1
Exchange rate policy in a dollarized economy: Implications on
growth and employment in Bolivia
RESEARCH PROPOSAL – CONFERENCE VERSION
Presented to
Partnership for Economic Policy (PEP)
By
Carlos Gustavo Machicado S.
&
Beatriz Muriel, Alejandra Goytia, Mario Arduz
Bolivia
May 16, 2018
2
There are three main areas/dimensions to all PEP-supported projects: capacity building, research
and policy engagement. Each dimension must be considered with due care and attention, as
they will be assessed individually and concurrently to determine the overall quality of a proposal.
The PEP proposal template is structured in five sections, as follows:
- Project overview and objectives
- Capacity building – team composition and experience
- Research – literature review, method and data
- Policy relevance and engagement strategy
- Other considerations
SECTION I – PROJECT OVERVIEW & OBJECTIVES
1.1. Abstract (max 100 to 250 words)
The abstract should state the main research question, the context and its relevance in terms of
policy issues/needs in relation to PAGE priority issues. Complete with a brief description of the
method and data that will be used.
In the last ten years, Bolivia has experienced unprecedented economic conditions. Annual
economic growth has been on average 5%. Poverty levels have been reduced in around 20
percentage points. The Non-Financial Public Sector has experienced eight years of fiscal surplus
(2006-2013) as well as the current account (2006-2014). But these favourable conditions seem to
be reached an inflection point and important economic policy decisions have to be taken in
Before you begin
Please make sure to carefully review and understand the following
Webpage – especially with regards to the PAGE priority themes and
Guidelines – for designing a research project proposal (in scientific terms)
PEP requirements and strategy for policy engagement and research communication
Please note that :
- This template is mandatory for proposals of projects submitted under the PMMA and MPIA
groups, i.e. that do not involve data collection
- Plagiarism is strictly forbidden – see note on “references and plagiarism” at the end of this
document/template. PEP will be using a software program to detect cases of plagiarism.
- PEP encourages applicant research teams to submit proposals in English, but content (in
text boxes below) may also be written in French or Spanish (and will be accepted given
proper justification of language barrier).
3
order to prevent an economic collapse in the form of a Balance-of-Payment and currency
crises.
One of these decisions and perhaps the most important is whether to maintain the fixed
exchange rate policy that has been adopted since November 2011. But this is a tough decision
as it involves putting in risk the process of bolivianization (the opposite of dollarization), the
control of the inflation and the equilibrium of the financial system. Therefore this research
proposal aims to analyze how a devaluation policy could impact the economic growth, the
composition of the economic sectors, employment and poverty. The analysis will be based on a
CGE model, based on an updated Social Accounting Matrix (SAM) that includes the financial
system and with the novelty that the devaluation will be endogenous to the model in the sense
that the actual economic conditions like the deficit of the current account, the fiscal deficit, the
declining international reserves and a self-fulfilling demand for dollars, will push the exchange
rate to devaluate. Thus, the model will also answer the question: How long could the fixed
exchange rate policy be maintained, before it collapses by itself? As usual in this type of models,
different scenarios will be simulated before and after the devaluation.
1.2. Main research questions and contributions (max 500 to 700 words)
Explain the focus (or key questions) of your research and its policy relevance. Explain why you
think this is an interesting research question and what the potential usefulness and value added of
your work might be - in terms of both (general) knowledge gaps and policy needs for evidence
base.
The literature review shall be detailed under "Research" (section III), not in this section.
Bolivia's modern economic history starts in 1952 (Kehoe, et.al., 2015). During these 65 years, two
periods have been identified as the fastest growing: 1958-1978 and 2006-present. In both periods,
real GDP grew by around 5%, and GDP per capita grew by 2.5% in the first period and by 3.2% in
the second period. In this last period, economic growth allowed reducing poverty levels, mainly
because labor earnings grew significantly following the expansive cycle (Muriel and Vera, 2015).
In 2006, the moderate poverty level was 59.9% and extreme poverty was 37.7%, this meant that 4
out of 10 Bolivians were considered extreme poor. In 2015, moderate poverty fell to 38.6% and
extreme poverty to 16.9%.
Two main features are common in these two periods. The first is the high increase in world prices
of Bolivian export commodities. The second is that the government adopted a fixed nominal
exchange rate policy, which resulted in an appreciation of the real exchange rate (RER). In the
first period, after the positive shock of international commodity prices, Bolivia had to confront a
severe economic crisis. In the current period, the recent fall in international commodity prices is
causing a slowdown in the economy and it seems that Bolivia is heading to a Balance-of-
Payment and currency crisis.
The research will focus in the actual period. We will calibrate the Bolivian economy to address
the issues of a fixed nominal exchange rate regime, a growing economy with important changes
in its sectoral composition, a dollarized economy, and poverty reduction. We will include specific
characteristics of the Bolivian labor market for better evaluating labor outcomes. A first
fundamental consideration is that we will take into account fundamental imperfections in the
Bolivian labor market, which, in particular, have led to the creation of informal employment,
unemployment and some peculiar endogenous interactions (Herrera, 2017, Muriel and Herrera,
2017). For instance, Bolivia has the lowest unemployment rate in South America (4.5%), but this is
because labor legislation is so rigid that it is very difficult to dismiss workers and therefore many
companies prefer to become informal. Thus, informality has exacerbated in the last years.
4
On the other hand, the adoption of a fixed exchange rate policy has had the following
advantages in the nominal side:
1. It has been possible to de-dollarize the economy. In 2003 the dollarization of deposits was
90% and they fell to 16% in 2015.
2. It has been possible to anchor the inflation to the exchange rate. In 2011 inflation was
9.81% and from 2011 onwards, once the exchange rate was fixed, it has been on average
4.75%.
3. Bank credit expanded by 371% between 2005 and 2015.
However, the advantages on the real side are not clearly identified. Some hypotheses are:
1. Main export sectors, like mining and hydrocarbons use more imported inputs than other
sectors (Muriel, 2015). These sectors benefited from the appreciated real exchange rate,
because their costs have reduced, as well as from the positive price shocks. However,
other tradable sectors -usually more labor intensive- have been adversely affected, as
they have lost competitiveness.
2. Bolivianization allowed for an additional source of government funding which is the
seigniorage. This funding has been used to finance some expenditures and investments of
public enterprises.
3. There has been a Dutch disease phenomenon of employment reallocation between
sectors, favoring the main export sectors, but hurting other sectors like manufacturing.
Textile product exports as a share of GDP have fallen from 0.47% in 2012 to 0.14% in 2017.
The calibration will focus on these advantages and disadvantages and with a CGE model we will
test, for instance, the hypothesis for the real sector by modifying the fixed exchange rate policy
towards a flexible exchange rate policy. Therefore, the main question we aim to answer with this
research is: What would be the impact of abandoning the fixed exchange rate policy on
growth, job-creation, employment and poverty, in a period of depressed international
commodity prices? But, we don´t want to answer this question by simulating an exogenous
devaluation or depreciation of the nominal exchange rate, as it is usual in most CGE models. We
want to endogeneize the process of devaluation taking into account that the Bolivian economy,
as a bi-monetary economy, has an endogenous mechanism operating first through the fiscal
deficit and second through the people´s demand of dollars that could put pressure and
accelerate the devaluation of the nominal exchange rate.
Answering this question is very important for the Bolivian economy for the following reasons:
1. To maintain a fixed exchange rate, it is crucial to have a current account surplus. Since
2014, there is a current account deficit and so international reserves have been falling
during the last years.
2. In a bi-monetary economy, easing the exchange rate can lead to an increase in the
demand for dollars, generating a continuous process of depreciation that could increase
inflation.
3. It is also mandatory to have a controlled fiscal deficit to maintain a fixed exchange rate.
Fiscal deficit has been increasing steadily in the last years.
4. In terms of economic policy, there is the doubt as to whether the government should wait
until there is no other option than to devalue or should move forward by applying a policy
of gradual devaluation.
