nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒04‒30
29 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Has the Stability and Growth Pact Stabilised? Evidence from a Panel of 12 European Countries and Some Implications for the Reform of the Pact By Carlos Fonseca Marinheiro
  2. Back to Keynes? By Frederick van der Ploeg
  3. Exploring the International Linkages of the Euro Area: a Global VAR Analysis By Stephane Dees; Filippo di Mauro; M. Hashem Pesaran; L. Vanessa Smith
  4. Asymmetries in the Trans-Atlantic Monetary Policy Relationship: Does the ECB follow the Fed? By Ansgar Belke; Daniel Gros
  5. An Interview with Thomas J. Sargent By George W. Evans; Seppo Honkapohja
  6. Consumption, Wealth and Business Cycles in Germany By Britta Hamburg; Mathias Hoffmann; Joachim Keller
  7. The Sustainability of Fiscal Policy in the United States By Henning Bohn
  8. Is there a Role for an Active Fiscal Stabilization Policy? By Torben Andersen
  9. Does Inflation and High Taxes Increase Bank Leverage? By Hortlund, Per
  10. The Expenditure Switching Effect, Welfare and Monetary Policy in a Small Open Economy By Alan Sutherland;
  11. Cost-Push Shocks and Monetary Policy in Open Economics By Philip R. Lane; Michael B. Devereux,Juanyi Xu
  12. The Effect of Capital Requirement Regulation on the Transmission of Monetary Policy: Evidence from Austria. By Philipp Engler,Terhi Jokipii,Christian Merkl; Pablo Rovira Kaltwasser,Lúcio Vinhas de Souza
  13. Forward-looking estimation of default probabilities with Italian data By Giuseppe Marotta; Chiara Pederzoli; Costanza Torricelli
  14. Long-term Patterns in Australia's Terms of Trade By Christian Gillitzer; Jonathan Kearns
  15. Precautionary Balances and the Velocity of Circulation of Money By Miquel Faig; Belén Jerez
  16. Accounting for the Relationship between Money and Interest Rates By Magnus Jonsson; Paul Klein
  17. The Behavioral Equilibrium Exchange Rate of the Czech Koruna By Martin Melecky; Lubos Komarek
  18. Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank By Bernd Hayo; Boris Hofmann
  19. Learning the inflation target By Ricardo Nunes
  20. Controllability and non-neutrality of economic policy: The Tinbergen’s approach in a strategic context By Nicola Acocella; Giovanni Di Bartolomeo
  21. Non-neutrality of economic policy: An application of the Tinbergen-Theil’s approach to a strategic context By Nicola Acocella; Giovanni Di Bartolomeo
  22. Monetary Policy and Long-term Interest Rates By Shu Wu
  24. Is corporatism feasible? By Nicola Acocella; Giovanni Di Bartolomeo
  25. Analysing the Distributional Impacts of Stabilisation Policy with a CGE Model: Illustrations and Critique for Zimbabwe By Sonja Fagernäs
  26. What can the Fiscal Impact of Aid tell us about Aid Effectiveness? By ESAU (Unassigned)
  27. The Fiscal Effects of Aid in Zambia By Sonja Fagernäs; John Roberts
  28. The Fiscal Effects of Aid in Malawi By Sonja Fagernäs; Cedrik Schurich
  29. The Fiscal Effects of Aid in Uganda By Sonja Fagernäs; John Roberts

  1. By: Carlos Fonseca Marinheiro
    Abstract: Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP is being accused of being too rigid and of forcing pro-cyclicality in fiscal policy. We test the impact of the SGP rules on the cyclical properties of fiscal policy for a panel of 12 European countries. We conclude that contrary to what might have been expected the euro fiscal rules have reinforced the counter-cyclicality of fiscal policy. However, the results also show that the SGP is not being applied symmetrically over the cycle, leading to insufficient fiscal consolidation during economic upswings. This explains the recent difficulties of Portugal, Germany and France in complying with SGP requirements. Based on these conclusions we argue for the creation of independent national technical committees that would define an appropriate deficit target on an annual basis.
