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on Macroeconomics |
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Issue of 2005‒10‒22
179 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Pau Rabanal |
| Abstract: | This paper estimates Taylor-type interest rates for the United States allowing for both time and state dependence. It provides evidence that the coefficients of the Taylor rule change significantly over time, and that the behavior of the Federal Reserve over the cycle can be explained using a two-state switching regime model. During expansions, the Federal Reserve follows a rule that can be characterized as inflation targeting with a high degree of interest rate smoothing. During recessions, the Federal Reserve targets output growth and conducts policy in a more active manner. The implications of conducting this type of policy are analyzed in a small scale new Keynesian model. |
| Keywords: | Business cycles , United States , Monetary Policy , Economic models , |
| Date: | 2004–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/164&r=mac |
| By: | Silvia Sgherri; Tamim A. Bayoumi |
| Abstract: | This paper proposes a markedly different transmission mechanism from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated U.S. monetary model distinguishing four monetary regimes employed since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output. |
| Keywords: | Monetary policy , Inflation , Central Banks , Economic models , |
| Date: | 2004–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/195&r=mac |
| By: | Agustin Carstens; Luis Ignacio Jácome H. |
| Abstract: | This study takes stock of the institutional reform of monetary policy in Latin America since the early 1990s. It argues that strengthening the legal independence of central banks, together with macroeconomic policies, was instrumental in reducing inflation from three-digit annual rates in the 1990s to single-digit territory in 2004. The paper also discusses the main challenges of monetary policy today, namely, achieving price stability, restoring market confidence in domestic currencies, and sticking to policy consistency despite adverse effects of the volatility of capital flows. Finally, recurrent banking crises and lack of fiscal discipline are identified as the main risks for the success of monetary policy in Latin America. |
| Keywords: | Inflation , Latin America , Bank reforms , Monetary policy , |
| Date: | 2005–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/114&r=mac |
| By: | Silvia Sgherri; Tamim A. Bayoumi |
| Abstract: | Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary uncertainty accounts for sluggish expectations adjustment to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in U.S. monetary policy and the Phillips curve, we find strong evidence that this link exists. These results bring into question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the United States and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply side of the economy. |
| Keywords: | Monetary policy , United States , Inflation , Economic models , |
| Date: | 2004–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/24&r=mac |
| By: | Charles Frederick Kramer; Mark R. Stone |
| Abstract: | Modifications to Japan's monetary policy framework will be needed as positive inflation resumes because the current monetary regime and operations are tailored to ending deflation. The paper suggests that the monetary regime should move from an "anti-deflation" objective to an inflation objective, complemented by a shift of monetary operations from a quantitative operating target to an interest rate target. There are also questions about the timing of these shifts and the particulars of such arrangements, but decisive answers are elusive. |
| Keywords: | Monetary policy , Japan , Monetary operations , Deflation , |
| Date: | 2005–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/73&r=mac |
| By: | Nicholas Apergis; Stephen M. Miller; Alexandros Panethimitakis; Athanasios Vamvakidis |
| Abstract: | This paper evaluates the performance of two alternative policy rules, a forward-looking rule and a spontaneous adjustment rule, under alternative inflation targets, in terms of output losses in a macroeconomic model, using European Union data. The simulations suggest that forward-looking rules contribute to macroeconomic stability and monetary policy credibility, and that a positive inflation target, as opposed to zero inflation, leads to higher and less volatile output. These results are robust to changes in the specification of the model and time period. The same methodology applied to individual countries supports country-specific flexible inflation targeting. |
| Keywords: | Inflation targeting , European Union , Economic growth , |
| Date: | 2005–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/89&r=mac |
| By: | Marco Arnone; Luca Bandiera |
| Abstract: | Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy. |
| Keywords: | Money , Monetary policy , Monetary unions , Monetary operations , |
| Date: | 2004–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/122&r=mac |
| By: | Fabien Tripier (EconomiX - University of Paris X Nanterre) |
| Abstract: | This paper studies the co-movements of unemployment and labor productivity growth for the U.S. economy. Measures of co-movements in the frequency domain indicate that co-movements between variables differ strongly according to the frequency. First, long-term and business cycle co-movements are larger than short-term co-movements. Second, co- movements are negative in the short and long run, but positive over the business cycle. A New Keynesian model that combines nominal rigidity on the goods market (sticky prices) and real rigidity on the labor market (fair wages) is shown to be quantitatively consistent with the observed co-movements both in the long term and over the business cycle. However, the model fails to explain the short-term co-movements. |
| Keywords: | growth, unemployment, sticky prices, fair wages, spectral analysis |
| JEL: | C32 E31 E32 J41 |
| Date: | 2005–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510015&r=mac |
| By: | Guglielmo maria Coporale and Alexandros Kontonikas |
| Abstract: | In this paper, we investigate empirically the relationship between inflation and inflation uncertainty in twelve EMU countries. We estimate a time-varying parameter model with a GARCH specification for the conditional volatility of inflation in order to distinguish between short-run (structural and impulse) and steady-state uncertainty. We then introduce a dummy variable to model the policy regime shift which occurred in 1999 with the introduction of the Euro, and its effects on the links between inflation and inflation uncertainty. We find that the EMU countries have had rather different experiences, and that in the post-Euro period monetary policy might have become less effective in lowering inflation uncertainty, in the sense that a monetary tightening on the part of the ECB might in result in higher uncertainty. This suggests the need for improvements in the ECB’s analytical framework. |
| JEL: | E31 E52 C22 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_13&r=mac |
| By: | Nikolay Gueorguiev; Pelin Berkmen |
| Abstract: | In the near future, Romania will introduce inflation targeting and fully liberalize its capital account. This paper aims to analyze, in a dynamic general-equilibrium model with sticky prices and monopolistic competition, how these two profound changes will affect the ability of monetary policy to pursue its objective of price stability. In particular, the resilience of the current and future monetary policy regimes to shocks is evaluated against two welfare criteria: a standard central bank loss function containing the deviations of inflation, output, and the real exchange rate from their equilibrium values, and the compensating variation measure of Lucas (1987). |
| Keywords: | Inflation targeting , Romania , Monetary policy , Capital account liberalization , |
| Date: | 2004–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/232&r=mac |
| By: | Alexandros Kontonikas, Alberto Montagnoli and Nicola Spagnolo |
| Abstract: | In this paper we investigate the interaction between inflation and stock market volatility. We employ unconditional and conditional volatility measures, the latter derived from a Bivariate GARCH model with the BEKK representation. The results indicate that once the impact of IT is taken into account, the relationship between inflation and stock market volatility ceases to be positive and be comes negative in line with the New Environment Hypothesis. The implication for monetary policy design is that focusing on price stability alone may not be a suffcient condition for financial stability. |
| JEL: | C22 E31 E44 E52 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_11&r=mac |
| By: | Eric Parrado |