These questions are crucial in a context where the fall in international prices are slowing down
the economic growth, increasing unemployment, and, as showed by Muriel and Vera (2014),
reversing the poverty reduction.
In addition, an endogenous process of devaluation has not been analyzed before with a CGE
model for a partially dollarized economy. So we believe that this research could be an important
contribution for CGE modeling and to understand economic policy mechanisms in partially
dollarized economies.
5
SECTION II – CAPACITY BUILDING
2.1. Team composition and experience
For each research team member, please indicate (using the following tables – one per member):
1. Age, sex, as well as relevant/prior training and experience in the issues and research
techniques involved (start with team/project leader).
- Note that PEP favors gender-mixed teams, composed of a maximum of four (4)
members, at least 50% female researchers, and at least two (2) junior researchers
(aged under 30), all contributing substantively to the research project. PEP also
seeks gender balance in team leaders and thus positively encourages female-led
research teams.
- Each listed member must post an up-to-date CV in their profile on the PEP website –
refer to “How to submit a proposal” on the call’s webpage.
2. Benchmark and expected capacity building:
- Describe the research capacities that each team member (and potentially her/his
affiliated institutions) is expected to build through their participation in this project.
This is an important aspect in the evaluation of proposals and should be presented
in detail.
What techniques, literature, theories, tools, etc. will each team member and
her/his institutions learn (acquire in practice) or deepen her/his knowledge of?
How will these skills help each team member in their career development?
What are the current state of knowledge of each team member in regard to
the project you are proposing?
3. Task and contributions to project: Indicate the specific tasks each team member would
carry out in executing the project.
- Note that one of the team members must be clearly identified as responsible for
coordinating and reporting on the design/implementation of the projects’ policy
engagement and communication strategy (see section III below). To achieve a
more balanced task distribution, PEP advises to select a member other than the
project leader.
Team leader
Name Age Sex (M, F) Highest degree/diploma
Carlos Gustavo Machicado S. 44 M Ph.D.
Training and experience More than 10 years working as senior researcher at INESAD
Foundation. He has ample experience on macroeconomics.
In most of his research he has used general equilibrium
models (CGE and DSGE). He has been also instructor for the
6
Bolivian Central Bank in General Equilibrium models.
Expected capacity building He aims to update his skills on CGE modelling, learn the
latest techniques and build a new and updated SAM for the
Bolivian economy.
Contribution to project Lead the project and organize the work. Develop the set of
equations to be included in the model to endogeneize the
process of exchange rate devaluation for a partially
dollarized economy. Set up the equations for the model and
SAM update + GAMS.
Team member #2
Name Age Sex (M, F) Highest degree/diploma
Beatriz Muriel Hernández 47 F Ph.D.
Training and experience Beatriz Muriel H. holds Ph.D. and Master degrees in
Economics from the Catholic University of Rio de Janeiro.
She has worked in both Bolivia and Brazil governments and
academia, which allowed her to apply her thorough
theoretical and empirical background to economic
development problems. She has more than ten years of
experience on labour economics research. For this topic, she
has produced more than 15 Working Papers, five specialized
articles and participated in six books. Under her
coordination, she has developed more than 250 indicators
on labour issues using household and firm surveys as well as
national accounts from 1988 to 2014. This information is
available for everyone at www.eminpro-inesad.com.
Expected capacity building She aims to update his skills on CGE modelling, in particular
including a better modeling of Bolivian labor characteristics
(e.g., high levels of informality).
Contribution to project Set up the micro-macro links needed to evaluate labor
market outcomes, and establish de MSM analysis
Team member #3
Name Age Sex (M, F) Highest degree/diploma
Alejandra Goytia 23 F B.Sc.
Training and experience No experience in CGE modelling
Expected capacity building Learn how to build the SAM, calibrate the model and run it in
GAMS.
Contribution to project Collect data, calibrate the model, estimate parameters, set
up the equations, run the model in GAMS, help on MSM part.
Team member #4
Name Age Sex (M, F) Highest degree/diploma
7
Mario Arduz 22 M B.Sc.
Training and experience No experience in CGE modelling
Expected capacity building Learn how to build the SAM, calibrate the model and run it in
GAMS.
Contribution to project Collect data, calibrate the model, estimate parameters, set
up the equations, run the model in GAMS, help on MSM part.
2.2. List of past, current or pending (non-PEP) projects in related areas involving team
members, including resulting publications (If any)
Name funding institution, title of project and related publications, list of team members involved.
Name of funding
institutions
Title of projects and related
publications (link)
Team member(s) involved
The International Food
Policy Research
Institute (IFPRI)
Title: Effect of the Global Financial and
Economic Crisis on the Bolivian
Economy: A CGE Approach
Carlos Gustavo Machicado
Publication (reference): Monitoring
and Mitigating the Impact on Poverty
of the Global Financial Crisis, PEP-CBMS
Network Office and De La Salle
University, Philippines, 2013
International
Development
Research Centre
(IDRC) and Centro de
Estudios Distributivos
Laborales y Sociales
(CEDLAS)
Title: Employment and Labor
Regulation: Evidence from
Manufacturing Firms in Bolivia, 1988-
2007
Beatriz Muriel and Carlos
Gustavo Machicado
Publication (reference): Development
Research Working Paper Series
07/2012, INESAD
No funding Title: Liquidity shocks and the
dollarization of a banking system
Carlos Gustavo Machicado
Publication (reference): Journal of
Macroeconomics, Elsevier, vol. 30(1),
pp. 369-381.
International
Development
Research Centre
(IDRC) and Danish
Cooperation
Title: Building an Effective Tool based
on information for Policy Discussion
and Influence: THE EMINPRO
(Employment, Income and Production)
NETWORK (see: www.eminpro-
inesad.edu.bo).
Beatriz Muriel and others
Publication (reference):
“Un Juego Experimental sobre
Emprendedurismo y Políticas de
Protección Laboral”, Development
Research Working Paper No. 11/2015.
“Cycles versus Trends: The Effects of
8
Economic Growth on Earnings in
Bolivia”, Development Research
Working Paper No. 08/2015.
“Pobreza, Ingresos Laborales y Trabajo
en Bolivia”, Development Research
Working Paper No. 09/2015.
Milenio Fundation and
Danish Cooperation
Title: Labor Regulation and Labor
Market: Main Challenges for Bolivia
Beatriz Muriel and Rubén
Ferrufino
Publication (reference): Book: Labor
Regulation and Labor Market: Main
Challenges for Bolivia
International
Development
Research Centre
(IDRC)
Title: Employment and Income in Peru,
Bolivia and Paraguay: Analysis of the
links between labor demand and
supply in urban and rural area
Beatriz Muriel and others
Educate Girls Globally
and International
Development Bank
Title: Rural Girls’ Primary Education and
Urban Female employment in Bolivia
Beatriz Muriel and others
Publication (reference): Working
Papers: Female Labor Force
Participation in Urban Bolivia, Female
Labor Market Conditions in Urban
Bolivia
2.3. List of past or current PEP-supported projects involving team members, including
resulting publications
Project code (e.g.
PMMA-12345)
Title of project and related external
(non-PEP) publications, if any
Team member(s) involved
MPIA 11343 Title: Public Expenditure Policy in
Bolivia, Growth and Welfare
Carlos Gustavo Machicado
Publication (reference): Working
Papers MPIA 2011-10, PEP-MPIA
SECTION III – RESEARCH
3.1. Literature review (max 1000 to 1500 words)
Explain specific gaps in existing literature that your research aims to fill. You might want to explain
whether or not this question has been addressed before in this context (including key references),
and if so, what you wish to achieve (in addition) by examining the question again?