    Keywords: fiscal policy, stabilisation, EMU, Stability and Growth Pact reform
    JEL: E62 H62
    Date: 2005
  2. By: Frederick van der Ploeg
    Abstract: After a brief review of classical, Keynesian, New Classical and New Keynesian theories of macroeconomic policy, we assess whether New Keynesian Economics captures the quintessential features stressed by J.M. Keynes. Particular attention is paid to Keynesian features omitted in New Keynesian workhorses such as the micro-founded Keynesian multiplier and the New Keynesian Phillips curve. These theories capture wage and price sluggishness and aggregate demand externalities by departing from a competitive framework and give a key role to expectations. The main deficiencies, however, are the inability to predict a pro-cyclical real wage in the face of demand shocks, the absence of inventories, credit constraints and bankruptcies in explaining the business cycle, and no effect of the nominal as well as the real interest rate on aggregate demand. Furthermore, they fail to allow for quantity rationing and to model unemployment as a catastrophic event. The macroeconomics based on the New Keynesian Phillips curve has quite a way to go before the quintessential Keynesian features are captured.
    Keywords: Keynesian economics, New Keynesian Phillips curve, monopolistic competition, nominal wage rigidity, welfare, pro-cyclical real wage, inventories, liquidity, bankruptcy, unemployment, monetary policy
    JEL: E12 E32 E63
    Date: 2005
  3. By: Stephane Dees; Filippo di Mauro; M. Hashem Pesaran; L. Vanessa Smith
    Abstract: This paper presents a global model linking individual country vector error-correcting models in which the domestic variables are related to the country-specific variables as an approximate solution to a global common factor model. This global VAR is estimated for 26 countries, the euro area being treated as a single economy. This paper proposes two important extensions of previous research (see Pesaran, Schuermann and Weiner, 2004). First, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Also using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international comovements of business cycles. Second, in addition to generalised impulse response functions, we propose an identification scheme to derive structural impulse responses. We focus on identification of shocks to the US economy, particularly the monetary policy shocks, and consider the time profiles of their effects on the euro area. To this end we include the US model as the first country model and consider alternative orderings of the US variables. Further to the US monetary policy shock, we also consider oil price, US equity and US real output shocks.
    Keywords: Global VAR (GVAR), global interdependencies, global macroeconomic modeling, impulse responses
    JEL: C32 E17 F47
    Date: 2005
  4. By: Ansgar Belke; Daniel Gros
    Abstract: The belief that the ECB follows the US Federal Reserve in setting its policy is so entrenched with market participants and commentators that the search for empirical support would seem to be a trivial task. However, this is not the case. We find that the ECB is indeed often influenced by the Fed, but the reverse is true at least as often if one considers longer sample periods. There is empirically little support for the proposition that there has been for a long time a systematic asymmetric leader-follower relationship between the ECB and the Fed. Only after September 2001 is there more evidence of such an asymmetry. We also find a clear-cut structural break between the pre-EMU and the EMU period in terms of the relationship between short term interest rates on both sides of the Atlantic.
    Keywords: co-movement of interest rates, European Central Bank, Federal Reserve, monetary policy, policy coordination
    JEL: E52 E58 F41
    Date: 2005
  5. By: George W. Evans; Seppo Honkapohja
    Abstract: The rational expectations hypothesis swept through macroeconomics during the 1970’s and permanently altered the landscape. It remains the prevailing paradigm in macroeconomics, and rational expectations is routinely used as the standard solution concept in both theoretical and applied macroeconomic modelling. The rational expectations hypothesis was initially formulated by John F. Muth Jr. in the early 1960s. Together with Robert Lucas Jr., Thomas (Tom) Sargent pioneered the rational expectations revolution in macroeconomics in the 1970s. We interviewed Tom Sargent for Macroeconomic Dynamics.
    JEL: E00
    Date: 2005
  6. By: Britta Hamburg; Mathias Hoffmann; Joachim Keller
    Abstract: This paper studies the long-run relationship between consumption, asset wealth and income in Germany, based on data from 1980 to 2003. While earlier studies — mostly for the Anglo-Saxon economies — have generally documented that departures of these three variables from their common trend signal changes in asset prices, we find that for Germany they predict changes in income. Asset price changes are found to have virtually no effect on consumption — both in the short as well as in the long-run. We offer an explanation of this finding that emphasizes differences between the bank-based German financial system and the rather market-based Anglo-American system: stock ownership by private households is much less widespread in Germany than in the Anglo-Saxon economies and the share of publicly traded equity in household wealth is much smaller in Germany than in the U.S., the UK or Australia.