| Abstract: | This paper provides a simple dynamic neo-Keynesian model that can be used to analyze the impact of monetary policy that considers inflation targeting in a small open economy. This economy is characterized by imperfect competition and short-run price rigidity. The main findings of the paper are that, depending on what shocks affect the economy, the effects of inflation targeting on output and inflation volatility depend crucially on the exchange rate regime and the inflation index being targeted. First, in the presence of real shocks, flexible exchange rates dominate managed exchange rates, while for nominal shocks the reverse is true. Second, domestically generated inflation targeting is preferable to CPI inflation targeting, because the former is more stabilizing not only in relation to both measures of inflation, but also to the output gap and the real exchange rate. Finally, flexible inflation targeting outperforms strict inflation targeting in terms of welfare. |
| Keywords: | Inflation targeting , Exchange rates , Monetary policy , Economic models , |
| Date: | 2004–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/21&r=mac |
| By: | Yan Sun |
| Abstract: | Since 1996, the Bank of Jamaica (BoJ) has sought to limit changes in the exchange rate for the Jamaican dollar in the context of its efforts to maintain low inflation. However, with a persistently high public sector deficit, real interest rates have remained generally high, which partly explains the slow pace of growth. This paper discusses an alternative monetary policy mix for achieving low variance for inflation and output through the prism of an empirical macroeconomic model. The simulation results suggest that a monetary policy mix that takes into account the impact of policy on both inflation and output achieves lower variance for inflation and output compared with the current policy mix, which tilts somewhat toward exchange rate stabilization. A case, therefore, can be made for the BoJ to move to a soft inflation targeting regime supported by fiscal consolidation. |
| Keywords: | Monetary policy , Jamaica , Inflation targeting , |
| Date: | 2005–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/41&r=mac |
| By: | Peter N. Ireland (Boston College) |
| Abstract: | The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment. Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models. |
| Keywords: | Monetary transmission mechanism |
| JEL: | E52 |
| Date: | 2005–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:628&r=mac |
| By: | Alexandros Kontonikas and Alberto Montagnoli |
| Abstract: | This paper analyses the relationship between monetary policy and asset prices in the context of optimal policy rules. The transmission mechanism is represented by a linearized rational expectations model augmented for the effect of asset prices on aggregate demand. Stabilization objectives are represented by a discounted quadratic loss function penalizing inflation and output gap volatility. Asset prices are allowed to deviate from their intrinsic value since they may be positively affected by past price changes. We find that in the presence of wealth effects and inefficient markets, asset price misalignments from their fundamentals should be included in the optimal interest rate reaction function. |
| JEL: | E52 E60 G1 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_9&r=mac |
| By: | Ashok Bhundia; Mark R. Stone |
| Abstract: | This paper proposes a new taxonomy of monetary regimes defined by the choice and clarity of the nominal anchor. The regimes are as follows: (i) monetary nonautonomy, (ii) weak anchor, (iii) money anchor, (iv) exchange rate peg, (v) full-fledged inflation targeting, (vi) implicit price stability anchor, and (vii) inflation targeting lite. This taxonomy captures the commitment-discretion tradeoffs that lie at the heart of choosing a monetary regime. During the last 15 years the world has moved toward monetary regimes with less discretion. Empirical analysis suggests that country regime choices reflect the level of financial and economic development and recent inflation history. |
| Keywords: | Monetary policy , Monetary systems , Transparency , Exchange rate regimes , |
| Date: | 2004–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/191&r=mac |
| By: | Silvia Sgherri |
| Abstract: | Under a flexible inflation targeting regime, should policymakers avoid any reaction to movements in the foreign exchange market? Using data for six advanced open economies explicitly targeting inflation, the paper examines empirically whether real exchange rate disequilibria systematically affect the conduct of monetary policy. Estimates indicate that monetary policy responses in inflation-targeting, open economies have changed significantly, as the institutional framework for the conduct of monetary policy has evolved. In particular, an explicit target for core inflation and a greater use of the expectation channel of monetary policy appear to be key features of the newest policy framework. In this context, central banks are unlikely to react to regular fluctuations in the exchange rate. |
| Keywords: | Inflation targeting , Interest rate policy , Exchange rates , Monetary policy , |
| Date: | 2005–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/176&r=mac |
| By: | Alexander Mihailov |
| Abstract: | This paper recovers empirically and evaluates the feedback and stance of monetary policy in the United Kingdom throughout the inflation targeting period, implemented since October 1992. Its principal contribution is in comparing two subsamples, before the Bank of England was granted operational independence in May 1997 and after that. Our econometric approach is theoretically motivated by the New Keynesian model and relies on estimating forward-looking Taylor rules via the Generalized Method of Moments from quarterly data. Both final and real-time data, with alternative variable proxies and regression specifications, were used, to find that Taylor rules based on real-time data provide a more reasonable description of British monetary policy. Interestingly, the operational independence subperiod has differed from the pre-independence one - according to our real-time data set - in terms of a weaker response of the Bank of England to inflation but stronger sensitivity to the output gap and a less restrictive stance of monetary policy. Such a reaction would, first of all, characterize the Bank as a flexible inflation targeter, as should be expected by its legal mandate, and not a strict one; secondly, the asymmetry in the feedback function appears justified once the stage in the business cycle is also taken into consideration. |
| Date: | 2005–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:602&r=mac |
| By: | Scott Roger; Mark R. Stone |
| Abstract: | This paper examines the international experience with full-fledged inflation targeting monetary regimes. Stylized facts are brought together from a review of the institutional elements of inflation targeting frameworks, a comparison of actual and targeted inflation outcomes, and case studies of large inflation target misses. Inflation targets are missed about 40 percent of the time and often by substantial amounts and for prolonged periods, yet no country has dropped inflation targeting. The resilience of the inflation targeting regime is attributable to the flexibility of the framework, its high standards of transparency and accountability, and the lack of realistic alternatives. |
| Keywords: | Inflation targeting , Monetary policy , |
| Date: | 2005–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/163&r=mac |
| By: | Peter Kugler (University of Basel, Petersplatz 1, CH-4003 Basel,Switzerland); Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner Platz 3, POB 61, A-1011 Vienna) |
| Abstract: | This paper analyses the role of M3 as an indicator for future inflation and correspondingly for current monetary policy in the euro area. We analyse the short and long run interrelationship between inflation and money growth in an error correction framework taking into account the output gap and short and long term interest rates. We find robust cointegration between money growth and inflation. In the long run, shocks in M3-growth account for 33 percent to 40 percent of the inflation forecast error variance. The effects of output gap and interest rate shocks on inflation are mainly transitory and there forecasting variance shares are negligible for medium term horizons. There is evidence for a second regime prevailing at the end of the seventies and beginning of the eighties which relates to periods of high interest rate and inflation rate levels and decreasing rates in real money growth. Overall, we present firm evidence for a stable dynamic relationship between money growth and inflation which implies that the deviation of the real money growth from its long run average is a good indicator of future inflation acceleration or deceleration. Of course, this finding provides evidence in favour of the recently de-emphasised first pillar of the ECB strategy. According to our results, however, an M3-growth rate of slightly above 5% is compatible with a non-accelerating average rate of inflation of 2%. |
| Date: | 2005–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:103&r=mac |
| By: | Olumuyiwa Adedeji; Oral Williams |
