physical and human capital - PowerPoint PPT Presentation

Transcript

  • Why are we obsessed with volatility and what have we done about it?Ugo PanizzaResearch DepartmentInter-American Development Bank

  • Volatility is costlyIt leads to lower growthNegative effect on productivityLow investment in both physical and human capitalIt increases inequality and povertyIt leads to smaller financial systemsIn the absence of a well-working financial market, it leads to high volatility of consumption

  • Latin America is volatile

  • Why is Latin America volatile?Large external shocksTerms of tradeSudden Stops in capital flowsVolatile macroeconomic policiesMonetary PolicyFiscal PolicyExchange Rate PolicyPolitical shocks

  • What can we do to reduce volatility?The 1995 ApproachDOMESTIC POLICIES CAN DO THE TRICK!!!Policies aimed at reducing terms of trade risk Export diversificationStabilization fundsPolicies aimed at reducing fiscal volatilityBudget institutionsGood debt managementPolicies aimed at reducing excessive exchange rate volatility and misalignmentsManaged floating

  • What can we do to reduce volatility?Lessons from the crisesThe Asian and Russian crises of the late 1990s spread shockwaves throughout the whole emerging world, also affecting countries characterized by good policiesIt became clear that good policies and institutions are NECESSARY but not SUFFICIENT conditions for isolating EM from external shocks

  • What can we do to reduce volatility?Lessons from the crisesEfforts to understanding the effects of the Asian and Russian crises and developing mechanisms to reduce volatility gave rise to two new complementary areas of researchThe role of currency denomination of external debt (ORIGINAL SIN)The role of SUDDEN STOPS in capital flows

  • What can we do to reduce volatility?Lessons from the crisesResearch showed that these problems are partly due to the way in which the international capital markets workHence, they cannot be fully addressed with domestic policiesThis led to proposals aimed at addressing what Calvo (2002) called GLOBALIZATION HAZARDS

  • What can we do to reduce volatility?Lessons from the crisesEmerging Markets Fund aimed at limiting contagion and generalized Sudden Stops in capital flows (Calvo, 2002) Emerging Markets Index and IFI issues in EM currencies aimed at creating new markets and achieving redemption from Original Sin (Eichengreen and Hausmann, 2004)

  • Why are we obsessed with volatility and what have we done about it?Ugo PanizzaResearch DepartmentInter-American Development Bank

Recommended

View more >