    Keywords: wealth effect on consumption, business cycles, monetary policy transmission, financial systems, asset price predictability, permanent income hypothesis
    JEL: E21 E32 E44 G12 G20
    Date: 2005
  7. By: Henning Bohn
    Abstract: The paper examines the sustainability of U.S. fiscal policy, finding substantial evidence in favor. I summarize the U.S. fiscal record from 1792-2003, critically review sustainability conditions and their testable implications, and apply them to U.S. data. I particularly emphasize the ramifications of economic growth. A “growth dividend” has historically covered the entire interest bill on the U.S. debt. Unit root tests on real series, unscaled by GDP, are distorted by the series’ severe heteroskedasticity. The most credible evidence in favor of sustainability is the robust positive response of primary surpluses to fluctuations in the debt-GDP ratio.
    Keywords: public debt, sustainability, primary surplus, unit root
    JEL: E60 H00 H60
    Date: 2005
  8. By: Torben Andersen
    Abstract: This paper discusses the need and scope for an active fiscal stabilization policy. It is argued that the effectiveness of fiscal policy as a short run stabilizer does not depend on the long run multipliers of (balanced budget) fiscal policies. To the extent that activity can be affected by aggregate demand in the short run, there is a case for a fiscal stabilization policy in terms of temporary variations in taxes or public consumption contingent on the state of the economy. The effectiveness of fiscal policy is supported by empirical evidence. However, an appropriate policy intervention depends both on the nature of the shock and the structure of the economy. There are thus fundamental information problems in pursuing discretionary fiscal policies on top of political economy concerns, and fiscal fine-tuning is not to be recommended. Automatic stabilizers do not to the same extent suffer from these problems, but their strength is not by design but the net result of other policy considerations. Hence, there is a need to consider the structure and size of automatic stabilizers.
    Keywords: shocks, insurance, adjustment failures, rules, discretion and fiscal policy
    JEL: E60
    Date: 2005
  9. By: Hortlund, Per (The Ratio Institute)
    Abstract: Does the combination of inflation and high corporate taxes explain the increase in bank leverage in the 20th century? Inflation automatically increases bank debt, while high corporate taxes hinder capital accumulation. Capital ratios therefore drop, until leverage-induced returns are sufficient to uphold them at constant levels. This theory was confronted with Swedish bank data 1870–2001. Bank capital ratios dropped when inflation and corporate tax rates were high, during WWI and in 1940–1980. The theory can explain the sinking bank capital ratios during these periods, but also their relative stability since the early 1980s. High corporate taxes and inflation were estimated to account for half of the drop in Swedish bank capital ratios since WWII.
    Keywords: Bank leverage; Capital-asset ratio; Inflation; Corporate taxes
    JEL: E44 E52 G28 G32 H25 N23 N24
    Date: 2005–04–28
  10. By: Alan Sutherland;
    Abstract: This paper analyses the implications of the 'expenditure switching effect' for the role of the exchange rate in monetary policy in a small open economy. It is shown that, when elasticity of substitution between home and foreign goods is not equal to unity, welfare depends on the variances of producer prices and the terms of trade. Producer-price targeting is compared to consumer-price targeting and a fixed exchange rate. It is found that a fixed exchange rate yields higher welfare than the other regimes only when the elasticity of substitution between home and foreign goods is a very high. ownership.
    Keywords: monetary policy, exchange rates, welfare
    Date: 2005–01–28
  11. By: Philip R. Lane; Michael B. Devereux,Juanyi Xu
    Abstract: This paper compares alternative monetary policy rules in a model of an emerging market economy that experiences external shocks to world interest rates and the terms of trade. The model is a two-sector dynamic open economy, with endogenous capital accumulation and slow price adjustment. Two key factors are highlighted in examining the response of the economy to shocks, and in the assessment of the effectiveness of monetary rules.These are: a) balance-sheet related financial frictions in capital formation; and b) delayed pass-through of changes in exchange rates to imported goods prices. We find that, while financial frictions cause a magniFcation of real and financial volatility, they have no effect on the comparison or ranking of alternative monetary policies. But the degree of exchange rate pass-through is very important for the assessment of monetary rules. With high pass-through, there is a trade-off between between real stability (in output or employment) and inflation stability. Moreover, the best monetary policy rule in this case is to stabilise non-traded goods prices. But, with delayed pass-through, the same trade off between real stability and inflation stability disappears, and the best monetary policy rule is CPI price stability Classification-
    Keywords: Monetary Policy, Exchange Rate Pass-through, Balance Sheet Constraints
    Date: 2005–04–20
  12. By: Philipp Engler,Terhi Jokipii,Christian Merkl; Pablo Rovira Kaltwasser,Lúcio Vinhas de Souza
    Abstract: This paper investigates the existence of a bank lending and a bank capital channel in Austria by applying the dynamic Arellano-Bond GMM-estimator to a quarterly bank level dataset spanning from 1997 to 2003. While we do find evidence that the bank lending channel is in existence, with an important role active for capitalization, we are unable to confirm that the bank capital channel is in force in Austria. Our results indicate some counter-cyclicality in lending activity, a finding that is in line with the existing Austrian literature. Classification-
    Date: 2005–04–20
  13. By: Giuseppe Marotta; Chiara Pederzoli; Costanza Torricelli
    Abstract: The solution adopted in Basel II to deal with procyclicality of capital requirements (i.e. through the cycle ratings and long-run average estimates of default probabilities) implies a reduction in the risk-sensitivity that contradicts the original spirit of the new framework.In order to preserve risk-sensitivity and to dampen procyclicality at the same time, Pederzoli and Torricelli (2005) set up a model which relies on a business cycle forecast in the estimation of the default probability and provide an application for the US. The modelling approach hinges on a forward-looking definition of capital requirements, in anticipation of the business cycle with a possible smoothing effect on the business cycle turning points.The present paper checks the robustness of the approach for the Italian case, where alternative business cycles chronologies are used and ratings have to be approximated by exploiting default data provided by the Bank of Italy. Findings suggest that the comparison between the alternative chronologies is an important issue.
