Puerto Rico and Economic Independence

Hindsight is the best economist. It always has the solution for everything. On the 1994 Tequila crisis that started in Mexico: “They should have either managed capital inflows through capital controls, or they should have let their exchange rate adapt to those inflows.” On Latin American hyperinflation: “Policy makers should have recognized that domestic debt issuances used to support ISI policies and an overvalued exchange rate led to unsustainable inflationary pressures once the exchange rate was devalued”. On the European debt crisis: “Governments should get their fiscal policies in sync…

The End of Foreign Capital Flows in Emerging Markets?

Emerging economies are entering into an economic and political paradigm where instating capital controls on foreign investment increasingly seems like a viable option. The economic aspect of this probable outcome relates to a trilemma found in international finance called the ‘Impossible Trinity’. Formally known as the “Mundell-Fleming model”, the impossible trinity frames a choice between three financial policy goals: 1) domestic monetary autonomy, 2) free-flowing foreign capital flows, and 3) a stable exchange rate. Only two of these three goals can be pursued at any given time. The third policy…

Sovereign Debt and the Euro-zone.

In the Spring of 2010, governments around Europe began announcing and preparing fiscal austerity measures to address budget and structural deficits. These plans for austerity measures owe their prompt formulation to the Greek debt crisis, and the threat it presented to the stability and viability of the Eurozone as an economic union. Greece itself announced austerity measures as a condition to receive a ‘bailout’ y the European Union and the IMF. The funds provided by the EU came primarily from France and Germany. However, as market and media attention underscored,…