CGE models have been used extensively in Bolivia to address different topics. Poverty is the topic
which received most attention in the past decades and most of the papers concentrated in pro-
poor growth. Thiele and Wiebelt (2003) investigated the economic and social development for
9
the years 1985 to 1999, by using a social accounting matrix for the year 1997 built by Thiele and
Piazolo (2003). They simulated the continuing of macroeconomic reforms, a negative external
shock (El Niño) and policies that targeted certain population groups. Lay, et.al. (2004) analyzed
how external shocks influenced the goal of pro-poor growth, by using a recursive-dynamic
model also with the SAM for 1997. Wiebelt (2004) published a technical description of a recursive
dynamic CGE model for Poverty Impact Analysis (GEM-PIA). The model combined the behavior
of a CGE model with the financial sector and included Bolivia as an example. In two scenarios a
permanent rise of gas exports and a temporary devaluation were simulated. Nunnenkamp, et.al.
(2006) analyzed the distributional effects of foreign direct investments (FDI) among poor
households in Bolivia. The model considered the urban and rural areas, informal activities and
various segments of the urban workforce. It was found that FDI enhance economic growth and
reduces poverty, however, income distribution becomes more unequal. Klasen (2006) found,
that there are only limited options for pro-poor macroeconomic policy, due to the low domestic
saving rate and the high dollarization of the Bolivian economy. Villegas et.al. (2010) analyzed the
relation between public investments and poverty, by incorporating micro-simulations to their
CGE analysis. They found that the reduction in poverty is positive for higher public investments,
although the positive effects are not very significant. Same results were obtained by Aliaga and
Villegas (2011) who used the same 2007 household survey. Zavaleta (2010) analyzed also the
impact of economic policies on poverty and inequality by using an integrated macro-micro
simulation model.
Another topic that appears recurrently in the Bolivian literature on CGE modeling is natural
resources, in particular gas and the impact of gas exports. Andersen and Faris (2002)
investigated the changes in the Bolivian economy, due to the sizable increase of natural gas
exports to Brazil. The authors used the SAM for 1997 and focused on the distributional effects.
They found that the increase in exports have the potential to increase wages for all groups,
which could foster poverty alleviation. They recommended building a stabilization fund as a
fiscal policy instrument, something that was discussed in an earlier paper from Andersen and Faris
(2002) under the following idea: Governments’ income is very volatile, because a high share of
the Bolivian fiscal revenues depends on the oil prices, which are indeed volatile. For poverty
reduction strategies, these volatile incomes are unpleasant. Therefore, the authors suggest
designing a stabilization fund to chop the volatility of prices. As the developments in the gas
sector had unexpected changes, Andersen, et. al. (2006) published an update of the paper
from Andersen and Faris (2002). They concluded that natural gas boom was very good from the
viewpoint of the government, but not so good from the viewpoint of the poor, when considering
high oil prices and the high level of royalties. Because of the adverse effects which are likely to
happen for the poorest groups of Bolivia, Andersen (2006) published a paper on how to best use
the increased natural gas revenues. In a CGE model, alternative uses of the gas revenues were
analyzed. The following two possibilities were discussed: (i) to redistribute a share directly to the
population and (ii) to help the workers moving from the informal to the formal sector which are
benefiting from the natural gas economy. Lay et.al. (2008) also investigated the question if the
gas boom of the 1990s had bypassed large parts of the poor population, and hence lead to
increasing inequalities. The following transmission channels were examined: initial FDI in the
sector, export earnings and public transfer programs. They found, that the positive and negative
inequality effects tend to offset each other. The poverty is reduced, while the informality
increased. The CGE analysis was based on a SAM for 2001. A recent paper from Barja et.al.
(2015) used a SAM for the year 2006 to simulate shocks and study the characteristics of sector
Dutch disease effects among other macroeconomic effects. Zavaleta (2010) analyzed also the
effects of an increase of natural resources on poverty and inequality, and concluded that the
boom in natural gas could generate a Dutch disease. While wages for skilled labor increase from
an appreciation of the real exchange rate, wages for unskilled labor decrease, thus inequality
10
increases. Output of other sectors decreases, because production factors migrate to the gas
sector.
As the Bolivian economy is dependent on exports, the influence of external shocks is another
important topic that has been analyzed. Jemio (2001) employed a CGE simulation to investigate
different external shocks and policy interventions on the Bolivian economy. Jemio and Wiebelt
(2002) used a recursive-dynamic CGE model with real and financial sectors to assess the effects
of external shocks and policies. The model included the characteristics of the Bolivian economy
e.g. high degree of dollarization and strong dependence of foreign trade on commodity
exports. Aliaga et. al. (2007) also used a recursive dynamic CGE model, based on the SAM for
1997, to simulate external effects in the terms of trade, the exchange rate, the foreign exchange
policy and fiscal policy. Aliaga et.al. (2009) used a CGE analysis to simulate different scenarios
which included a reduction of export prices, declining FDI, a fall in remittances and a shortening
in government expenditure. Cicowiez and Machicado (2010) used the PEP 1.1 model to analyze
the impact of the global financial crisis of 2008 in the Bolivian economy. They analyzed the
reductions in (i) the world export prices of mining and agriculture, (ii) the world demand of textiles
and (iii) transfers to households from abroad. The simulation was based on a SAM for 2006.
Canavire and Mariscal (2010) also used a CGE model to simulate external shocks and policies.
Their simulations included: fall of prices in important export commodities, fall in remittances,
capital outflows, food subsidies and tariff reductions.
At some point, the adoption of free trade agreements was discussed in Bolivia; therefore some
papers addressed this theme and analyzed its distributional effects. For example, Tellería et.al.
(2008) combined a CGE model and a micro simulation approach to analyze the distribution
effects of a potential free trade agreement between Bolivia and the United States. The authors
concentrated on the benefits for the households. Although in general households could benefit
from a free trade agreement, a full liberalization would not be the best option for the poor
households; hence, some protection measures in specific sectors would help to spread the
additional wealth more evenly. An analogous analysis was done by Telleria, et.al. (2011) for
joining the Andean Community - European Union (AC-EU) agreement, after the ending of the
preferences under the Andean Trade Promotion and Drug Eradication Act (ATPDEA). It was
found, that Bolivia would benefit from such agreement. However, there was the need for further
measures, as the higher-income groups will benefit the most. Therefore, without any measures,
the prevailing inequality in income distribution will not be reduced. Tellería and Ludeña (2015)
analyzed the impact of a free trade agreement between Bolivia and the European Union and
found positive effects for the Bolivian economy.
Other topics analyzed also with CGE models include fiscal policy, climate change, and foreign
aid. Requena et. al. (1989) used a CGE analysis to investigate which are the determinants of the
public sector deficit in the period 1980 - 1987. Gibson and Godoy (1993) studied the effects of
alternatives to coca production. As coca benefits the Bolivian economy in some ways there is
little political incentive to eradicate the coca production. Therefore the analysis tried to find an
appropriate agricultural substitute. De Franco and Godoy (1992) analyzed the economic
consequences of cocaine production in Bolivia from a historical perspective.
Aliaga and Aguilar (2009) analyzed the impact of the climate change on the agricultural sector,
with and without mitigation measures, by using a CGE model with a SAM for 2004. A recent
paper from Chisari and Miller (2016) also investigate the effects of climate change in a context of
migration. In their simulation, they used a CGE version of the Harris-Todaro model to simulate the
displacement of population from Bolivia and Paraguay to Argentina.
Andersen and Evia (2003) used a CGE analysis to investigate the macroeconomic and
distributional impact of foreign aid (additional donations of $258 million per year for four years).
Of course, the effects are dependent, on how the money is used. It was found, that GDP growth
enhanced by 1 percentage point per year. However, after four years, the growth rates return to
11
their normal levels. Further, foreign aid only has little permanent influence on poverty and
incomes at the macro level. Morales et. al. (2016) analyzed the impact of the wage policy on
informality and growth by employing a CGE model with a SAM for 2012.