    Keywords: Basel II; business cycle; capital requirement; default probability; procyclicality
    JEL: G21 G28 E32
    Date: 2005–04
  14. By: Christian Gillitzer (Reserve Bank of Australia); Jonathan Kearns (Reserve Bank of Australia)
    Abstract: We examine two important aspects of Australia’s terms of trade using 135 years of annual data up to 2003/04. Since Australia predominantly exports commodities and imports manufactures, the Prebisch-Singer hypothesis suggests that there should be a negative trend in the terms of trade. But the trend is no more than -0.1 per cent per annum, less than the trend decline in world commodity prices relative to manufactured goods prices. The weaker trend appears to be the result of Australia exporting, and importantly diversifying toward, commodities with faster price growth. Extending the sample using projections for the terms of trade for the two years to 2005/06 based on commodity price movements to date, the apparent downward trend disappears. Indeed, based on these projections, the terms of trade will have increased by around 50 per cent over the period 1987–2006, unwinding the decline over the preceding 30 years. We also investigate the volatility of the terms of trade and demonstrate that it was significantly higher between 1923 and 1952. This is attributable to substantially higher volatility in the export prices of a few key commodity exports. Volatility declined after 1952 due to smaller shocks to the prices of these goods. The diversification in Australia’s export base since then means that the terms of trade are less susceptible to shocks to prices of individual commodity exports.
    Keywords: terms of trade; commodity prices; Prebisch-Singer
    JEL: E30 F10
    Date: 2005–04
  15. By: Miquel Faig; Belén Jerez
    Abstract: The observed low velocity of circulation of money implies that households hold more money than they normally spend. A natural explanation for this behavior is that households face uncertain expenditure needs, so they have a precautionary motive for holding money. We investigate the precautionary demand for money in a search model where households are subject to preference shocks. The model predicts that the velocity of circulation of money is not only low but also interest elastic. The model closely fits United States data on the velocity of circulation of money and interest rates that span the period 1892-2003. The empirical analysis reveals a dramatic reduction in precautionary balances towards the end of our sample, probably linked to innovations in the information technology. This drop in precautionary balances is crucial for important issues of monetary economics such as the elasticity of the demand for money and the welfare cost of inflation.
    JEL: E41 E52
  16. By: Magnus Jonsson (Sveriges Riksbank); Paul Klein (University of Western Ontario)
    Abstract: In time series from the United States, the relationship between the money to income ratio and the nominal interest rate is a negative and stable one. In Swedish data, there is no such stable relationship. In this paper, we argue that this difference can be explained by the differences in the shock processes that have hit the two countries. Using a dynamic general equilibrium model driven by shock processes estimated to fit the two countries, we find that we can account for the main properties of the data remarkably well.
    Date: 2005–04–22
  17. By: Martin Melecky (School of Economics, University of New South Wales); Lubos Komarek (Czech National Bank)
    Abstract: The behavioural equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for non-stationary time series. The considered potential determinants of the real equilibrium exchange rate are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption and the degree of openness. We find that the Czech koruna was on average undervalued over the period 1994 to 2004 by about 7 percent with respect to the estimated BEER. The significant determinants of the equilibrium exchange rate of the Czech koruna appear to be the productivity differential, the real interest rate differential, the terms of trade and the net foreign direct investment.