| Abstract: | This paper investigates the determinants of inflation in the Dominican Republic during 1991-2002, a period characterized by remarkable macroeconomic stability and growth. By developing a parsimonious and empirically stable error-correction model using quarterly observations, the paper finds that inflation is explained by changes in monetary aggregates, real output, foreign inflation, and the exchange rate. Long-run relationships in the money and traded-goods markets are found to exist, but only the disequilibrium from the money market exerts a significant impact on inflation. |
| Keywords: | Inflation , Dominican Republic , Economic models , |
| Date: | 2004–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/29&r=mac |
| By: | Alexander Mihailov |
| Abstract: | This paper is an empirical investigation into the question of whether increased independence affects central bank behavior, in particular when monetary policy is already in an inflation targeting regime. We take advantage of the unique experience in that sense of the United Kingdom, where the Bank of England was granted operational independence from Her Majesty's Treasury only in May 1997, while inflation targeting had been implemented since October 1992. Our strategy is to estimate Taylor rules employing alternative specifications, econometric methods and variable proxies in search for robust results that survive most of those modifications. The key lesson we extract from UK quarterly data is that the Bank of England has responded to the output gap, and not at all to output growth, the more so after receiving operational independence, when the gap has been positive or close to zero and inflation credibly stabilized at target. We find no unambiguous evidence for any definite change in the Bank's reaction to inflation or in the degree of its interest rate smoothing. Our main import is to argue that both the asymmetry of the monetary policy reaction function across the cycle and the response to the output gap, not growth, are fully consistent with New Keynesian theory, especially under inflation targeting. Anchored inflation and economic expansion during the post-independence period thus complement greater autonomy in influencing the behavior of the Bank of England, yet clear separation of the individual contribution of each of these effects appears challenging given our short sample. |
| Date: | 2005–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:601&r=mac |
| By: | Michael Funke |
| Abstract: | The New Keynesian Phillips curve (NKPC) posits the dynamics of inflation as forward looking and related to marginal costs. In this paper we examine the empirical relevance of the NKPC for mainland China. The empirical results indicate that an augmented (hybrid) NKPC gives results that are consistent with the data generating process. It is in this respect that the NKPC provides useful insights into the nature of inflation dynamics in mainland China as well as useful insights for the conduct of monetary policy. |
| Keywords: | China, Inflation, New Keynesian Phillips Curve |
| JEL: | C22 E31 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ham:qmwops:20507&r=mac |
| By: | Daniel Leigh |
| Abstract: | This paper proposes a new method of estimating the Taylor rule with a time-varying implicit inflation target and a time-varying natural rate of interest. The inflation target and the natural rate are modeled as random walks and are estimated using maximum likelihood and the Kalman filter. I apply this method to U.S. monetary policy over the past 25 years and find considerable time variation in the implicit target, confirming hypotheses about "opportunistic disinflation" and the recent "deflation scare." |
| Keywords: | Inflation targeting , United States , Monetary policy , Interest rates , Disinflation , Deflation , Economic models , |
| Date: | 2005–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/77&r=mac |
| By: | Martin Cerisola; R. Gaston Gelos |
| Abstract: | This study examines the macroeconomic determinants of survey inflation expectations in Brazil since the adoption of inflation targeting in 1999. The results suggest that the inflation targeting framework has helped anchor expectations, with the dispersion of inflation expectations declining considerably, particularly during periods of high uncertainty. We also find that apart from the inflation target, the stance of fiscal policy, as proxied by the ratio of the consolidated primary surplus to GDP, has been instrumental in shaping expectations. The importance of past inflation in determining expectations appears to be relatively low, and the overall empirical evidence does not suggest the presence of substantial inertia in the inflation process. |
| Keywords: | Inflation , Brazil , Inflation targeting , Economic models , |
| Date: | 2005–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/109&r=mac |
| By: | Robert Tchaidze |
| Abstract: | Although very attractive both theoretically and empirically, Taylor rules imply mechanical responses by the policy variable (interest rate) to fundamental ones (inflation and output gap). This study looks for empirical evidence of a more sophisticated monetary policy, one which takes into account expected future developments. An important piece of information added is the "Greenbook" forecast series, calculated by the Federal Reserve staff and which allow evaluation of expected inflation shocks. These shocks are significant in the estimated Taylor rule, confirming that policymaking is forward looking. This paper also demonstrates that a simple Taylor rule may be a misspecification if policymakers have in mind a timevarying inflation target. |
| Keywords: | Monetary Policy , United States , |
| Date: | 2004–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/213&r=mac |
| By: | Anita Tuladhar |
| Abstract: | This paper surveys decision-making roles of governing bodies of central banks that have formally adopted inflation targeting as a monetary framework. Governance practices seek to balance institutional independence needed for monetary policy credibility with accountability required to protect democratic values. Central bank laws usually have price stability as the primary monetary policy objective but seldom require an explicit numerical inflation target. Governments are frequently involved in setting targets, but to ensure operational autonomy, legal provisions explicitly limit government influence in internal policy decision-making processes. Internal governance practices differ considerably with regard to the roles and inter-relationships between the policy, supervisory, and management boards of a central bank. |
| Keywords: | Inflation targeting , Governance , Central bank role , Price stabilization , Monetary policy , |
| Date: | 2005–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/183&r=mac |
| By: | Madhavi Bokil; Axel Schimmelpfennig |
| Abstract: | This paper presents three empirical approaches to forecasting inflation in Pakistan. The preferred approach is a leading indicators model in which broad money growth and private sector credit growth help forecast inflation. A univariate approach also yields reasonable forecasts, but seems less suited to capturing turning points. A vector autoregressive (VAR) model illustrates how monetary developments can be described by a Phillips-curve type relationship. We deal with potential parameter instability on account of fundamental changes in Pakistan's economic system by restricting our sample to more recent observations. Gregorian and Islamic calendar seasonality are addressed by using 12-month moving averages. |
| Keywords: | Forecasting models , Pakistan , Inflation , |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/105&r=mac |
| By: | Sergio Clavijo |
| Abstract: | This paper focuses on monetary and exchange rate policies in Colombia, with particular emphasis on the period 1999-2002, when flotation of the peso and inflation targeting were adopted. We argue, first, in favor of adopting "operational inflation target ranges" and, second, in favor of strengthening the current scheme of foreign exchange options. The impact of reductions in the reference rates of the Central Bank of Colombia is also assessed. We find that a lower central bank policy interest rate is likely to affect demand only if mortgage refinancing takes place. We present preliminary estimates of Taylor rules in an openeconomy framework for Colombia. |
| Keywords: | Monetary policy , Colombia , Exchange rate policy , Central bank role , |
| Date: | 2004–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/166&r=mac |
| By: | Arto Kovanen |
| Abstract: | This study examines the appropriateness of alternative intermediate monetary policy targets for Zimbabwe in light of the stability of the demand for money and the information content of financial variables for predicting price level movements. Results of the study indicate that a well-defined long-run demand relation exists for currency in circulation, but not for other monetary aggregates. Currency in circulation has strong information content for predicting future price level movements. The information content of other financial variables, such as the exchange rate and interest rates, is weaker. Statistical relationships break down of the outset of high inflation. |
