Essays on current account dynamics in Latin America and on income inequality in Mexico

The first part of this dissertation tries to address empirically the issue of the observed counter cyclical behavior of the current account and output growth in developing economies, focusing in Latin America. This counter cyclical behavior of the current account represents a puzzle for traditional intertemporal models for open economies based solely on consumption dynamics. The research presented in the chapter tries to explain empirically this counterciclicality by introducing investment dynamics in the model. The paper is based on an intertemporal model of investment and current account determination in small open economies. The paper extends Glick and Rogoff (1995) estimations of the model on developed countries (G7) to developing countries, specifically 16 Latin American countries, with data from 1960 to 1994. The results also highlight the important role of investment in explaining the current account behavior in Latin America. The regression results show that productivity shocks seem crucial to explain investment behavior and current account determination in Latin America. The estimations support simulation models that predict current account deficits in the presence of positive productivity shocks. The second part of the dissertation analyzes the causes of the important increase in inequality observed in Mexico after the 1985 trade reform. Many studies conclude that the pervasive effects of the reform on the wages of the less skilled workers combined with the important increase in the demand of skilled workers are the factors that explain the increase in inequality after the liberalization. The dissertation uses two different methodologies to analyze the effects of changes in labor market characteristics on the increase in inequality. The first one is a counter-factual methodology developed by UNDP to study the impacts of trade liberalization on poverty and inequality in Latin America. The second one is based on an econometric based simulation technique developed for the household level by Bourguignon, Fournier, and Gurgand (1998) to measure the contribution of changes in skill premium and sector returns on the increase in inequality in Mexican male wages. The results of this research highlight the importance of education returns in explaining the increase in inequality in Mexico.