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Essays in empirical work in emerging markets

Sergio Godoy, 2004
Faculty Advisor: Joseph E. Stiglitz
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Abstract

This dissertation comprises the empirical analysis of three fundamental issues in emerging markets. They are the following: (1) economic growth, (2) co-movements of sovereign spreads and (3) economic determinants of these spreads.

The first chapter (with Joseph Stiglitz) examines alternative hypotheses concerning the determinants of success in the transition from Communism to the market. In particular, we look at whether speed of privatization, legal institutions or initial conditions are more important in explaining the growth of the transition countries in the years since the end of the Cold War. In the mid 90s a large empirical literature attempted to relate growth to policy measures. A standard conclusion of this literature was the faster countries privatized and liberalized, the better.

Our results suggest that, contrary to the earlier literature, the speed of privatization is negatively associated with growth, but it confirms the result of the few earlier studies that have found that legal institutions are very important.

This second chapter (with Monica Fuentes) investigates the behavior of daily bond stripped spreads on sovereign bonds for 18 emerging market economies located in Asia, East Europe and Latin America from September 1997 to November 2002. In the emerging market world, financial crises are seen more often than not. An obvious question is whether these events, each associated with a particular country, spread to other countries, regardless of economic fundamentals at that specific point in time. That is, if the ‘simultaneous’ movements that we observe in spreads across emerging market economies are linked to economic fundamentals. We find that the correlation across countries is regionally dominated. Spreads from sovereigns with high savings rates, low indebtedness and good credit ratings are less likely to co-move with spreads where financial crises are being originated.

The third chapter examines the empirical behavior of monthly secondary spreads from eighteen emerging market economies located in Asia, East Europe and Latin America from October 1997 to September 2002. This period was turbulent for those economies since it includes the Asian crisis, the Russian default, the Brazilian devaluation, the Ecuadorian default, the Turkish crisis and the Argentine default.

Our results can be summarized as follows. First, our dummies show that spreads rose in the country or region where the crisis occurred. Second, the Russian default and the Turkish crisis correspond to episodes of global reduction of portfolio flows to emerging sovereign debt markets since all spreads go up over these two events. The Brazilian devaluation was fundamentally an abatement of portfolio flows to Latin America and East Europe (except for Russia). Third, the Asian crisis and the Ecuadorian default were consistent with a rebalancing of portfolios in emerging markets, as spreads narrowed in non-crisis countries or regions. Fourth, although the Argentine crisis shares some similarities with the former crises, it is unique in the sense that it was fully anticipated long before it happened. Finally, we find that negative (positive) changes in sovereign ratings significantly widen (narrow) regional spreads and other variables have no explanatory power. (Abstract shortened by UMI.)

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