The closest CGE model to our proposal is the one of Schweickert, et. al. (2005), who employ a
recursive-dynamic real-financial CGE model for Bolivia to analyze the macroeconomic,
distributional and poverty impacts of devaluation. But we want to go further by incorporating an
endogenous devaluation mechanism in the line of the Balance-of-Payment and currency crisis
literature. The foundation of currency crises literature begins with Krugman (1979) and Flood and
Garber (1984), where persistent fiscal deficits or raising debt levels with a constant decrease of
reserves (unsustainable fiscal policy) are related with a foreseeable depreciation of a currency in
part of investors. This logic leads to a concomitant attack of investors where they seek to acquire
government’s reserves of foreign money before they become depleted. Since then, several
approaches to this topic have been developed, which can also be grouped in three
generations of models as it is explained in Jeanne (2000), Burnside, et al. (2016), Razin and
Goldstein (2012) and Agenor and Montiel (2015).
After first generation models, where rational expectations describe the speculative attacks
because of an anticipated depreciation, second generation models attempt to incorporate
more explanations of speculative attacks with an absence of signs of market malfunctioning.
Moreover, policy making decisions (alongside with possible multiple equilibria) are also present in
these models. As it is explained by Jeanne (2000), whether to defend or not the fixed exchange
rate could depend on minimizing a loss function. Obstfeld (1996), for instance, incorporates
trade-offs between unemployment and inflation within his analysis of the loss function.
Finally, third generation models attempt to relate currency crisis with banking crisis because
unsustainable fiscal policy may be absent at the moments of crises, as in the case of Asia at the
end of the last century. These and other issues, as addressed in Chang and Velasco (1998), give
an impulse to the development of a new set of models that are more related with financial
crises. For example, Chang and Velasco (2001) analyze the consequences of bank runs and
decreases in external borrowing with an illiquid banking system and Flood and Marion (2004)
propose a joint study of these crises without assuming a perfect correlation nor isolation between
them. Furthermore, the topic of dollarization (as well as exchange rate risk) is more related with
problems in the solvency of the banking system, which could be later associated with currency
crises (see Burnside, et al., 2003, Calvo, et al., 2004 and Cespedes, et al., 2004).
3.2. Methodology (max 1200 to 1600 words)
Presentation of the specific techniques that will be used to answer the research questions and
how exactly they will be used to do so.
- Explain whether you will use a particular technique normally used in other contexts or
whether you intend to extend a particular method and how you will do so.
- Explain if these methods have already been used in the context you are interested in
(including key references).
- For PMMA (microeconomic analysis) proposals only: In case the proposed
methodology aims to empirically estimate a causal relationship, explain potential
sources of endogeneity in the context of your research, and how the proposed
technique(s) would allow the identification of the relevant parameters.
As we saw in the literature review, there are several papers that employed CGE models to
address the topics that we aim to analyze. For example, Klasen (2006) and Jemio and Wiebelt
12
(2002) incorporate the issue of dollarization, Aliaga (2007) and Schweickert, et.al (2005) include
the issue of exchange rate devaluation, Barja, et.al (2015) analyze the dutch disease in the
Bolivian economy and so on. Therefore, a first step will be to review these works and analyze the
ways in which the Bolivian bi-monetary system, the tradable and non-tradable sectors and the
exchange rate policy, among other characteristics, have been modeled before.
But the model we propose and the novelty we want to incorporate is an endogenous
devaluation mechanism. In most CGE models, devaluation is modeled as an exogenous shock
where the nominal exchange rate is simply changed exogenously. In this case we want to
modify this exogenous mechanism, by modeling the interaction of the Non-Financial Public
Sector, the Central Bank, the banking system, the public and the rest of the world, regarding the
supply and demand of dollars. This endogenous mechanism of devaluation will have particular
characteristics that arise only in partially dollarized economies like the Bolivian economy and we
want to highlight them.
In fact, this is the actual situation of the Bolivian economy. The government does not want to
relax the nominal exchange rate because it believes that the costs would outweigh the benefits.
Among these costs is the increase in dollarization, the fall in income from seigniorage and
inflation. The benefits include a depreciated real exchange rate (RER) that could benefit the
export sectors, but as expressed before this is just a hypothesis that needs to be tested also.
To incorporate the endogenous mechanism of devaluation in the CGE model, we will follow
Krugman (1979) model in which a Balance-of-Payments problem, defined as a situation in which
a country is gradually loosing reserves, becomes a Balance-of-Payments crisis, in which
speculators attack the currency. According to Burnside, et.al. (2007) this model could also be
classified as a first-generation model of currency crisis, because the collapse of the fixed
exchange rate regime is caused by unsustainable fiscal deficit. But, as we are proposing also an
interaction with the financial system, the model could also be classified as a third-generation
model of currency crisis where a bank run in the style of Diamond and Dybvig (1983) is possible.
Schematically, the endogenous devaluation mechanism to be introduced in the CGE model will
follow:
1. Start from a baseline scenario where the nominal exchange rate is fixed, the real
exchange rate is overvalued and the Central Bank has a given level of international
reserves.
2. The economy has twin deficits, i.e. it has a fiscal and a trade deficit.
3. In that situation, the economy is not able to generate foreign exchange, thus
international reserves are falling. As Bolivia is a small country producing a single composite
tradable good (gas and minerals), the price of the good will be set on world markets, so
that Purchasing Power Parity will hold
ttt ePP * (1)
where Pt is the domestic price level, Pt* is the price level of the foreign country to which the
domestic currency is pegged, and et is the nominal exchange rate. The second key equation will
be the demand for money based on the quantity theory:
ttt yPvM (2)
where v is the velocity of money, assumed constant, and yt is real GDP, determined in the real
sector of the economy. To simplify, it can be assumed that the relevant monetary aggregate is
the monetary base, thus from the balance sheet of the Central Bank we have
ttt DCRM (3)
where Rt is the stock of international reserves and DCt is the stock of domestic credit.
As the nominal exchange rate is fixed, the first equation determines the domestic price level.
Then the second equation determines the nominal quantity of money. And the third equation
shows that in a situation of fiscal deficit where there is a pressure to increase the domestic credit,
13
international reserves will decrease. This fall will reach a threshold where a devaluation and
inflation will be inevitable.
4. Since the economy has a bi-monetary system, deposits in the banking system are in local
currency and in dollars. Dollar deposits are backed by the international reserves held by
the Central Bank. Krugman´s model also displays a simple way to present this, although for
investors, but it can easily be applied for depositors. The total real wealth of domestic
residents is the sum of the real value of their holdings of domestic money M and their
holdings of foreign money F:
FP
MW (4)
By assuming that the desired holdings of domestic money are proportional to wealth, there is a
condition for portfolio equilibrium
WLP
M )( (5)
where is the expected rate of inflation, and by equation (1) the expected rate of depreciation
of the currency. The determination of will be crucial, in particular in a dynamic context.
5. As international reserves fall, people begin to perceive that their dollar deposits do not
have sufficient backing, so they begin to demand more dollars from the banking system
(withdraw their deposits in dollars), or begin to change their deposits in local currency into
deposits in dollars, or just demand dollars to put under the mattress.
As long as the government has reserves left, the domestic money supply will be determined by
equation (5). But when reserves are reaching an exhausted point, portfolio balance begins to
determine the price level instead of the money supply. The price level will immediately begin
rising, for either or both of two reasons. Domestic residents may still be dissaving, and will try to
reduce their holdings of domestic money; and if government is running a deficit, as it is the
Bolivian case, the nominal money supply must rise (using seigniorage to finance the deficit).
Machicado (2008), showed in a theoretical model for a partially dollarized economy, how banks
endogeneize their decision to maintain a certain amount of dollars, or demand dollars for
precautionary reasons, facing uncertainty of a high demand for liquidity in dollars by the public.
6. This further accelerates the fall in reserves and thus the economy reaches a point where
the government has no other option to devalue.
In order to implement this mechanism it is necessary to carefully model the monetary system that
includes both the Central Bank that controls the international reserves and the commercial
banks that receive deposits in local currency and dollars. Banks also give credit and this could be
a potential explanation for the change in the composition of sectors, seen in the last years in
Bolivia. Service sectors have increased a lot their participation in GDP.