| Keywords: | Monetary policy , Zimbabwe , Demand for money , Inflation , |
| Date: | 2004–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/130&r=mac |
| By: | Ossama Mikhail (University of Central Florida) |
| Abstract: | This paper investigates the effect of a positive technology shock on per capita hours worked within the class of Bayesian Vector Auto-Regressive [BVAR] models. Such a framework avoids the current debate regarding the specification issue of per capita hours [level versus first-difference stationary]. Six priors are considered and for each, we examine the impulse responses of per capita hours following a positive technology shock. The marginal posteriors of the VAR parameters are generated using the Markov Chain Monte Carlo (MCMC) Gibbs sampler. We find that the estimation of the VAR yields significantly different estimates under competing priors. Using the Francis and Ramey (2004, UCSD working paper) new measure for per capita hours, and after imposing the identifying restrictions (i.e., Blanchard-Quah and sign restrictions), the results show that per capita hours worked rise following a positive technology shock - if one [objectively] assumes a non-informative prior. |
| Keywords: | Bayesian Vector Auto-Regression (BVAR), Blanchard-Quah Identification, Markov Chain Monte Carlo (MCMC) Gibbs Sampler, Technology Shock, Real Business Cycle (RBC) |
| JEL: | E32 E24 C11 |
| Date: | 2005–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510016&r=mac |
| By: | Theodore Panagiotidis (Dept of Economics Univ. of Loughborough); Afrodit Triampella |
| Abstract: | This paper investigates the argument for Central Bank Independence (CBI) in the case of Greece. Using a time series approach and the last data available before Greece joined the EMU, the hypothesis that central bank independence is important for controlling inflation is examined. Employing two indices, which serve as proxies for CBI, LegalCBI and TOR, the inverse relationship between CBI and inflation was confirmed. The interactions between the variability of inflation and CBI were also investigated. Furthermore, evidence was found to suggest that the rate of turnover Granger causes inflation. |
| Keywords: | Central Bank Independence, Inflation, Greece. |
| JEL: | E58 E52 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2005_7&r=mac |
| By: | Julian di Giovanni; Justin McCrary; Till von Wachter |
| Abstract: | Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany. |
| Keywords: | Monetary policy , Germany , Fund , Interest rates , |
| Date: | 2005–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/86&r=mac |
| By: | Johannes Wiegand |
| Abstract: | This paper discusses fiscal surveillance criteria for the countries of the Central African Monetary and Economic Union (CEMAC), most of which depend heavily on oil exports. At present, the CEMAC's macroeconomic surveillance exercise sets as fiscal target a floor on the basic budgetary balance. This appears inadequate, for at least two reasons. First, fluctuations in oil prices and, hence, oil receipts obscure the underlying fiscal stance. Second, oil resources are limited, which suggests that some of today's oil receipts should be saved to finance future consumption. The paper develops easy-to-calculate indicators that take both aspects into account. A retrospective analysis based on these alternative indicators reveals that in recent years, the CEMAC's surveillance exercise has tended to accommodate stances of fiscal policy that are at odds with sound management of oil wealth. |
| Keywords: | Fiscal policy , Oil , Monetary unions , |
| Date: | 2004–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/8&r=mac |
| By: | Jose Giancarlo Gasha; Gonzalo C. Patsor |
| Abstract: | This paper discusses the nature of Angola's disinflation strategy in recent years, with special emphasis on the most recent efforts by the Angolan authorities to stabilize the economy. Looking to the past, the paper stresses the costs of the disinflation strategy, as measured by the central bank sizable foreign exchange intervention and the increase in Angola's external liabilities that unfolded in the process. The paper also notes that non-oil fiscal deficits have remained very large. Looking to the future, the paper stresses the pressing need to reduce demand pressures stemming from sizable government spending on wages and salaries, goods and services, subsidies, and other current transfers to the economy. The prescribed fiscal consolidation effort is viewed as critical to curtail the non-oil fiscal deficit, reduce inflation expectations on a lasting basis, and avoid further foreign borrowing on commercial terms, including loans collateralized by future oil revenues. |
| Keywords: | Economic stabilization , Angola , Monetary policy , Fiscal policy , |
| Date: | 2004–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/83&r=mac |
| By: | Luis Araujo (Michigan State University); Braz Camargo (University of Western Ontario) |
| Abstract: | This paper analyzes the stability of monetary regimes in an economy where fiat money is endogenously created by the government, information about its value is imperfect, and learning is decentralized. We show that monetary stability depends crucially on the speed of information transmission in the economy. Our model generates a dynamic on the acceptability of fiat money that resembles historical accounts of the rise and eventual collapse of overissued paper money. It also provides an explanation of the fact that, despite its obvious advantages, the widespread use of fiat money is only a recent development. |
| Keywords: | monetary stability; endogenous money; decentralized trade; learning |
| JEL: | D82 D83 E00 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:uwowop:20051&r=mac |
| By: | Andros Gregoriou and Alexandros Kontonikas |
| Abstract: | In this paper we examine the time series properties of inflation in seven countries that have adopted inflation targeting. Unlike previous studies we utilize a non-linear mean reverting adjustment mechanism for inflation and we discover that although deviations of inflation from the target can exhibit a region of non-stationary behavior, overall they are stationary indicating successful targeting implementation. |
| JEL: | E31 C32 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_10&r=mac |
| By: | Oya Celasun; Gaston Gelos; Alessandro Prati |
| Abstract: | Is backward-looking behavior in pricing or imperfect credibility of stabilization efforts responsible for the failure of inflation rates to decline to targeted levels during many disinflation programs? This paper assesses the relative importance of these two factors during a number of disinflation attempts in developing and transition economies. Using survey data, we find that expectations of future inflation play a much more important role than past inflation in shaping the inflation process. We also find that an improvement in primary fiscal balances significantly reduces inflation expectations. This suggests that during stabilization episodes, priority should be given to building fiscal credibility by strengthening public finances. |
| Keywords: | Disinflation , Economic stabilization , Inflation targeting , Emerging markets , Fiscal management , Public finance , Economic models , |
| Date: | 2004–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/111&r=mac |
| By: | James Y. Yao; Nathaniel John Porter |
| Abstract: | This paper develops a new macrofinance model for small open economies, allowing the investigation of Mauritius's experience with 'inflation targeting lite' as described in Stone (2003). It finds that this monetary policy regime has been associated with a general reduction in inflation, principally through a reduction in inflation expectations. The credibility the Bank of Mauritius has established with its 'inflation targeting lite' regime has allowed it to shift from an emphasis on exchange rate targeting towards inflation targeting. By estimating a model in which the yield curve is modeled explicitly we are able to obtain estimates of inflation expectations. |
| Date: | 2005–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/172&r=mac |
| By: | Nicoletta Batini |
| Abstract: | This paper reviews the historical performance of monetary policy in Nigeria and discusses the relative merits of alternative monetary policy strategies that Nigeria could adopt in the future, once the many operational issues that today obstruct the conduct of monetary policy have been addressed. An analysis of external and fiscal dominance in Nigeria reveals that none of the candidate strategies is particularly appealing although, on various grounds, a long-run target for inflation combined with a free float seems to be the ultimate option. The paper shows how to design and operationalize such a regime in Nigeria when account is taken for the emerging market features of the economy. |
| Keywords: | Price stabilization , Nigeria , Inflation targeting , Dollarization , Fiscal management , |
| Date: | 2004–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/97&r=mac |
