Intermediation of international capital inflows and macroeconomic fluctuations in emerging market economies

by 1970- Oviedo, Pedro Marcelo

OVIEDO, PEDRO MARCELO. Intermediation of International Capital Inflows and Macroeconomic Fluctuations in Emerging Market Economies (Under the direction of John J. Seater and Enrique G. Mendoza). This study investigates the macroeconomic implications of financial intermediation of international capital inflows in a small open economy (SOE). The interplay between financial intermediation and macroeconomic fluctuations is studied under alternative representations of the relationship between international lenders, banks, and domestic borrowers, following two typical approaches in the banking literature. Under the industrial organization approach, a model with neoclassical banks is unable to reproduce the large output swings associated with capital outflows observed in actual emerging economies. Furthermore, the volatility of domestic financial variables is consistent with actual statistics only when banks’ supply of funds has a finite elasticity. Modelling banks under the incomplete information approach permits incorporation of aggregate risk into the analysis. Under this setting, banking crises are driven by fundamentals, and both capital inflows and country-specific interest rates are endogenous and important in explaining domestic fluctuations. The study ends with a detailed explanation of how to use numerical methods to solve linearized models like the model with neoclassical banks. Intermediation of International Capital Inflows and Macroeconomic Fluctuations in Emerging Market Economies by Pedro Marcelo Oviedo A dissertation submitted to the Graduate Faculty of North Carolina State University in partial satisfaction of the requirements for the Degree of Doctor of Philosophy Department of Economics Raleigh 2003 Approved By: Dr. Atsushi Inoue Enrique G. Mendoza Dr. John J. Seater Chair of Advisory Committee Dr. Paul L. Fackler To my beloved wife, Pauli, for her love and unconditional support. ii iii Biography Pedro Marcelo Oviedo was born on May 8, 1970 in Rio Colorado, Rio Negro, Argentina, to Nelly Selina Menchón and Daniel Oviedo. He then lived in Balcarce and La Plata before moving to the US in 1998. Pedro completed his secondary school at the Liceo Naval Capitan Moyano in Necochea in 1987 and his BA in Economics at the University of La Plata, in 1993. His formal education in Argentina also includes studies at the masters level in Banking, Macroeconomic and Finance at the School of Banking Disciplines, a join program of the University of La Plata and the University of Siena (Italy). After being working as a researcher, policy analyst, and instructor of economics in Argentina during three years, Pedro started his doctoral studies in North Carolina State University. As part of these studies, he took courses on Macroeconomic and International Finance in Duke University, where he became a student of Enrique G. Mendoza. As a Ph.D. student, he spent a semester at the Board of Governors of the Federal Reserve System as a Dissertation Intern in 2002, and conducted a consultant research for the Interamerican Development Bank before graduating in 2003. After finishing his doctoral studies at North Carolina State University, Pedro is joining the faculty of Iowa State University as assistant professor in August 2003. iv