- Editor's Summary
This volume of Economía consists of four papers. The first discusses why Latin American governments have such a low capacity to execute proper public policy. The second studies the lending channel in Brazil using a high-frequency, extremely detailed, and novel data set. The last two papers study commodity prices and their impact.
The first paper is Mauricio Cárdenas's Presidential Address, entitled "State Capacity in Latin America." The state's capacity refers to the ability of governments to enforce and respect contracts, to collect taxes and execute expenditures, to honor their commitments, and so forth. In his paper, Cárdenas studies why governments in Latin America have exceptionally low levels of state capacity. The paper starts with a proper definition of state capacity and then proceeds to document the very low levels that are characteristic of Latin America. Indeed, Latin America underperforms even within the smaller comparison group of colonized countries. Cárdenas finds three important results. First, he argues that political and economic inequalities are two important determinants. Using a panel, he finds that countries in which inequality is large have fewer incentives to invest in their own bureaucracies, and they therefore underperform. Second, his evidence supports the hypothesis that internal wars (such as civil wars and other forms of internal conflict) deteriorate the quality of the state, while external wars have no impact. Finally, he finds that democracy tends to improve the quality of state capacity. In his view, the detrimental effects of internal conflict and of political and economic inequalities in Latin America outweigh the positive impact of democracy. This paper is a must read for those interested in institution building and development.
The second paper, authored by Christiano A. Coelho, João M. P. De Mello, and Márcio G. P. Garcia, is entitled "Identifying the Bank Lending Channel in Brazil through Data Frequency." In this paper, the authors estimate the strength of the lending channel in Brazil and outline its characteristics. The workings of the lending channel have been a concern of the literature for more than two decades in developed nations, in particular in the United States. The [End Page vii] main problem of the literature is that the identification problem in the estimation has not been resolved. In other words, if the interest rate increases, does lending contract because the interest rate is higher (the standard channel of transmission) or because the banks find it very expensive to lend (the lending channel)? The best evidence available in the literature focuses on bank characteristics—big versus small, rural versus urban—to distinguish the effect. This empirical strategy presumes that bank characteristics and behaviors are exogenous to the cost of lending and the types of clients the banks face. These two assumptions are clearly weak. In the end, the identification is dubious, and the measurement of the lending channel is weak at best.
This paper is completely different from earlier efforts. The authors use very high frequency bank-level data on loans to isolate supply shocks driven by monetary policy. As explained by the authors, "Our method bypasses both concerns with Kashyap and Stein's identification strategy. We have daily bank-level data on interest rate and quantity. The high frequency of the data allows us to isolate supply from demand shocks. The key identifying assumption is that supply reacts faster than demand to monetary shocks." From an empirical point of view, this is the standard Cholesky decomposition used so frequently in macroeconomic vector autoregressions (VARs). The underlying assumption is that "demand for credit depends on investment and consumption decisions that do not react immediately to changes in monetary policy," while "banks' costs of funds increase immediately (on the following working day) in response to an increase in the basic interest rate." This identification strategy takes advantage of the very good quality of the data to which the authors have access and convincingly tackles a very important question in the literature.
The paper presents two main results. First, the authors find a very strong lending channel in Brazil. "Credit volume and interest rate respond strongly to monetary policy changes in the direction one would expect if...