| By: | Irina Tytell; Shang-Jin Wei |
| Abstract: | Monetary and fiscal policies around the world are in better shape today than two decades ago. This paper studies whether financial globalization has helped induce governments to pursue better macroeconomic policies (the "discipline effect"). The empirical tests have two innovations. First, we recognize potential endogeneity of the observed capital flows in a given country and employ an instrumental variable approach that relies on the autonomous (global) component of the capital flows. Second, we recognize inherent discreteness in defining good versus bad macroeconomic policies and use a transition matrix technique to determine whether capital flows are effective in inducing substantial qualitative policy shifts. Our results suggest that, in spite of the plausibility of the "discipline effect" in theory, it is not easy to find strong and robust causal evidence. There is some evidence that financial globalization may have induced countries to pursue low-inflation monetary policies. However, there is no evidence that it has encouraged low budget deficits. |
| Keywords: | Globalization , Financial sector , Inflation targeting , Capital flows , |
| Date: | 2004–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/84&r=mac |
| By: | Rodolphe Blavy |
| Abstract: | The paper analyzes the dynamics of inflation in Guinea during 1992-2003 applying cointegration and error-correction modeling to a bivariate model that includes consumer price and monetary variables. The empirical results, based on quarterly data, confirm the existence of a long-run relationship between money supply and consumer prices. This paper argues further that the pass-through has increased in recent years. Short-term dynamics are shown to accentuate the long-run impact. Impulse response analysis shows that a shock in the money stock will have an increasing impact over two years and will then stabilize at a higher level. |
| Keywords: | Inflation , Guinea , Money supply , Consumer prices , Economic models , |
| Date: | 2004–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/223&r=mac |
| By: | Nienke Oomes; Franziska Ohnsorge |
| Abstract: | Money demand in dollarized economies often appears to be highly unstable, making it difficult to forecast and control inflation. In this paper, we show that a stable money demand function for Russia can be found for "effective broad money," which includes an estimate of foreign cash holdings. Moreover, we find that an excess supply of effective broad money is inflationary, while other excess money measures are not, and that effective broad money growth has the strongest and most persistent effect on short-run inflation. |
| Keywords: | Demand for money , Russian Federation , Inflation , Dollarization , Currency substitution , |
| Date: | 2005–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/144&r=mac |
| By: | André Binette; Sylvain Martel |
| Abstract: | The authors investigate empirically the relationship between different aspects of inflation and relative price dispersion in Canada using a Markov regime-switching Phillips curve. They examine three theories that explain movements in relative price dispersion: the signal extraction model, the extension of the signal extraction model, and the menu cost model. The authors show that expected inflation, which is captured by the menu cost model, is the aspect of inflation that is most closely associated with relative price dispersion. Furthermore, this result seems robust to different specifications. The authors, however, cannot completely discard inflation uncertainty (the signal extraction model), especially when using core inflation. They also observe a strong asymmetry regarding the impact of positive and negative unexpected inflation on relative price dispersion using total inflation, but this asymmetry is not observed for core inflation. This suggests that the strong asymmetry arises mainly from the presence of components typically associated with supply shocks, and not from the presence of downward nominal rigidities, as Aarstol (1999) proposes, following Ball and Mankiw (1992a,b). |
| Keywords: | Inflation and prices |
| JEL: | C32 E31 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-28&r=mac |
| By: | Saleh M. Nsouli; Connel Fullenkamp |
| Abstract: | The literature on the economic effects of electronic money and banking lacks organization and a common analytical framework. This paper identifies the main issues raised by e-money and e-banking and presents them as six puzzles. Our solutions to the puzzles build a framework for analyzing the effects of e-money and e-banking, and for choosing the appropriate approach to regulating electronic money and banking. Although electronic money and banking will likely not fulfill the more dire predictions in the literature, such as the possible loss of central banks' ability to control the money supply, they nonetheless will need to be regulated carefully. |
| Keywords: | Banking , Monetary policy , |
| Date: | 2004–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/19&r=mac |
| By: | Alexander F. Tieman |
| Abstract: | Interest rate pass-through from policy interest rates to market rates and inflation has been hypothesized to play a lesser role in Romania than in other Central European transition economies. This paper tests this hypothesis and concludes that it cannot be supported by the data. Hence pass-through in Romania is concluded to be in line with that in comparable economies in the region. Moreover, the interest rate pass-through has become more pronounced over time. |
| Keywords: | Monetary policy , Romania , Transition economies , Interest rates , Economic models , |
| Date: | 2004–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/211&r=mac |
| By: | Andros Gregoriou and Alexandros Kontonikas |
| Abstract: | This study tests for and models non-linearities in inflation deviations from the target in five OECD countries that adopted inflation targeting over the 1990s. Our tests reject the linearity hypothesis and we show that the exponential smooth transition autoregressive (ESTAR) model is capable of capturing the non-linear behavior ofinflation misalignments. The extent of inflation deviations from the target varies across the OECD countries, with countries that consistently undershoot the target having a rapid adjustment process, whereas countries that overshoot the target have a slower revision back to equilibrium. |
| JEL: | E31 E52 C5 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_12&r=mac |
| By: | Eric Parrado |
| Abstract: | The Monetary Authority of Singapore, instead of relying on short-term interest rates or monetary aggregates as its monetary policy instrument, conducts policy by managing the trade-weighted exchange rate index (TWI). This paper investigates how this operating procedure actually works. For empirical purposes, it assumes the authorities follow a reaction function that aims the TWI at stabilizing expected inflation and maintaining output at potential. A partial adjustment mechanism is included to dampen the actual changes in the exchange rate. The estimates confirm that the major focus of monetary policy in Singapore is controlling inflation. The estimated changes in the TWI track the actual change relatively well, and the estimated parameters are as expected. Accordingly, they support the hypothesis that monetary policy in Singapore can be described by a forward-looking policy rule that reacts to both inflation and output volatility. The results suggest that Singapore's monetary policy has mainly reacted to large deviations in the target variables, which is consistent with monetary policy's medium-term orientation. |
| Keywords: | Monetary policy , Singapore , Exchange rate policy , Inflation , |
| Date: | 2004–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/10&r=mac |
| By: | Giovanni Ganelli |
| Abstract: | This paper helps resolve a paradox in the literature, noticed by Alesina and Perotti (1995), which is that, although government employment is an important component of public spending, the debate on the effects of fiscal policy focuses almost exclusively on shocks to non-wage government consumption. We incorporate the distinction between spending for government employment and spending for non-wage government consumption in a "new open economy macroeconomics" model. Our results show that a permanent reduction in public employment in one country reduces relative private consumption and appreciates the domestic exchange rate if it is matched by a reduction in taxes. When the reduction in public employment is used to finance increased non-wage government consumption, the macroeconomic effects results are ambiguous, and are affected by the initial level of the public wage bill. |
| Keywords: | Government expenditures , Fiscal policy , Wages , Economic models , |
| Date: | 2005–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/4&r=mac |
| By: | Dale T. Mortensen (Northwestern University, NBER and IZA Bonn); Éva Nagypál (Northwestern University) |
