Alberto Ortiz
Research
Credit Risk and the Macroeconomy: Evidence from an Estimated DSGE Model
Embedded in canonical macroeconomic models is the assumption of frictionless financial markets, implying that the composition of borrowers’ balance sheets has no effect on their spending decision. As a result, these models have a difficult time accounting for the feedback effects between financial conditions and the real economy during periods of financial turmoil. Financial frictions—reflecting agency problems in credit markets—provide a theoretical link between the agents’ financial health and the amount of borrowing and hence economic activity in which they are able to engage. This paper attempts to quantify the role of such frictions in business cycle fluctuations by estimating a DSGE model with the financial accelerator mechanism that links balance sheet conditions to the real economy through movements in the external finance premium. Our estimation methodology incorporates a high information-content credit spread—constructed directly from the secondary-market prices of outstanding corporate bonds—into the Bayesian ML estimation. This credit spread serves as a proxy for the unobservable external finance premium, an approach that allows us to estimate simultaneously the key parameters of the financial accelerator mechanism along with the shocks to the financial sector. Our results indicate the presence of an operative financial accelerator in U.S. cyclical fluctuations over the 1973–2009 period: Increases in the external finance premium cause significant and protracted declines in investment and output. The estimated effects of financial shocks and their impact on the macroeconomy also accord well with historical perceptions of the interaction between financial conditions and economic activity during cyclical fluctuations over the past three decades and a half.
Credit Market Shocks, Monetary Policy, and Economic Fluctuations
This paper uses a dynamic stochastic general equilibrium model with credit market imperfections to estimate the role of credit market shocks and monetary policy in U.S. business cycles. The estimated model captures much of the historical narrative regarding the conduct of monetary policy and developments in financial markets that led to episodes of financial excess and distress over the last two decades. The estimation suggests that credit market shocks are an important factor behind economic fluctuations accounting for 15% of the variance in real output since 1985. Monetary policy is also an important force behind real output fluctuations explaining 12.5% of its variance. The impulse response functions of the estimated model show that financial shocks have important real effects as a 0.25% rise in the external finance premium causes a 0.73% decrease in output and a 2.8% decrease in investment.
Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter?
In this paper we ask whether tighter monetary and fiscal policies are the right way to face a sudden stop (a sudden curtailment in capital flows) in a typical emerging economy. We develop exogenous measures of fiscal and monetary policy response and conclude that tighter policies are associated to larger falls in output. The conclusion of the analysis is not so much that macro policies should be relaxed upon a crisis, but that countries should prepare themselves by creating the conditions to be able to act countercyclically upon such events. This entails among other things reducing balance sheet mismatches or strengthening fiscal results during expansions.
Estimating South African Reserve Bank´s Policy Reaction Rule (South African Journal of Economics)
This paper uses a dynamic stochastic general equilibrium model to estimate the South Africa Reserve Bank (SARB) policy reaction rule. We find that the SARB has a stable rule very much in line with those estimated for Canada, UK, Australia and New Zealand. The distinguishing characteristics are a somewhat larger weight on output and a very low weight on the exchange rate. Relative to other emerging economies, the policy reaction function of the SARB appears to be much more stable.
Measuring the Importance of Financial Frictions in Emerging Market Economies (in progress)
This paper gives evidence of the importance of including credit market imperfections when analyzing emerging markets' business cycles fluctuations. We analyze the cases of Argentina, Korea, and Mexico by providing Bayesian estimations of a dynamic stochastic general equilibrium small open economy model with a financial accelerator mechanism. The cost of financing varies with agents' financial positions and including financial frictions improves model's fit to data.
The Effects of the 1994 Mexican Financial Crisis on Firms’ Investment Activity (Undergraduate Dissertation)
This paper finds evidence of the existence of rigidities in the Mexican credit market, thereby lending support to the important role of firm's internal funds in taking advantage of investment opportunities. Using balance-sheet data on firms listed in the Mexican Stock Market between 1988 and 2002, we find that the importance of internal funds varies according to firms' characteristics and that the 1994 Mexican financial crisis modified firms' access to credit. The modification that a particular firm witnessed was determined by their leverage ratio and export activity. Exchange rate overshooting lead to increased income streams for export oriented firms, thus increasing their credit access. Meanwhile, the net-worth of highly leveraged firms dropped due to the increase in the value of their debt.
Analysis of the Mexican Footwear Cluster in Leon, Guanajuato (In Spanish, Pre-graduate)
This paper analyzes the footwear industrial district in Leon, Guanajuato to define its cluster and factors of comparative advantage. We identify the industry's main strenghts and areas for improvement.