An interesting feature of Krugman´s model is that it allows learning something about the factors
determining the timing of a crisis. Intuitively, the length of time for which a government can peg
the exchange rate is an increasing function of its initial reserves. Therefore, the CGE model will be
used to calculate how long the Bolivian economy can withstand a fixed exchange rate regime.
As the fall in reserves responds to the financing needs of the government, different scenarios
could be tested where the government has the option to contract external debt, to increase
taxes, or commodity prices of the main exports rise. Then we will propose different scenarios in
which the fixed exchange rate regime could be abandoned, i.e. abruptly or gradually, before
reserves exhaust. And logically, we will analyze again the impact of this policy change on
growth, sectoral composition, employment and poverty.
The CGE model has to be a dynamic recursive model for a country that could include real and
nominal or monetary sectors. The real part will be modified to reflect better conditions of the
Bolivian economy. For instance, to reflect properly the labor market it is important to understand
the mobility of workers between informality, formality and unemployment, as well as the
14
formation of labor income in these contexts (Herrera, 2017, and Muriel and Herrera, 2017).
Therefore, the equations for the labor market in the CGE model will reflect the imperfections of
the labor market, which are particularly important to understand the employment movement
between economic sectors. This new modeling of the imperfections of the Bolivian labor market,
will be based on the partial equilibrium analysis already made by Muriel and Machicado (2013)
and Muriel and Herrera (2017) and other approaches used in the literature of CGE modeling.
Certainly most of the work has to be done in the monetary-financial part to incorporate the
characteristics of a bi-monetary economy. The CGE model will be combined with micro
simulations to analyze the impact on employment and poverty (microeconomic effects).
3.3. Data requirements and sources (max 400 to 700 words)
This is a critical part of the proposal. The key issue is to explain the reason for the choice of your
particular databases. You must establish that they are ideal for the question you wish to address and
that you have or will have access to these data before your project begins. Please consult the
“Guide for designing a research project proposals” for more detail.
The CGE model to be used in this research project will be based on a very detailed Social
Accounting Matrix for the Bolivian economy. In 2014, INESAD, together with the International
Food Policy Research Institute (IFPRI), participated in a research project aimed at building a 2012
SAM for the Bolivian economy, for the study of Agriculture and Income Distribution Issues
(http://www.ifpri.org/publication/bolivia-social-accounting-matrix-2012). The 2012 SAM includes
considerable disaggregation of economic activities, labor, and households by ecological zones,
gender, ethnicity, geographic location (urban-rural), and income quintiles. In the construction of
the 2012 Bolivian SAM, different data sources were used, including the 2012 National Census of
Population and Housing, household surveys, national accounts, I-O table for 2012, balance of
payments, various fiscal balances, and other more detail information on sectoral activities.
In addition, there is at INESAD a working CGE model, built by Luis Carlos Jemio. The model is
based on the 2012 SAM, which could be adapted for the analysis of the research topics
proposed in this research project. The Bolivian CGE model includes the disaggregation of
activities, factors and household categories included in the 2012 SAM. The CGE model is
recursive-dynamic, and thus, it allows for evaluating the short and long-term effects of shocks
and policies.
Therefore, as we are much familiarized with this 2012 SAM, this is going to be the starting point to
build an updated 2016 SAM. Almost all the information that is needed to update this SAM is
available in the National Accounts, fiscal accounts and balance of payment accounts. Most of
the data is now available and compiled by the Ministry of Economy and Public Finances.
Carlos Gustavo Machicado has worked also with the PEP 1.1 standard model and a Bolivian SAM
for 2006. This model has been modified to incorporate characteristics of the Bolivian economy. In
particular the equations for international trade, government consumption, private and public
investment were modified. A wage curve was also introduced to model endogenous
employment, as the PEP 1.1 assumes full employment. The PEP 1.1 model is static, but there is the
PEP 1-t model that is recursive dynamic and could be used in this research project. We will
evaluate that.
As mentioned before the paper of Schweickert, et. al. (2005) is the closest to our idea, because it
employs a real-financial CGE model for a dollarized economy like Bolivia. In their model they
distinguish between commercial banks and the Central Bank as financial institutions. Beside the
financial assets and liabilities accumulated in the domestic banking system (cash holdings,
deposits, and loans), private and public enterprises have the possibility to accumulate a
15
considerable amount of FDI, the government can acquire external debt, and some agents
(employees, employers, public and private enterprises) can hold limited amounts of shares in
domestic enterprises. Given that the aim is to analyze the impact of devaluation in a dollarized
economy, the net dollar asset position of economic agents (households, workers, government,
financial institutions, etc.) is of particular importance. We will calibrate the model to capture
which agents are the main creditors and debtors in local and foreign currency and how their
transactions relate. For this task we will employ the financial accounts from the Monetary System
that includes the banking system accounts and the Central Bank accounts
Social Accounting Matrices (SAM) that include both the real and the financial components of
the economy are relatively new and developed to perform a complete analysis of the
economy. They are called Financial Social Accounting Matrix (FSAM) and have been built for
different countries (see Emini and Fofack, 2004 for Cameroon; Hernández, 2008 for Colombia;
Waheed, 2008 for Pakistan; and Li, 2008 for China, among others). Wong et.al. (2009) discuss the
outlines and constructions framework for building an aggregate FSAM. The understanding of the
structure of an FSAM can be a database for a financial Computed General Equilibrium (CGE)
model and can be used to analyze the behaviour of national’s public debt. The concepts, the
construction and the theoretical framework that they present will be a starting point for building
a Bolivian FSAM. But certainly this FSAM will include the currencies, deposits, bonds, and loans
held by household, enterprises, commercial banks, the Central Bank, government, and the rest of
the world.
The financial SAM scheme of Hernández (2008) seems to be appropriate to have a first view of
the macro-financial relationships of the Bolivian economy. Certainly, we need to investigate
more, especially if we want to introduce the possibility that banks have liabilities and assets in
foreign currency (dollars). In addition, as we want to model informal producers, we need to
introduce some constraints in their access to credit.
Finally, in order to carryout microeconomic analysis through micro-simulation techniques (MSM),
a complete set of databases is available, including updated household surveys, population and
agriculture census for 2012. In this regard, we have to mention that INESAD members have
extensive experience working with these types of databases. For instance, in the EMINPRO-
INESAD Network it is possible to find more than 200 labor indicators from 1999 and 2014, which
were processed using household surveys, census and others (see www.eminpro-inesad.com).
In the appendix, we present the macro SAM with its real and financial structure that incorporates
the insights from other SAM’s which are also public available and that are going to be our
starting point to build a 2016 FSAM (see Thiele and Piazolo, 2003 and Canavire and Mariscal,
2010).
SECTION IV – POLICY ENGAGEMENT
4.1. Policy relevance
4.1.1. Describe policy context and needs
Describe the specific policy issues or needs that your research aims to address; how your potential
outcomes and findings may be used in policy making? Please be as precise as possible, indicating
specific current or prospective policies and the specific contributions your research would make.
16
Also, justify timing of your research in terms of policy and socioeconomic needs and context – e.g.
reference to existing, planned or potential policies at the national, regional or local level; specific
political context; international examples of similar policy problems or solutions, etc.
The proposed investigation is very relevant to the current situation that the Bolivian economy is
experiencing, for several reasons:
First, the fixed nominal exchange rate policy seems unsustainable in the current situation,
characterized by a growing current account deficit and declining international reserves.
Remember that international reserves are key to maintaining a fixed nominal exchange rate,
because with them the Central Bank can intervene in the dollar market, provided there is a
demand that presses up the price of the dollar.
Second, the fixed nominal exchange rate policy has been determinant in de-dollarizing the
economy or “bolivianizing” it, and this has allowed the Central Bank to recover many important
monetary policy instruments to influence economic activity. In fact the financial system has been
revitalized through deposits and credits in local currency, which in turn has boosted domestic
demand and this has boosted also economic growth.