| Abstract: | Shimer (2005a) argues that the Mortensen-Pissarides equilibrium search model of unemployment explains only about 10% of the response in the job-finding rate to an aggregate productivity shock. Some of the recent papers inspired by his critique are reviewed and commented on here. Specifically, we suggest that the sole problem is neither the procyclicality of the wage nor the failure to account fully for the opportunity cost of employment. Although an amended version of the model, one that accounts for capital costs and counter cyclic involuntary separations, does much better, it still explains only 40% of the observed volatility of the job-finding rate. Finally, allowing for on-the-job search does not improve the amended model’s implications for the amplification of productivity shocks. |
| Keywords: | labor market search, unemployment and vacancies volatility, job-finding rate, productivity shocks |
| JEL: | E24 E32 J41 J63 J64 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1765&r=mac |
| By: | Luís Costa; Huw Dixon |
| Abstract: | We develop a dynamic general equilibrium model of imperfect competition where a sunk cost of creating a new product regulates the type of entry that dominates in the economy: new products or more competition in existing industries. Considering the process of product innovation is irreversible, introduces hysteresis in the business cycle. Expansionary shocks may lead the economy to a new ‘prosperity plateau,’ but contractionary shocks only affect the market power of mature industries. |
| Keywords: | Entry; Hysteresis; Mark-up. |
| JEL: | E62 L13 L16 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp162005&r=mac |
| By: | Noureddine Krichene |
| Abstract: | A model for world crude oil and natural gas markets is estimated. It confirms low price and high income elasticities of demand for both crude oil and natural gas, which explains the market power of oil producers and price volatility following shocks. The paper establishes a relationship between oil prices, changes in the nominal effective exchange rate (NEER) of the U.S. dollar, and the U.S. interest rates, thereby identifying demand shocks arising from monetary policy. Both interest rates and the NEER are shown to influence crude prices inversely. The results imply that crude oil prices should be included in the policy rule equation of an inflation targeting model. |
| Keywords: | Natural gas , Energy sector , Markets , Investment , Oil prices , Interest rates , Economic models , |
| Date: | 2005–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/32&r=mac |
| By: | Alain Borghijs; Louis Kuijs |
| Abstract: | Central European accession countries (CECs) are currently considering when to adopt the euro. From the perspective of macroeconomic stabilization, the cost or benefit of giving up a flexible exchange rate depends on the types of asymmetric shocks hitting the economy and the ability of the exchange rate to act as a shock absorber. Economic theory suggests that flexible exchange rates are useful in absorbing asymmetric real shocks but unhelpful in the case of monetary and financial shocks. For five CECs-the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia-empirical results on the basis of a structural VAR suggest that in the CECs the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks. |
| Keywords: | Exchange rates , Czech Republic , Hungary , Poland , Slovak Republic , Slovenia , |
| Date: | 2004–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/2&r=mac |
| By: | Marcela Eslava (CEDE, Universidad de los Andes); John Haltiwanger (University of Maryland, NBER and IZA Bonn); Adriana Kugler (University of Houston, NBER, CEPR and IZA Bonn); Maurice Kugler (University of Southampton) |
| Abstract: | In this paper, we analyze employment and capital adjustments using a panel of plants from Colombia. We allow for nonlinear adjustment of employment to reflect not only adjustment costs of labor but also adjustment costs of capital, and vice-versa. Using data from the Annual Manufacturing Survey, which include plant-level prices, we generate measures of plant-level productivity, demand shocks, and cost shocks, and use them to measure desired factor levels. We then estimate adjustment functions for capital and labor as a function of the gap between desired and actual factor levels. As in other countries, we find non-linear adjustments in employment and capital in response to market fundamentals. In addition, we find that employment and capital adjustments reinforce each other, in that capital shortages reduce hiring and labor shortages reduce investment. Moreover, we find that the market oriented reforms introduced in Colombia after 1990 increased employment adjustments, especially on the job destruction margin, while reducing capital adjustments. Finally, we find that while completely eliminating frictions from factor adjustments would yield a dramatic increase in aggregate productivity through improved allocative efficiency, the reforms introduced in Colombia generated only modest improvements. |
| Keywords: | joint factor adjustment, irreversibilities, adjustment costs, input reallocation, deregulation |
| JEL: | E22 E24 O11 C14 J63 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1751&r=mac |
| By: | Ansgar Belke (University of Hohenheim and IZA Bonn); Bernhard Herz (University of Bayreuth); Lukas Vogel (University of Bayreuth) |
| Abstract: | We test the significance of the relationship between the exchange rate regime and the degree of structural reforms by estimating panel regressions for a world and an OECD country sample. The empirical results suggest a positive correlation between on the one side the adoption of an exchange rate rule and on the other side overall structural reforms as well as reforms in the money and banking sector in the broad country sample. For government size and for market regulation, we do not find any robust significant effect, however. The results do not confirm the main implication of Calmfors-type models, namely a higher degree of reforms under monetary policy autonomy. They corroborate conditional policy convergence and, partly, that limiting monetary policy autonomy fosters structural reforms. |
| Keywords: | exchange rates, monetary policy regime, liberalisation, panel data, political economy of reform |
| JEL: | D78 E52 E61 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1798&r=mac |
| By: | Etibar Jafarov; Anne Marie Gulde; Vassili Prokopenko |
| Abstract: | This paper discusses costs, benefits, and implementation challenges of a possible currency union between Belarus and Russia. It shows that Belarus and Russia are economically closely linked but nevertheless do not fulfill all "optimal currency area" criteria, especially the macroeconomic symmetry condition. Furthermore, we argue that the different speeds of economic liberalization over the past decade have resulted in different economic structures, with Belarus still dependent on monetary financing of budgets and industries. However, a final cost-benefit analysis also needs to consider that currency unification may bring substantial benefits from reduced transaction costs, an improved macroeconomic environment in Belarus, and by acting as a catalyst to advance structural reforms in Belarus. |
| Keywords: | Monetary unions , Belarus , Russian Federation , Currencies , |
| Date: | 2004–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/228&r=mac |
| By: | David A. Grigorian; Armine Khachatryan; Grigor Sargsyan |
| Abstract: | This paper is the first attempt to look at inflation dynamics and monetary transmission mechanisms in Armenia in the context of a full information model containing three interrelated markets: foreign exchange, money, and labor. Using the vector error correction model (VECM) approach, we find that the exchange rate pass-through to prices is very strong relative to credit, wage, and interest rate channels. The analysis suggests a relatively fast adjustment of prices to long-run disequilibria in the exchange rate market, albeit with initial overshooting of the price level. In addition, we find no evidence of prices responding to changes in money and wages in a statistically significant manner. |
| Keywords: | Price adjustments , Armenia , Exchange markets , Wages , Money markets , Labor markets , Economic models , |
| Date: | 2004–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/229&r=mac |
| By: | A. Prasad; Saibal Ghosh |
| Abstract: | The paper examines the association and corporate behavior for a sample of manufacturing firms in India for the post-reform period 1992-2003. The findings suggest that a contractionary monetary policy lowers overall debt including bank debt, although the lagged response is positive, and listed firms increase their short-term bank borrowings, after monetary tightening. The responses of corporates to a monetary contraction in the post-1997 period has been more pronounced. A disaggregated analysis of responses of firms according to size and leverage largely validates these findings. Two policy implications emerge from the analysis. First, the interest rate transmission channel has strengthened since 1998, and, second, corporates in India, especially listed ones, seem to exhibit relationship lending. |
