‘Is your piggy bank too big?’: Rosero discusses economic fluctuation in Latin America

Luis Rosero, professor of accounting, economics and finance, spoke March 28 as part of the 2019 Lyceum Lecture series – an event that highlights sabbatical activities and faculty research.

Rosero discussed his research on international reserve accumulation in Latin America, a talk he titled, “Is your piggy bank too big?”

Linda Vaden-Goad, provost and vice president for academic affairs, said the event was designed to establish the ways in which faculty members “are always understanding their own field and how it advances. In part, they do that so they can bring their students forward,” or advance their students’ knowledge about the field in addition to their own.

Lina Rincón, professor of sociology and assistant director of CELTSS, said Rosero earned a B.A. in Economics from Wheaton College, a master’s and Ph. D. in Economics from the University of Massachusetts at Amherst, and has appeared in multiple research publications, such as the Journal of Economic Integration and the Journal of Global South Studies.

In his presentation, Rosero discussed the effectiveness of international reserve accumulation as a method for promoting macroeconomic stability and the implications of Latin American countries that have accumulated large sums of reserves.

Reserves are a supply of a commodity, not needed for immediate use but available. Reserves serve as “precautionary motives to unforeseen changes in the international trade and financial flow,” Rosero said.

He added, “The way that I got interested in this topic was basically based on two trends that I noticed. The first one is the unprecedented recreational international accumulation of reserves in emerging economies, primarily those in Latin America. The second one, the re-emergence of South-South cooperation.”

Rosero questioned throughout his research whether Latin American reserve accumulation is excessive and if there is a more effective way other than the accumulation of reserves.

The problem for Latin America is that foreign investors are unwilling to borrow emerging countries currency because of three consequences, said Rosero.

One of the consequences Rosero pointed out was the “exchange rates” between countries. A country that borrows currency other than their own, is not able to “borrow abroad, basically assuming risk for fluctuations in that exchange rate.”

The second was the Procyclical nature of loans. When a recession hits, “typically your currency will become weaker and it will be much more difficult to pay back,” he said.

The third consequence is “inflation pressure.”

“When a country with a weaker currency pays in a strong currency, the process spreads inflation.”

Pesos aren’t considered reserves because of the “original sin,” or how most countries are not able to borrow abroad in their domestic currency, said Rosero. This is due to past financial crises in Latin America, such as the 1980s Lost Decade, the 1994 Tequila Crisis, the 1998 Brazil’s Real Crisis, and the 2001 to 2002 Argentina Crisis.

Rosero gathered information from the seven largest Latin American economies from 1972 to 2014. The countries included Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.

Rosero found that countries with lower capital are just sitting on reserves for show. “Latin America had alone about 720 billion in reserves just sitting there. To put in perspective, that’s about 1.3 times the size of Massachusetts economy every year,” he said.

Rosero discussed the “impossible trinity,” or the “trilemma,” a concept that states that it is impossible for a country to have “exchange rate stability, monetary policy with their own needs and domestic goals, and freedom of international capital movements,” all at once.

Rosero said he found “reserves seem to give more policy space and improve the trilemma only under two conditions – its fixed exchange rate in Venezuela or due to very large relative levels of reserves in Peru.”

At the end of the presentation, Rosero suggested “access to large pool of reserves without the cost of holding individual reserves” and the “FLAR model,” the Latin American Reserve Fund designed to support trade within the region, as solutions to help improve Latin American economic standing.