Third, a key element explaining economic growth in recent years is macroeconomic stability
reflected in a controlled inflation rate of less than 5%. This is precisely because inflation is
anchored to the fixed exchange rate and any upward pressure on prices due to the scarcity of
some commodities is easily controlled by imports. And as the real exchange rate (RER) is
overvalued, imported goods are cheaper.
Fourth, there is some evidence that bolivianization has allowed the government to have at its
disposal the seigniorage as a source of financing for public expenditure, investment and public
enterprises. Recently many public enterprises benefited from credits of the Central Bank.
Therefore, in the current conditions where there is also a growing fiscal deficit, losing that source
of financing could be risky.
For all these reasons, an important debate of the current economic policy in Bolivia is precisely
whether or not the nominal exchange rate should be relaxed, that is, to devalue it, as many
neighboring countries did. In fact, the devaluation of many countries that are Bolivian trading
partners has accentuated the problem of overvaluation of the real exchange rate. There is some
pressure from the export sectors to change the exchange rate policy.
As far as we are aware, neither the Central Bank nor UDAPE nor the Ministry of Economy and
Public Finance have an updated CGE model that could be used to test different
macroeconomic scenarios in the face of a change in the exchange rate policy. Therefore,
having a CGE model, that allows performing this analysis and quantifying the effects on the
growth of the sectors, the labor market and the financial system, will be crucial in guiding public
policy in Bolivia.
Moreover, as the model proposed seeks to endogeneize the process of devaluation of the local
currency, it also allows quantifying the extent to which it is possible to withstand this policy of
fixed exchange rate and if a gradual adjustment could be incorporated in order to prevent
dramatic consequences for the economy.
4.1.2. Consultations to date
List the consultations that you have had with potential research users (e.g. policy makers or
stakeholders) and that have helped define your research question, and/or informed you of the
specific policy context described above.
For each institution consulted, please:
17
- List key (individual) representatives who participated in the consultation
- Describe the main outcome(s) of the consultation (feedback, inputs, etc.)
Name of institution/organization #1 EpC Bolivian Catholic University
List the key representative involved in consultations (names and titles/positions)
- Juan Antonio Morales (former President, Central Bank of Bolivia)
Describe main outcomes of consultation – feedback or inputs received
The exchange rate is a key variable in a small open economy and tracking its effects throughout
the economy with a Computable General Equilibrium Mode is very appealing. Bolivia has been
following a de facto fixed exchange rate policy since November 2011. During the commodity
boom of 2004-2013 the government of Bolivia preferred to accumulate international reserves
rather than to revalue the currency. After the price crash of commodities that started in mid-
2014, the government has kept the parity to the dollar, notwithstanding the loss of about 40% of
exports between then and 2016, and the fact that the main trade partners in the region have
depreciated their currencies to cope with the crisis. These exogenous shocks have overvalued
the domestic currency. Computations with different methodologies, some of them undertaken
by the Central Bank of Bolivia, and by independent researchers suggest an overvaluation
between 20% and 40%. The policy implications of this proposed study are very clear.
Name of institution/organization #2 KAS Konrad Adenauer
List the key representative involved in consultations (names and titles/positions)
- Iván Velasquez (Bolivian coordinator)
Describe main outcomes of consultation – feedback or inputs received
In 1985 a crawling peg regime was implemented to make the exchange rate competitive with
respect to a basket of currencies and favoring the export sector in generating value added. In
2011, the statist model established a fixed exchange rate that brought mixed results for the
Bolivian economy. First a fixed exchange rate facilitated monetary policy and did not demand
fundamental macroeconomic balances; second, it penalized competitiveness of the export
sector and favored the increase of imports to the economy. After several years, evaluating this
results and analyzing them from a general equilibrium perspective is highly relevant since in an
ex post boom scenario it is important to rethink public policy measures in the exchange rate
field. The model will serve to identify the transmission mechanisms of monetary policy; therefore
this research proposal is fully justified.
Name of institution/organization #3 IADB – Bolivian Office
List the key representative involved in consultations (names and titles/positions)
- Javier Beverinotti (Country economist)
Describe main outcomes of consultation – feedback or inputs received
The nominal exchange rate has not changed since November 2011, which has allowed the
country to progress in the de-dollarization of the economy, to control the imported inflation, to
anchor expectations and to have greater action with the monetary policy. However, it has also
led to a real exchange rate appreciation which, sooner or later, will lead to a currency
realignment. In this sense, the proposal to develop a computable general equilibrium model
becomes relevant because it will allow the identification of the impact of the exchange rate
alignment on important variables such as saving and credit, foreign trade, growth, wages and
prices.
4.2. Engagement strategy
18
4.2.1. Identify target audiences
Identify potential users of your research findings – institutions/organizations that may use your findings
to inform, advise or influence policy or other relevant decision-making processes. Please explain why
you believe these institutions/organizations are the most important potential users of your research,
to inform relevant development/policy decisions.
Name of institution/organization #1 Central Bank of Bolivia (BCB)
Explain relevance of this user to inform key decisions
The exchange rate policy is part of the monetary policy. Therefore the decision to relax the
exchange rate policy depends mainly on the Central Bank. Its president and directors will be
glad to see numbers about the impact of this potential change in its policy, and suggestions
about what could be the optimal way to implement it.
Name of institution/organization #2 Unit of Economic and Social Policy Analysis
(UDAPE)
Explain relevance of this user to inform key decisions
This Unit dependent of the Ministry of Development Planning has experience on CGE
modeling and they have used different CGE models to inform and advice public policy in
the past. They would be glad to learn from the results of this analysis and also the novelties
introduced could inspire the update of their models for future research. They also have
experts on SAM, so the interaction with them will be important.
Name of institution/organization #3 National Institute of Statistics (INE)
Explain relevance of this user to inform key decisions
The data used to build the SAM will come mainly from this institution, therefore this research
will guide their technicians which data has to be updated in order to have the most recently
results. The household survey´s used in the micro simulations come also from INE, and
according to their representativeness we will use one or more surveys.
4.2.2. Define outreach and engagement strategy
How, from proposal design to the dissemination of your research results, will you consult and
communicate with these users to both gather their inputs and keep them informed of your project, in
order to increase chances of research uptake?
We plan to organize an advisory group made up of experts on macroeconomics and national
accounts from the Bolivian Central Bank, UDAPE, INE, the Ministry of Economy and Public Finance
and the Ministry of Development Planning. This advisory group will meet once a month to monitor
the advance of the project. As they are very busy people, in each meeting a presentation will
be done in order to receive their feedback. If needed, specific meetings with one or some of the
experts will be arranged to discuss a specific topic. For example, the correct structure of the SAM
will be discussed with the expert from UDAPE, who has ample experience on input-output matrix.
We will organize workshops to have internal discussions with invited people, in particular
19
academics from other research institutions or universities.
4.2.3. Outline your preliminary dissemination strategy
Outline your preliminary dissemination strategy (channels, tools, events, audiences, etc.).
Note that PEP expects grantees to disseminate information about their research work and
(expected) outcomes throughout the project cycle, and not only after publication.
INESAD foundation is the leading research institution in Bolivia with the mission to impact in public
policy through our research. Therefore INESAD takes part in many networks through which we
disseminate our research. As every year we will organize an economic symposium where we will
invite policymakers, academics, students, international organizations´ representatives, etc. to
present the results of the research. Our researcher will take part on national and international
seminars and conferences, like the Bolivian Conference on Development Economics or the
LACEA meeting, where the paper will be submitted. Recently we have started using the social
networks like Facebook and Twitter to discuss actual economic issues. We can present the results
through info graphics to motivate some discussion. We plan to organize also presentations for the
main authorities of the institutions involved in the advisory group.
SECTION V – OTHER CONSIDERATIONS
5.1. Describe any ethical, social, gender or environmental issues or risks that should
be noted in relation to your proposed research project.
