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Capital Formation in Latin America

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  • Eliana Cardoso

Abstract

This paper studies investment in Latin America and explores the relationships of investment with growth, exchange rates and the terms of trade. It addresses the theoretical issue of the relationship between the real exchange rate and the real price of capital with a model of a small open economy with four assets. It discusses the dynamics of both the real price of capital and the real exchange rate in response to different shocks, including a change in monetary policy, an increase in external interest rates and a deterioration of the terms of trade. In the model (with a nominal exchange rate rule fixed by the central bank) a deterioration of the terms of trade leads to an immediate decline of the real price of capital, followed by a depreciating real exchange rate while the real price of capital slowly recovers. The paper explores the determinants of investment in Latin America. The regressions use quadrennial panel data for the period 1970-1985 in Argentina, Brazil, Chile, Colombia, Mexico and Venezuela. Together, these six countries account for 86 percent of the total GDP of the region. The decline in private investment shares in Latin America during the 1980s seems to result from the deterioration in the terms of trade, from the decline in growth (resulting from adjustment programs designed to reduce current account deficits), from a reduction in complementary public investment, from increased macroeconomic instability, and from a large stock of foreign debt. The real exchange rate and the real rate of depreciation have no significant role in the determination of private investment.

Suggested Citation

  • Eliana Cardoso, 1991. "Capital Formation in Latin America," NBER Working Papers 3616, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3616
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    References listed on IDEAS

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    1. Riccardo Faini & Jaime de Melo, 2015. "Adjustment, Investment and the Real Exchange Rate in Developing Countries," World Scientific Book Chapters, in: Developing Countries in the World Economy, chapter 6, pages 137-165, World Scientific Publishing Co. Pte. Ltd..
    2. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-143, March.
    3. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    4. Behrman, Jere R, 1972. "Sectoral Investment Determination in a Developing Economy," American Economic Review, American Economic Association, vol. 62(5), pages 825-841, December.
    5. Serven, Luis & Solimano, Andres, 1992. "Private Investment and Macroeconomic Adjustment: A Survey," The World Bank Research Observer, World Bank, vol. 7(1), pages 95-114, January.
    6. Solimano, Andres, 1989. "How private investment reacts to changing macroeconomic conditions : the case of Chile in the 1980s," Policy Research Working Paper Series 212, The World Bank.
    7. Musalem, Alberto R., 1989. "Private investment in Mexico : an empirical analysis," Policy Research Working Paper Series 183, The World Bank.
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    Cited by:

    1. Cáceres, Luis René, 1997. "La relación de largo plazo entre el ahorro y la inversión en la América Latina," El Trimestre Económico, Fondo de Cultura Económica, vol. 64(255), pages 305-317, julio-sep.
    2. Trish Kelly, 1997. "Public Investment and Growth: testing the non-linearity hypothesis," International Review of Applied Economics, Taylor & Francis Journals, vol. 11(2), pages 249-262.
    3. Ramón A. Castillo Ponce & Jorge Herrera Hernández, 2005. "Efecto del gasto público sobre el gasto privado en México," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 20(2), pages 173-196.
    4. Stanley Fischer, 1992. "Macroeconomic Stability and Growth," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 29(87), pages 171-186.

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