Predictability of Competing Measures of Core Inflation: An Application for Peru
Eduardo Morón y Luis F. Zegarra

A central element of an inflation targeting approach to monetary policy is a proper measure of inflation. The international evidence suggests the use of core inflation measures. In this paper we claim that core inflation should be measured as the underlying trend of inflation that comes from nominal shocks that have no real effect in the long term. However, most of the time core inflation is computed zero weighting observations at the tail of the inflation distribution. Quah and Vahey (1996) proposed a method of computing core inflation imposing theory restrictions to a SVAR specification. In this paper we present estimation for Peruvian data and compare the predictability properties of competing measures of inflation following an idea of Diebold and Killian (1997).

  

Efectos del programa de desinflación competitiva en España sobre el tipo de cambio real.
Mariam Camarero, Vicente Esteve y Cecilio Tamarit

In this paper we enquire about the link among Spanish real effective exchange rate relative to the EU, The terms of trade and the real interest rate differential over the period 1980-1994. This period is of interest to the Spanish economy due to the fact the monetary authorities were applying the so-called "competitive disinflation" strategy in the European Monetary System. The analysis draws on Meese and Rogoff (1998), using the terms of trade as an explanatory variable for the long-run performance of the real exchange rate.

The empirical results shows that the interest rate differential, representing the demand side factors, has been the relevant one in explaining the real exchange rate behavior, while the terms of trade have been of a minor importance. This fact could be due to the tight monetary policy undertaken during this decade as a part of a disinflationary program as wells as to the important changes occured to the financing of the public sector.

  

Educación y Crecimiento Económico Provincial en Argentina
Oscar Mitnik

Investment in education is an essential element for the economic growth of a country. Theory supports this argument with models that stress the individual and social benefits of education. Although the empirical literature shows ample consensus regarding the existence of positive individual returns to education, its impact on economic growth is, nevertheless, not clear. This paper applies panel data techniques to measure the effects of education on long-run economic growth, to the case of regional growth in Argentina.

There are two major problems when estimating growth regressions: 1) individual effects are correlated with explanatory variables, and 2) simultaneity biases. To avoid these problems, a generalized method of moments (GMM) estimator is used (Arellano and Bond, 1991; Caselli, Esquivel and Lefort, 1996).

Two types of models were tested. Standard and human capital-augmented Solow models, and Barro specifications. The standard Solow model fit poorly in most cases. Likewise, the augmented Solow model presented wrong signs on most coefficients. However, education always showed a positive and significative impact on long-run growth. On the other hand, in a-la-Barro specifications always education present a positive and important impact on growth, using aggregate measures of education achievement levels, although using disaggregate measures of education the results were not so clear. It turns out that, depending on the empiric specification, secondary school and university education have an important effect on growth.

Regarding convergence, the empirical evidence is mixed. Under certain specifications, GMM estimation finds strong evidence of convergence at a rather fast speed (around 5% per year), which is twice as fast as estimates using standard techniques for the US and Japan (Barro and Sala-i-Martin, 1995). However, when using more demanding specifications, the data does not support the conditional convergence hypothesis.

  

Teoría De Opciones: Una Síntesis
Viviana Fernández M.

Option pricing dates back to the turn of the century with Bachelier's doctoral dissertation on speculation theory. In 1964 Bonness developed a formula for option pricing similar in nature to that of Black-Scholes's but that relied upon an unknown interest rate. It was not until 9 years later that Black and Scholes came up with a formula to price European options, which would revolutionize financial theory. Unlike most theoretical breakthroughs, Black-Scholes's formula became increasingly popular among practitioners, and nowadays it is widely used in the main exchanges around the world.

In recent years Hull, White and Rubinstein, among many others, have worked on pricing the so-called exotic options. Meanwhile Trigeorgis, Brennan, Schwartz and others have illustrated how option theory can be used in assessing the profitability of investment opportunities(real options. Option theory has been also applied to the pricing of many other financial instruments, such as warrants, callable bonds, and callable-convertibles bonds.

The aim of this paper is to discuss the progress that option theory has made since Black and Scholes developed their seminal formula. We will review the most outstanding models, mention some numerical methods used in option pricing when no analytical solution exist, and discuss the importance of real options as a new technique for assessing investment opportunities.

