Three essays on exchange rates: The current account, financial account, and Latin America

Chapter 1, Trade elasticities, current account, and dollar devaluation, addresses the large current account deficits in the United States and discusses the various theories in which these deficits can be analyzed. Global economic imbalances have become a large concern for both deficit and surplus nations. The unsustainability of these large imbalances have led many to speculate on the different ways that the economic system could come back into balance, or if balance is necessary for long-term sustainable growth. Using a trade account model and a trade elasticity calculation, the paper predicts how far the dollar must fall in order for the trade account to balance. The results show that as of year-end 2007, the dollar must fall 32.8% to fully close the trade account.;Chapter 2, The role of the financial account in exchange rate determination: A multilateral approach, attempts to provide evidence that exchange rates are not dictated by the flows of international trade, but increasingly by the constant movement of global portfolio flows on the financial side of the balance of payments. Contributing to the literature by using a unique multilateral exchange rate model, this paper shows that financial flow variables are important to exchange rate determination. Several nontraditional financial flow variables are used to estimate the impact of financial flows on exchange rates, with evidence in favor of the expanding importance of the financial account in determining exchange rates.;Chapter 3, Institutions, geography, and terms of trade in Latin America: A longitudinal econometric analysis, focuses on three "deep" determinants: geography, integration, and institutions. Traditionally, authors study the impact of institutions, integration and geography on per capita income using worldwide cross-section data. This chapter employs the Hausman and Taylor (1981) estimator to examine the influence of these three determinants on per capita income in Latin American countries. Our results demonstrate that not just the quality of institutions, as much of the previous literature has claimed, but also the terms of trade both have strong impacts on per capita income. Specifically, both openness and an overvalued exchange rate are found to be detrimental to Latin American Growth.