| Keywords: | Governance , India , Monetary policy , |
| Date: | 2005–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/25&r=mac |
| By: | Ivan Tchakarov |
| Abstract: | This paper examines the issue of whether countries can improve their welfare by coordinating macroeconomic policies. The main purpose is to compute the gains from international monetary cooperation as the difference between the steady state consumption levels associated with the Nash and the cooperative outcomes of the game in which monetary authorities pursue active monetary policy. A numerical second-order approximation makes the solution of the model possible. Contrary to Obstfeld and Rogoff (2002), who claim that the gains from international cooperation in monetary policy are negligible, the paper finds that they could be very significant and reach as high as 2.2 percent of steady state consumption. This suggests that individual countries could experience significant welfare losses if they concentrate only on domestic stabilization policies. |
| Keywords: | Monetary policy , International cooperation , |
| Date: | 2004–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/1&r=mac |
| By: | Michael B. Devereux; Woon Gyu Choi |
| Abstract: | This paper empirically explores how fiscal policy (represented by increases in government spending) has asymmetric effects on economic activity at different levels of real interest rates. It suggests that the effect of fiscal policy depends on the level of real rates, since the Ricardian effect is smaller at lower financing costs of fiscal policy. Using threshold regression models on U.S. data, the paper provides new evidence that expansionary government spending is more conducive to short-run growth when real rates are low. It also finds asymmetric effects on interest rates and inflation, and threshold effects associated with substitution between financing methods. |
| Keywords: | Fiscal policy , United States , Government expenditures , Real interest rates , Economic models , |
| Date: | 2005–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/7&r=mac |
| By: | Olivier Jeanne; Lars E. O. Svensson |
| Abstract: | An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap. |
| Keywords: | Deflation , Liquidity , Central Banks , Interest rates , Exchange rates , |
| Date: | 2004–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/162&r=mac |
| By: | Juan Sole |
| Abstract: | This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictions where this policy can be effective. The friction I emphasize is the same as in Lucas (1990): money is required for asset transactions. When the government raises domestic interest rates, agents want to increase their holdings of domestic currency in order to acquire more domestic-currency-denominated assets. Thus, agents do not run on the reserves of the central bank, and the peg survives. A key implication of the model is that an interest rate defense can always be successful, but at great costs for domestic agents. Hence the reluctance of governments to sustain this policy for long periods of time. |
| Keywords: | Interest rates , Currency pegs , Exchange rate regimes , |
| Date: | 2004–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/85&r=mac |
| By: | Helge Berger; George Kopits; István P. Székely |
| Abstract: | In recent years, fiscal performance in Central Europe has steadily deteriorated, in contrast to the improvement in the Baltics. This paper explores the determinants of such differences among countries slated for EU accession. Regression estimates suggest that economic and institutional fundamentals do not provide a full explanation. An alternative explanation lies in the political economy of the accession process, and a game-theoretic model illustrates why a country with a stronger bargaining position might have an incentive to deviate from convergence to the Maastricht criteria. The model generates alternative fiscal policy regimes-allowing for regime shifts-depending on country characteristics and EU policies. |
| Keywords: | Fiscal policy , Europe , European Union , European Economic and Monetary Union , Fiscal reforms , Budget deficits , Economic models , |
| Date: | 2004–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/62&r=mac |
| By: | Mario Catalán; Eduardo J.J. Ganapolsky |
| Abstract: | There is a widespread view that bank capital requirements should be loosened during recessions and tightened during expansions to avoid excessive credit and output swings. This view is based on a partial analysis that ignores the effects of capital requirement policies on the saving decisions of households, and, through this channel, on bank loans and output. We present an intertemporal general equilibrium framework that accounts for such effects and evaluate the optimal responses to loan supply and productivity (loan demand) shocks. In contrast to the standard view, we show that, when loan supply is reduced, increasing the capital requirement allows a faster recovery of households' savings, loans, and output than a flat capital requirement policy. When productivity (loan demand) is reduced, lowering the capital requirement facilitates households' dissaving and amplifies the output decline, but enhances welfare. Finally, we show that if productivity reductions are anticipated-rather than unanticipated-by regulators, lowering the capital requirement preemptively enhances welfare through greater intertemporal smoothing of households' consumption and deposit holdings. |
| Date: | 2005–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/168&r=mac |
| By: | Alina Carare; Robert Tchaidze |
| Abstract: | This paper draws attention to inconsistencies in estimating simple monetary policy rules and their implications for policy advice. We simulate a macroeconomic model with a backward reaction function similar to Taylor (1993). We estimate different versions of a policy rule, using these simulated data. Under certain circumstances, estimations document an illusionary presence of a lagged interest rate, or of forward-looking behavior. Our results are consistent with the fact that several authors found very different versions of monetary policy rules, all fitting the U.S. data well. We also survey the literature, providing a list of issues complicating practical use of Taylor rules. |
| Keywords: | Central banks , Monetary policy , Economic models , |
| Date: | 2005–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/148&r=mac |
| By: | Paul Cashin |
| Abstract: | This paper identifies and describes key features of Caribbean business cycles during the period 1963-2003. In particular, the chronologies in the Caribbean classical cycle (expansions and contractions in the level of output) and growth cycle (periods of above-trend and below-trend rates of economic growth) are identified. It is found that Caribbean classical cycles are longer-lived than those of developed countries and non-Caribbean developing countries. While there are large asymmetries in the duration and amplitude of phases in the Caribbean classical cycle, on both measures the Caribbean growth cycle is much more symmetric. Further, there is some evidence of synchronization among the classical cycles of Caribbean countries, and stronger evidence of synchronization of Caribbean growth cycles. |
| Keywords: | Business cycles , Antigua and Barbuda , Bahamas, The , Barbados , Belize , Dominica , Grenada , Guyana , Haiti , Jamaica , Montserrat , St. Kitts and Nevis , St. Lucia , St. Vincent and the Grenadines , Suriname , Trinidad and Tobago , Economic Growth , |
| Date: | 2004–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/136&r=mac |
| By: | Pau Rabanal; Jordi Galí |
| Abstract: | Our answer: Not so well. We reached that conclusion after reviewing recent research on the role of technology as a source of economic fluctuations. The bulk of the evidence suggests a limited role for aggregate technology shocks, pointing instead to demand factors as the main force behind the strong positive comovement between output and labor input measures. |
| Keywords: | Business cycles , United States , Economic models , |
| Date: | 2005–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/234&r=mac |
| By: | Ari Aisen |
| Abstract: | In response to high and chronic inflation, countries have adopted different stabilization policies. However, the extent to which these stabilization programs were designed for political motives is not clear. Since exchange-rate-based stabilizations (ERBS) create an initial consumption boom followed by a contraction, whereas money-based stabilizations (MBS) generate a consumption bust followed by a recovery, policymakers may consider the timing of elections when determining the nominal anchor for stabilization. This paper finds strong evidence that the choice of nominal anchor depends on elections, implying the existence of political opportunism. ERBS are, on average, launched before elections while MBS are set after them. |
| Keywords: | Stabilization measures , Anti-inflation policy , Economic models , |
| Date: | 2004–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/94&r=mac |
| By: | David Cook; Woon Gyu Choi |