    Keywords: Equilibrium Exchange Rate Modelling, Time-Series Analysis, Exchange Rate Misalignments, Czech Republic, ERMII
    JEL: C52 C53 E58 E61 F31
    Date: 2005–04–28
  18. By: Bernd Hayo (Philipps-University Marburg); Boris Hofmann (ZEI, University of Bonn)
    Abstract: This paper compares the ECB’s conduct of monetary policy with that of the Bundesbank. Estimated monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1- 2004:5) show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Theoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion.
    Keywords: Taylor rule, monetary policy, ECB, Bundesbank
    JEL: E5
    Date: 2005–04–25
  19. By: Ricardo Nunes (Universitat Pompeu Fabra)
    Abstract: The New Keynesian model with rational expectations unrealistically predicts that unanticipated credible changes in the inflation target lead to an immediate jump in the inflation level while the output gap is unaffected. We set up a theoretical model where agents learn the behaviour of the economy. In this context, a permanent change in the inflation target leads inflation to respond sluggishly while the output gap is temporarily affected. We extend the model to allow for both learners and forward looking agents to coexist. The calibrated model explains quite well transition dynamics during the Volker disinflation.
    Keywords: Learning, Policy shifts, Volker disinflation
    JEL: D83 E31 E52
    Date: 2005–04–25
  20. By: Nicola Acocella (University of Rome I); Giovanni Di Bartolomeo (University of Rome I)
    Abstract: In the last 20 years issues of policy effectiveness and neutrality (notably with reference to monetary policy) have been increasingly raised in the context of static LQ (linear-quadratic) policy games. The general conditions ensuring policy non-neutrality in a strategic environment remains however to be inquired. We state these conditions by generalizing the classical theory of economic policy developed by Tinbergen and others to such a context. We also state necessary and sufficient conditions for the existence of Nash and Stackelberg equilibria. We finally show that the conditions for monetary policy effectiveness asserted in the literature respect our general conditions.
    Keywords: LQ-policy games, policy ineffectiveness, static controllability
    JEL: C72 E52 E61
    Date: 2005–04–26
  21. By: Nicola Acocella (University of Rome I); Giovanni Di Bartolomeo (University of Rome I)
    Abstract: Issues of policy effectiveness and neutrality are widespread in the economic literature. They have been increasingly raised in specific contexts within the class of LQ (linear-quadratic) policy games in the last 20 years, notably with reference to monetary policy. The more general conditions ensuring nonneutrality in a strategic environment remain however to be inquired. We fill this gap by applying the classical theory of economic policy to a strategic context. This is also useful to highlight some existence conditions for policy game solutions. We restrict ourselves to the common LQ-games in a static perfect information framework, but our simple logic can be extended to other more general situations.
    Keywords: LQ-policy games, policy ineffectiveness, controllability.
    JEL: C72 E52 E61
    Date: 2005–04–26
  22. By: Shu Wu (Department of Economics, The University of Kansas)
    Abstract: This paper documents some new empirical results about the monetary policy and long-term interest rates in the United States. It shows that changes in the monetary policy stance are more predictable to the bond market in the 1990s than in the 1970s. This shift in the predictability of the monetary policy actions affects the policy¡¯s impact on long-term interest rates as well as the forecasting power of the yield spread for the future changes in short-term interest rates.
    Keywords: monetary policy, interest rates, predictability
    JEL: E52 E43
    Date: 2005–04
  23. By: Nicola Acocella (University of Rome I); Giovanni Di Bartolomeo (University of Rome I)
    Abstract: This paper generalizes the classical theory of economic policy developed by Tinbergen and Theil to a static LQ-strategic context between n players. We show how this generalized version of controllability can profitably be used to deal with policy ineffectiveness issues and Nash equilibrium existence.
    Keywords: Policy games, policy ineffectiveness, static controllability, Nash equilibrium existence.
    JEL: C72 E52 E61
    Date: 2005–04–26
  24. By: Nicola Acocella (University of Rome I); Giovanni Di Bartolomeo (University of Rome I)
    Abstract: This paper investigates the effects of cooperation (corporatism) on macroeconomic performance by considering a rather standard policy game between the government and a monopoly union. We stress the shortcomings of the traditional way used to model cooperation in policy games (the maximization of the weighted sum of players’ preferences), which only approximates the Nash product solution. We find that it is difficult to implement corporatism, although it generally increases social welfare, since it often reduces the union’s utility. In particular, we show that an inflation-neutral union will never find it profitable to cooperate with the government, unless side-payments are considered. The study of this issue is however beyond the scope of this paper.
