- Editors' Summary
The four papers included in this issue of Economía range across many topics and subdisciplines, but they all contribute to shedding light on issues that are at the center of the economic policy debate in Latin America. The first paper uses a novel data set to check whether households respond to crises by allocating more time to shopping search and other home production activities. The second paper uses a theoretical model and cointegration analysis to study the effect of remittances on the real exchange rate. The third paper looks at whether the democratization process has affected the nature of the political budget cycle in Latin America. The last paper describes recent trends in income inequality in Latin America and provides some speculation on whether the recent decline in income inequality is sustainable.
In the first paper, David McKenzie and Ernesto Schargrodosky use the Argentine crisis of 2002 as a natural experiment to study whether households react to macroeconomic shocks by taking actions aimed at reducing the unit cost of their food expenditure. In other words, the paper asks whether economic crises lead households to shop more in search of better bargains. McKenzie and Schargrodosky find that although Argentine households responded to the crisis by reducing consumption, the total quantity of food purchased fell less than total expenditure. In particular, the paper uses high-frequency data that track the shopping activities of a panel of Argentine households to show that while the crisis led to an 11 percent drop in real expenditure, consumers increased shopping frequency by 7 percent. This increase in search allowed households to find better bargains and thus to buy more goods for any given level of expenditure. The paper estimates that this increase in shopping time allowed consumers to save about two percent on the cost of food, beauty, and cleaning products—a reduction that corresponds to approximately 17 percent of the drop in expenditure in these products. The discussion by Guillermo Cruces emphasizes that McKenzie and Schargrodosky's work is one of the few attempts to look at how households actually respond to a crisis, rather than focusing on households' stated strategies. Cruces's discussion also includes [Begin Page vii] an interesting point about gender. In particular, he suggests that there is evidence that women tend to have a better grasp on the evolution of prices and that women experienced a larger drop in the opportunity cost of time during the Argentine crisis. It would thus be interesting to know more about gender differentials in price search during tranquil and crisis periods.
In the second paper of this issue, Adolfo Barajas, Ralph Chami, Dalia Hakura, and Peter Montiel examine how remittances affect the equilibrium real exchange rate. They start by modeling a two-sector small open economy with a fixed exchange rate and flexible wages and prices. The model starts by analyzing the case in which remittances are exogenous, reproducing the standard result that an increase in the level of remittances leads to an appreciation of the equilibrium real exchange rate. However, the authors show that the magnitude of this effect is decreasing in the degree of trade openness and labor market flexibility. Next, Barajas, Chami, Hakura, and Montiel explore what happens if remittances are assumed to respond to domestic income shocks. In particular, the authors study the case in which family members working abroad increase remittances when the recipient country receives a negative income shock. They find that assuming endogenous remittances weakens but does not reverse the standard result indicating that an increase in remittances leads to an appreciation of the real exchange rate. As a third exercise, the authors study what happens if remittances affect a country's risk premium (which may happen because a permanent increase in remittances has a positive effect on the country's wealth). They show that in this case remittances have no effect on the equilibrium real exchange rate. Finally, they look at the case in which remittances affect households' preferences over the composition of consumption. They show that if remittances increase the share of traded good in consumption, there are parameterizations under which an increase...