Expropriation Dynamics

Many emerging market economies oscillate between periods of high and low growth (see Aguiar and Gopinath 2007). These changes in growth regimes generate business cycles that are markedly different from the ones observed in developed countries: consumption and investment are volatile relative to output, and net exports are strongly countercyclical. This volatility is often accompanied by sharp changes in the policy environment as well. For example, Figure 1 shows the relationship between two measures of expropriation and political risk and real GDP for Argentina between 1984 and 2007. For easy comparison to the GDP series, the risk factors are inverted so that an increase in the index corresponds to a decrease in risk, and all series are normalized to 100 in 1984. The risk factor series are highly correlated with output. When GDP is higher than average, the institutions and government policies in Argentina foster growth, as measured by increased political stability, enhanced respect for property rights, and stronger contract enforcement. In Aguiar, Amador, and Gopinath (2009), we develop a framework to understand these policy