There is no ethical, social, gender or environmental issues or risks related to this research project.
Bolivia is a democratic country, so everybody is free to express his opinion and to develop his
ideas in a scientific way, as this research is going to be.
5.2. References and plagiarism:
Applicants should be very careful to avoid any appearance of plagiarism. Any text of five or more
consecutive words that is borrowed from another source should be carefully contained between
quotation marks with a reference to the source (including page number) immediately following
the quotation. It is essential that we be able to distinguish what you have written yourself from
what you have borrowed from elsewhere.
Note also that copying large extracts (such as several paragraphs) from other texts is not a good
practice, and is usually unacceptable. For a fuller description of plagiarism, please refer, for
example, to the following website:
http://writing.yalecollege.yale.edu/advice-students/using-sources/understanding-and-
avoiding-plagiarism
PEP will be using a software program to detect cases of plagiarism.
20
Agénor, P. R., & Montiel, P. J. (2015). Exchange-Rate Crises and Sudden Stops. In: Development
macroeconomics. Princeton University Press
Alarcón, J., Van Heemst, J., & Jong, N. D. (2000). Extending the SAM with social and environmental
indicators: An application to Bolivia. Economic Systems Research, 12(4), 473-496.
Aliaga, J., & Villegas Quino, H. (2011). Poverty, Indigence and Public Investment in Bolivia: A
Simulation Analysis (No. 5/2011).
Aliaga, J., & Aguilar, T. (2009). The Climate Change Effects on the Agricultural Sector of Bolivia (No.
5/2009).
Aliaga, J., Aguilar, T., & Tellez, S. (2009). Bolivia en el Contexto de la Crisis Económica Internacional
(No. 4/2009).
Aliaga, J., Bielsa, F. J. T., Argudo, R. R., & Chóliz, J. S. (2007). Shocks externos y escenarios de
política macroeconómica en Bolivia. In Anales de economía aplicada 2007 (pp. 87-111).
Asociación Española de Economía Aplicada, ASEPELT.
Andersen, L. E. (2006). How Best to Use the Extraordinary Hydrocarbon Revenues in Bolivia: Results
from a Computable General Equilibrium Model (No. 14/2006). Institute for Advanced
Development Studies.
Andersen, L. E., & Evia, J. L. (2003). The effectiveness of foreign aid in Bolivia: Final report (No.
10/03). Documento de Trabajo, Instituto de Investigaciones Socio-Económicas, Universidad
Católica Boliviana.
Andersen, L. E., & Faris, R. (2001). Reducing volatility due to Natural Gas exports: Is the answer a
Stabilization Fund?. Documento de Trabajo, (11).
Andersen, L. E., & Faris, R. (2002). Natural gas and income distribution in Bolivia (Vol. 1). Instituto de
Investigaciones Socio Económicas, Universidad Católica Boliviana.
Andersen, L. E., & Faris, R. (2004). Natural Gas and Inequality in Bolivia. Revista Latinoamericana de
Desarrollo Económico, (2), 57-90.
Andersen, L. E., Caro, J., Faris, R., & Medinaceli, M. (2006). Natural Gas and Inequality in Bolivia
after Nationalization (No. 05/2006). Institute for Advanced Development Studies.
Barja, G., Fernández Tellería, B. X., & Zavaleta Castellón, D. (2015). Diminishing Commodity Prices
and Capital Flight in a Dutch Disease and Resource Curse Environment: The Case of Bolivia.
Burnside, C., Eichenbaum, M., & Rebelo, S. (2004). Government guarantees and self-fulfilling
speculative attacks. Journal of Economic Theory, 119(1), 31-63.
Burnside, C., M. Eichenbaum & S. Rebelo. (2007). Currency Crisis Models. The New Palgrave: A
Dictionary of Economics, 2nd Edition.
Burnside, C., Eichenbaum, M., & Rebelo, S. (2016). Currency crises models. In Banking Crises (pp.
79-83). Palgrave Macmillan UK.
Calvo, G. A., Izquierdo, A., & Mejia, L. F. (2004). On the empirics of sudden stops: the relevance of
balance-sheet effects (No. w10520). National Bureau of Economic Research.
Canavire-Bacarreza, G., & Mariscal, M. (2010). Implicaciones de la política macroeconómica, los
choques externos y los sistemas de protección social en la pobreza, la desigualdad y la
vulnerabilidad en América Latina y el Caribe: Bolivia.
Céspedes, L. F., Chang, R., & Velasco, A. (2000). Balance sheets and exchange rate policy (No.
w7840). National bureau of economic research.
21
Chang, R., & Velasco, A. (1998). Financial crises in emerging markets (No. w6606). National Bureau
of Economic Research.
Chang, R., & Velasco, A. (2001). A model of financial crises in emerging markets. The Quarterly
Journal of Economics, 116(2), 489-517.
Chisari, O. O., & Miller, S. J. (2016). Climate Change and Migration: A CGE Analysis for Two Large
Urban Regions of Latin America (No. 93378). Inter-American Development Bank.
Cicowiez, M., & Machicado, C. G. (2011). Effects of the global financial and economic crisis on
the Bolivian economy: a CGE approach. Documentos de Trabajo del CEDLAS.
Cicowiez, M., B. Decaluwé, & M. Nabli. (2017). Optimal policy design: A CGE approach. PEP
working paper 2017-07.
De Franco, M., & Godoy, R. (1992). The economic consequences of cocaine production in Bolivia:
Historical, local, and macroeconomic perspectives. Journal of Latin American Studies, 24(02), 375-
406.
Diamond, D. W. & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of
Political Economy 91(June): 401-19.
Emini, C., & Fofack, H. (2004). A financial Social Accounting Matrix for the integrated
macroeconomic model for poverty analysis. World Bank Policy Research Working
Flood, R. P., & Garber, P. M. (1984). Collapsing exchange-rate regimes: some linear
examples. Journal of international Economics, 17(1-2), 1-13.
Flood, R. P., & Marion, N. P. (2004). A model of the joint distribution of banking and currency
crises. Journal of International Money and Finance, 23(6), 841-865.
Gibson, B., & Godoy, R. (1993). Alternatives to coca production in Bolivia: a computable general
equilibrium approach. World Development, 21(6), 1007-1021.
Hernández, G. (2008). Building a Financial Social Accounting Matrix for Colombia, 5731.
Herrera, A. (2017). Costos Laborales, Productividad y Sector Informal en un Modelo de Búsqueda y
Emparejamiento de Empleo para Bolivia. La Paz: Universidad Católica Boliviana.
Herrera, A. and Muriel, H. B. (2017). Labor Regulation and its Incidence on the Segmented
Informal/Formal Labora Marjet in Bolivia. Unpublished Manuscript, INESAD.
Jeanne, O. (2000). Currency crises: A perspective on recent theoretical developments (Vol. 20).
International Finance Section, Department of Economics, Princeton University.
Jemio, L. C. (2001). Simulation of External Shocks and Policies with the CGE Model for Bolivia. In
Debt, Crisis and Reform in Bolivia (pp. 311-369). Palgrave Macmillan UK.
Jemio, L. C., & Wiebelt, M. (2002). Macroeconomic impacts of external shocks and anti-shock
policies in Bolivia: a CGE analysis.
Jemio, L. C., Andersen, L. E., Breisinger, C., & Wiebelt, M. (2015). Regional development, income
distribution and gender in Bolivia: Insights from a 2012 Social Accounting Matrix (SAM) and
Multiplier Analysis (No. 01/2015). Institute for Advanced Development Studies.
Jimenez, W. (2007). Bolivia export promotion and its effects on growth, employment and poverty.
Who Gains from Free Trade: Export-Led Growth, Inequality and Poverty in Latin America, 150.
Kehoe, T., Machicado, C.G. & Perez-Cajias, J. (2015). The Fiscal and Monetary History of Bolivia,
1950-2015. Federal Reserve Bank of Minneapolis, mimeo
22
Klasen, S. (2006). Macroeconomic Policy and Pro-Poor Growth in Bolivia (No. 143). Ibero-America
Institute for Economic Research.