    Keywords: Employment, inflation, trade unions, government, corporatism, policy game, feasibility.
    JEL: E24 E61 E31 E58 J51
    Date: 2005–04–26
  25. By: Sonja Fagernäs
    Abstract: ESAU Working Paper 4 applies a standard (IFPRI) macroeconomic CGE model to Zimbabwe to ascertain the likely income distribution impacts of alternative policy instruments for stabilising the economy, specifically for eliminating the current account deficit, viz. devaluation or fiscal adjustment. The author finds, however, that the model is unable for structural reasons to simulate the impact of expenditure reduction on the current account; its closure procedure offsets decreases in public consumption with increases in private consumption. This leaves devaluation as the only analysable policy instrument for balance of payments adjustment. Devaluation is likely to be contractionary for GDP, and in all sectors except agriculture and export-oriented production. Profits and labour incomes in commercial farming rise, but in other sectors fall.
    Keywords: CGE model, stabilisation policy, Zimbabwe, PSIA, expenditure switching, expenditure reduction
    Date: 2004–04
  26. By: ESAU (Unassigned)
    Keywords: Fiscal, aid, aid effectiveness, Malawi, Uganda, Zambia, budget, economic growth
    Date: 2005–01
  27. By: Sonja Fagernäs; John Roberts
    Abstract: Working Paper 11 gives a synthesis of Working Papers 7, 9 and 10 (see the relevant Summaries for further details). It also provides a brief synthesis of earlier literature on the fiscal effects of aid, which is related to the wider literature on the development impact of aid and on budget choice. The paper presents the econometric methodology used in the country studies of Malawi, Uganda and Zambia (vector autoregression) and its application, and discusses the problem of reconciling data on aid from donor and recipient sources. It makes some general observations from the three country studies relevant to aid effectiveness – the sui generis character of recipient countries’ policies and institutions that govern the impact of aid, the heterogeneity of calculated fiscal impacts, the persistent rigidities in countries’ uses of aid, and the absence of significant aid-financed expenditures from countries’ budgets.
    Keywords: Fiscal, aid, aid effectiveness, Malawi, Uganda, Zambia, budget, economic growth
    Date: 2004–10
  28. By: Sonja Fagernäs; Cedrik Schurich
    Abstract: Working Paper 7 is the first of three ESAU monographs on the fiscal effects of aid - the two others covering Uganda (Working Paper 9) and Zambia (Working Paper 10). Their methodology and general conclusions are summarised in a separate Survey and Synthesis paper (Working Paper 11). The purpose of this research was to find out how aid has been absorbed through recipients’ fiscal processes with a view to better understanding how aid is effective in promoting growth. Each country paper combines historical and institutional analysis with the econometric analysis of time series data. In Malawi, growth has been slow and fitful, and there has been a record of uneven macroeconomic management, poor fiscal control and debt problems, often leaving public services underfunded. The government has practised fiscal dichotomy – allocating aid to the development budget, while financing its recurrent budget from revenue and domestic borrowing. The econometric evidence confirms that aid has been used to finance the development budget. It also shows that aid has, if anything, been a stabilising influence, being associated with higher domestic revenues and lower borrowing.
    Keywords: Fiscal, aid, aid effectiveness, Malawi, absorption, economic growth
    Date: 2004–09
  29. By: Sonja Fagernäs; John Roberts
    Abstract: Working Paper 9 forms part of a set of four ESAU papers on the fiscal effects of aid in African countries. The others are on Malawi (Working Paper 7), on Zambia (Working Paper 10) and a literature Survey and Synthesis (Working Paper 11). The first, historical and analytical background, part of the paper contrasts the pre-1986 period of misrule, instability, conflict, the exodus of entrepreneurs and professionals, dwindling aid and economic decline, with the subsequent period when growth resumed, poverty fell, economic stability was restored, aid was substantial, and the government implemented budget management and pro-poor expenditure reforms. The second, econometric, part shows that the main effect of aid between the 1970s and 1990s was to increase development budget expenditure, with lesser positive impacts on recurrent budget expenditure and domestic revenue. The effectiveness of aid has therefore turned on the (rising) quality of development budget expenditure and on the (growing) credibility of accompanying economic policies.
    Keywords: Fiscal, aid, aid effectiveness, Uganda, budget, economic growth
    Date: 2004–10

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