  

Estimando un Modelo de 2 Factores del Tipo "Exponential-affine" para la Tasa de Interés Chilena
Sergio Zuñiga

In this article we estimate a two-factor model for the risk-free term structure yield in Chile. These factors are the short rate and the central tendency that are not directly estimable. Both factors follow an Ito stochastic process. In the solution of the model we follow the Balduzzi et al. (1996) specification, which provides an estimation procedure that do not depend on the parametric specification of the second factor and an "exponential affine" solution type that allows to estimate the model by mean of only one equation.

The data used in this study is the average weekly yields of the bonds "Bonos de Reconocimiento" (BR) of the Chilean stock exchange during May 1993 and December 1997. The results show that when we use a stochastic level for the long term rates the yields adjust better than the case when this level is constant. Also, the speed of the reversion process increases due to the better performance of the short term rate. In addition, using an ARCH specification for the rate volatility we found additional evidence that the variance of the rates.

  

Productividad y Tipo de Cambio Real de Largo Plazo
Rodrigo Valdés y Valentín Délano

This paper analyzes the relationship between productivity growth differentials and real exchange rate (RER) in Chile using three alternative methods. First, it calibrates with Chilean data a simple RER model that includes Balassa-Samuelson effect. Second, it uses time series data to estimate cointegrating vectors between RER and its fundamentals, including productivity differentials. Third, using a panel of 92 countries and data form 1960 to 1990, it studies the international evidence about the relationship between productivity and RER. The three methods yield surprisingly similar results. Explicitly considering the way in which the RER is measured in Chile, the paper shows that that the annual appreciation due to productivity growth differential in Chile during the period 1990-1997 is between 0.7 and 0.9% per annum.

Credit market behavior during turbulent economic environments: an example for a Latin American country.
Hugo Mena

The variability of the economy's growth in Latin American Countries (LACs) tends to far exceed that found in developed nations. Huge recessions are frequent in LACs. Typically, these recessions are accompanied by major exchange-rate-policy breakdowns. In turn, these output and exchange rate changes drastically alter private expectations concerning the future behavior of these variables. As a result, discrete and significant changes in private behavioral functions occur. This typically affects crucial monetary policy indicators, such as interest rates and credit. This turbulent economic environment makes it particularly troublesome for econometricians to test theoretical propositions dealing with credit market behavior, as well as for policymakers to interpret and forecast credit and interest rate behavior. This paper illustrates this issue using Chile as a case study. A simple theoretical model of business credit is developed, which is then used to interpret the developments in Chile's credit market during 1980-1986. Using a partial equilibrium analysis, it is shown how the contemporaneous correlation between output and credit demand can change sign, whenever the economy is subject to unanticipated recessions and devaluations. The analysis is a timely one for policymakers in many LDCs, who are currently on the path of transforming their economies to free-market open-economies.

 

Industrial Selection and Growth
Germán Echecopar

The paper provides an argument for how selective industrial policies (targeting) can produce faster productivity growth. A model is developed to show that when learning externalities are present, targeting can increase the amount of learning that is produced and shared within the targeted sector. This effect will raise the sectoral and the economy-wide average productivity growth rates. The paper also discusses how targeting can speed output growth by raising the incentives to learn and by reducing investment risk.

  

Do Investment Regulations Compromise Pension Fund Performance?
Evidence From Latin America
P.S. Srinivas y Juan Yermo

The paper assesses the impact of regulatory regimes on the market performance of private pension funds in Latin American countries that have undertaken reforms of their pension systems. It focuses in particular on the effects of "draconian" regulation, a set of rules on the industry's structure, investment regime, and performance. The conclusion is that while such rules may have achieved their basic objective of safeguarding workers' retirement savings from financial systems that lack transparency and solidity, they are not without costs. These rules limit opportunities for diversification, and, as a consequence, hamper the performance of pension funds.

  

Función de Costos en la Industria de las Administradoras de Fondos de Jubilaciones y Pensiones en la Argentina: Un Análisis de las Modificaciones Regulatorias
Braberman, Daniel G., Omar O. Chisari, Lucía Quesada, y Martín Rossi

In this paper we address two important issues for the young pension fund industry in Argentina: (i) How can individual funds be ranked according to their efficiency? and (ii) How have recent regulations -mainly, limiting the use of promotion for transferring members and allocating residual members not according to market shares but evenly among the funds- influenced costs? Panel data are used to estimate a cost frontier and relative efficiency is defined accordingly as the distance between firms' actual costs and the frontier. We find that regulation has increased total costs but has not modified relative efficiency to a significant extent.