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Extensions of ABCT: The Fed’s Impact on Latin America

April 11, 2013 in Economics

By John P. Cochran

Nicolás Cachanosky, who recently completed his PhD at Suffolk University under Ben Powell (now at Texas Tech running the new Free Market Institute), has been hired by Metro State. Nicolás fills the position I vacated when I completed retirement from Metro following the Spring 2012 semester. Nicolás has just posted a new and potentially very important working paper “U. S. Monetary Policy’s Impact on Latin America’s Structure of Production (1960-2010)” which extends ABCT and capital-based macroeconomics in the international arena, especially as it applies to the ‘periphery’.

The abstract:

I study the effects of U.S. monetary policy on Latin America’s structure of production prior to two recent economic crises. I find that changes in the Federal Funds rate produced uneven effects across economic sectors. Those industries that are more capital intensive and relative long-term projects are more sensitive to changes in the Federal Funds rate than projects that are less capital intensive and relative short-term in duration. Therefore, periods of loose monetary policy resulted in a misallocation of resources that has been costly to correct during the bust. This result finds a particular pattern of economic distortion during an unsustainable boom.

The work provides evidence which supports concerns about the effect of Fed policy on Latin America expressed by Mary Anastasia O’Grady earlier this year in the Wall Street Journal (See part II of Thoughts on Capital-Based Macroeconomics).

Cachanosky’s paper complements earlier work by Andreas Hoffman, “Zero Interest Rate Policy and the Unintended Consequences on Emerging Markets.

Currency wars and a race to the bottom by major central banks have major demonstrated negative unintended consequences around the world.

I look forward to all the great things Nicolás can achieve in Colorado especially as he has an opportunity to work with Alex Padilla who has already developed a very successful Exploring Economic Freedom.

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