Krugman, P. (1979). A Model of Balance-of-Payment Crises. Journal of Money, Credit and Banking,
Vol. 11, 3, pp. 311-325.
Lay, J., Thiele, R., & Wiebelt, M. (2004). Pro-poor growth in Bolivia: accounting for external shocks
and policy reforms. Institut für Weltwirtschaft an der Universitat Kiel.
Lay, J., Thiele, R., & Wiebelt, M. (2005). External Shocks, Policy Reforms, and Pro-poor Growth in
Bolivia.
Lay, J., Thiele, R., & Wiebelt, M. (2008). Resource booms, inequality, and poverty: The case of gas
in Bolivia. Review of Income and Wealth, 54(3), 407-437.
Lay, J., Thiele, R., & Wiebelt, M. (2008). Shocks, Policy Reforms and ProPoor Growth in Bolivia: A
Simulation Analysis. Review of Development Economics, 12(1), 37-56.
Li, Jia (2008). The Financial Social Accounting Matrix for China, 2002, and Its Application to a
Multiplier Analysis. MPRA Paper.
Machicado, C.G. (2008). “Liquidity shocks and the dollarization of a banking system,” Journal of
Macroeconomics, Vol. 30(1), pp. 369-381 (March 2008).
Morales, R., Gomez, E., Cueto, M., Parisaca, E., & Illanes, J. (2016). The Impact of Wage Policy on
Informality and Growth.
Muriel, H. B. and H. Vera (2015). “Cycles versus Trends: The Effects of Economic Growth on
Earnings in Bolivia”, Development Research Working Paper No. 08/2015, INESAD.
Muriel, H. B. and Machicado, C.G. (2012) "Employment and Labor Regulation: Evidence from
Manufacturing Firms in Bolivia, 1988-2007," Development Research Working Paper No. 07/2012,
INESAD.
Muriel, H. B. and Ferrufino G. R. (2012) Regulación Laboral y Mercado de Trabajo: Principales
Desafíos para Bolivia. La Paz: Fundación Milenio, Embajada de Dinamarca.
Muriel, H. B. and Ferrufino G. R. (2012) Regulación Laboral y Mercado de Trabajo: Principales
Desafíos para Bolivia. La Paz: Fundación Milenio, Embajada de Dinamarca.
Muriel, H. B. and Ferrufino G. R. (2016). “Productividad y Política Salarial en Bolivia”. Unpublished
Manuscript. Confederación de Empresarios Privados de Bolivia.
Nunnenkamp, P., Schweickert, R., & Wiebelt, M. (2007). Distributional effects of FDI: how the
interaction of FDI and economic policy affects poor households in Bolivia. Development policy
review, 25(4), 429-450.
Obstfeld, M. (1996). Models of currency crises with self-fulfilling features. European economic
review, 40(3), 1037-1047.
Razin, A., & Goldstein, I. (2012). Review of Theories of Financial Crises. In 2012 Meeting Papers (No.
214). Society for Economic Dynamics.
Requena, J. C., Huarachi, G., Barja, G., & Cupe, E. (1989). Determinantes del déficit del sector
público en Bolivia (1980-1987).
Schweickert, R., Thiele, R., & Wiebelt, M. (2005). Macroeconomic and Distributional Effects of
Devaluation in a Dollarized Economy: A CGE Analysis for Bolivia (No. 120). Ibero-America Institute
for Economic Research.
23
Tellería, R., & Ludeña, C. (2015). Bolivia-European Union Trade Agreement: Is It an Option for the
Morales Administration?. Latin American Research Review, 50(3), 24-45.
Tellería, R., Ludeña, C. E., Shankar, B., & Bennett, R. (2007). Would a free trade agreement
between Bolivia and the United States prove beneficial to Bolivian households?. Forthcoming
Journal of International Agricultural Trade and Development.
Tellería, R., Ludeña, C., & Fernández, S. (2011). Policy alternatives and strategies for the
Plurinational State of Bolivia following the end of trade preferences.
Thiele, R., & Piazolo, D. (2002). Constructing a social accounting matrix with a distributional focus-
the case of Bolivia.
Thiele, R., & Piazolo, D. (2003). A Social Accounting Matrix for Bolivia Featuring Formal and Informal
Activities. Cuadernos de economía, 40(120), 285-318.
Thiele, R., & Wiebelt, M. (2003). Attacking poverty in Bolivia Past evidence and future prospects:
Lessons from a CGE analysis. Kiel Institute for World Economics, Duesternbrooker Weg, 120.
Thiele, R., & Wiebelt, M. Prospects for Pro-poor Growth in Bolivia: A CGE Analysis.
Villegas, H., Aguilar, T., Vargas, J., & Montaño, C. (2010). Inversión pública y pobreza en Bolivia.
Documento de trabajo, (08).
Waheed, Abdul; Ezaki, Mitsuo (2008). Aggregated and Compact Dissagregated Finacial Social
Accounting Matrices for Pakistan. Journal of Economic Cooperation, 29. 4
Wiebelt, M. (2004). GEM-PIA: A real-financial general equilibrium model for poverty impact
analysis technical description (No. 1230). Kiel Institute for the World Economy (IfW).
Wong, Kai Seng; M. Azali; Lee, Chin (2009). Financial Social Accounting Matrix: Concepts,
Constructions and Theoretical Framework. MPRA Paper
Zavaleta Castellon, D. H. (2010). Modeling the impact of economic policies on poverty and
inequality: the case of Bolivia (Doctoral dissertation, University of Geneva).
Zavaleta, D. (2010). Applying exact aggregation conditions to build an integrated macro-micro
simulation model for Bolivia." (Doctoral dissertation, PhD Dissertation, Universidad Católica
Boliviana.
Appendix
Structure of the real SAM
24
Structure of the financial SAM
1 2 3 4 5 6 7 8 9 10
Activities CommoditiesFactors of
productionHouseholds Enterprises Taxes Government
Saving-
investment
Rest of the
worldTotal
1 ActivitiesDomestic
supplyTotal revenue
2 CommoditiesIntermediate
demand
Household
consumption
Government
consumptionInvestment Exports Total demand
3Factors of
productionValue added Factor income
4 Households Wages Transfers Transfers TransfersHousehold
income
5 Enterprises Profits Transfers TransfersFirms'
incomes
6 Taxes
Import tariffs
& indirect
taxes
Direct taxes Direct taxes Tax payments
7 Government Tax receipts TransfersGovernment
revenues
8Saving-
investment
Household
savings
Firms´
savings
Government
savings
Foreign
savingsTotal savings
9Rest of the
worldImports Transfers Transfers Transfers
Payments to
RoW
10 Total Total cost Total supplyFactor
income
Households'
outlays
Firms'
outlaysTotal taxes
Government's
outlays
Total
investment
Payments
from RoW
1 2 3 4 5 6 7 8
Households Enterprises GovernmentDomestic
banks
Rest of the
world
Central
BankAccumulation Total
1 HouseholdsHousehold´s
deposits
Deposits
abroad
Demand for
money
Household's
portfolio
2 EnterprisesFirm´s
deposits
Private
investment
Firm's
expenditures
3 GovernmentGovernment´s
surplus or deficit
Government's
requirements
for loans
4Domestic
banks
Loans to
households
Loans to
firmsLoans to government
Domestic
reservesBank assets
5Rest of the
world
Foreign
loans to
firms
Foreign loans to
government
Foreign
loans to
domestic
banks
FDIForeign bank
assets
6 Central Bank Loans to public sectorRediscount
operations
International
reserves
Central bank
assets
7 AccumulationHousehold's
savings
Retained
profits Total savings
8 TotalHousehold's
savings
Firms'
fundingLoans to government
Bank
liabilities
Current
account
surplus/defic
it or foreign
banking
sector
liabilities
Central
Bank
liabilities
Total investment