| Abstract: | In a liquid financial market, investors are able to sell large blocks of assets without substantially changing the price. We document a steep drop in the liquidity of the Japanese stock market in the post-bubble period and a steep rise in liquidity risk. We find that, during Japan's deflationary period, firms with more liquid balance sheets were less exposed to stock market liquidity risk, while slowly growing firms were highly exposed to liquidity shocks. Also, aggregate liquidity had macroeconomic effects on aggregate demand through its effect on money demand. |
| Keywords: | Stock markets , Japan , Liquidity , Demand , |
| Date: | 2005–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/6&r=mac |
| By: | Michael Funke; Sebastian Weber; Jörg Döpke; Sean Holly |
| Abstract: | We establish stylised facts for Germany's business cycle at the firm level. Based on longitudinal firm-level data from the Bundesbank's balance sheet statistic covering, on average, 55,000 firms per year from 1971 to 1998, we analyse the reallocation across individual producers and its connection to aggregate business cycles. Our results indicate a pronounced heterogeneity across firms. Moreover, the distribution of growth rates of firm's real sales is influenced by business cycle conditions. The cross-section skewness of real sales changes is counter-cyclical. The results confirm findings for the UK and the US and are, therefore, robust stylised facts of the business cycle. |
| Keywords: | Business Cycles, Cross-Sectional Moments, Firm Growth |
| JEL: | E32 D21 D92 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ham:qmwops:20508&r=mac |
| By: | Alain Ize |
| Abstract: | This paper provides a simple, quantitative, net worth-based, approach to assessing the need for central bank capital. It derives a concept of "core capital" (a function of the central bank's operating expenditures and the carrying cost of its international reserves) as the minimum capital needed by a central bank to ensure the credibility of its inflation target. The approach is illustrated with the published accounts of three loss-making central banks and selected accounting entries for a broader sample of central banks. Policy implications are explored. In particular, the paper argues that central bank capitalizations cannot be automatic and require instead a broad policy debate. |
| Keywords: | Central banks , Costa Rica , Chile , Mozambique , Capital , Reserves , |
| Date: | 2005–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/15&r=mac |
| By: | Bharat Barot (National Institute of Economic Research) |
| Abstract: | This study evaluates the performance of the eight most important Swedish domestic forecasters of real GDP-growth, CPI-inflation and unemployment for the sample period 1993-2001. The evaluation is based on the following measures: mean absolute error, the root mean square error, bias and finally directional accuracy. The forecasts are even compared to naive random walk and random walk with drift models. The results indicate that the current forecasts compared to the year ahead forecasts decline over the forecasting horizons as more information becomes available. The results with respect to the directional accuracy indicate that we are equally good/bad in predicting the directional accuracy for all three macro aggregates. According to the comparisons with the naive random walk model six out of seven Swedish CPI-inflation forecasters were outperformed by the naive random walk model. Tests of bias indicate that the Swedish forecasters underestimate GDP-growth and overestimate CPI-inflation and the unemployment rate for the sample period. All the Swedish forecasters have been successful in predicting the downward trend in CPI-inflation and the unemployment rate. The performance of the Swedish domestic forecasters is better using preliminary GDP-growth outcomes than final. The performance for the current year forecasts is better than the year ahead forecasts for all three macro economic variables. Revisions are positively biased. Key words Mean absolute error, root mean square error, directional accuracy, bias, revisions, final respective preliminary outcomes, Theil index, naïve forecasts |
| Keywords: | MEAN ABSOLUTE ERROR, ROOT MEAN SQUARE ERROR, DIRECTIONAL ACCURACY, BIAS, REVISIONS, FINAL RESPECTIVE PRELIMINARY OUTCOMES |
| JEL: | E |
| Date: | 2005–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510017&r=mac |
| By: | Alain Ize |
| Abstract: | Rapidly rising dollarization and numerous related financial crises in recent years have heightened the need for policy action. This paper contributes to the policy debate by presenting a common analytic framework that examines the roots of de facto financial dollarization under different economic environments and analyzes its interplay with monetary and prudential policies. In addition to providing a systematic analysis of the existence, stability, and multiplicity of dollarization equilibria, the paper makes a few novel contributions. In particular, it stresses the key role played by monetary policy endogeneity and identifies the underlying determinants of the peso premium that are responsible for inducing a preference for the dollar in financial transactions. |
| Keywords: | Dollarization , Monetary policy , Financial crisis , Credit , Risk premium , Economic models , |
| Date: | 2005–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/186&r=mac |
| By: | Albert Jaeger; Ludger Schuknecht |
| Abstract: | Boom and bust phases in asset prices have become a pervasive feature of macroeconomic developments in many advanced economies. This paper studies fiscal policy during boom-bust phases in asset prices and draws several conclusions. First, expansions and contractions in economic activity during such boom-bust phases tend to be highly persistent, cyclical turning points are harder to forecast, and the margins of error for output gap estimates can be large. Second, conventional estimates of revenue elasticities seem not to allow an accurate assessment of the fiscal stance and of the strength of underlying fiscal positions during boom-bust phases. And third, boom-bust phases tend to exacerbate already existing procyclical policy biases, as well as political-economy biases, toward higher spending and public debt ratios. |
| Keywords: | Business cycles , Fiscal policy , Asset prices , Public debt , Budget deficits , |
| Date: | 2004–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/54&r=mac |
| By: | Inci Ötker; Paul Hilbers; Gudrun Johnsen; Ceyla Pazarbasioglu |
| Abstract: | This paper reviews trends in bank lending to the private sector, with a particular focus on Central and Eastern European countries, and finds that rapid growth of private sector credit continues to be a key challenge for most of these countries. The paper discusses possible implications for economic and financial stability and the policy options available to counter and reduce these risks. It argues that the authorities will need to focus on the implications for both the macro economy and the financial system and, depending on their assessment, may need a comprehensive policy response comprising a mix of macro and prudential policies. In particular where there are limitations to the effective use of monetary and fiscal measures, supervisory and prudential policy responses will have a key role in addressing financial stability concerns. |
| Keywords: | Credit expansion , Europe , Financial stability , Economic policy , |
| Date: | 2005–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/151&r=mac |
| By: | J. C. Odling-Smee |
| Abstract: | This paper explains the IMF's impact on economic policies in Russia, focusing on where the IMF made a difference. The Russian economic and political leadership essentially determined economic policies. The IMF's influence was modest: it had only a limited impact on overall fiscal policy and the major structural reforms, but it had a positive impact on monetary policy. A tougher position on fiscal policy in 1996-98 might have produced a better outcome. The G-7's concerns weakened the IMF. However, the IMF played a major role in transferring knowledge about macroeconomic policymaking and implementation. |
| Keywords: | Transition economies , Russian Federation , Fund , Fiscal policy , Structural adjustment , |
| Date: | 2004–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/155&r=mac |
| By: | Demid Golikov |
| Abstract: | This is a short literature overview. (1) The literature demonstrates no coherent view on the nature of economic exchange and, in particular, provides no conventionally accepted, fully satisfactory explanation of the real effects of money. Recent developments in macroeconomics suggest a role for financial intermediaries. (2) The economics literature, however, has very little to say about that though the role of intermediaries in economic history has always been emphasised. (3) Further reading suggests that intermediation is largely missing from economics for methodological reasons. Revival of interest in this topic became evident in recent years thanks to developments in the treatment of asymmetric information, thin markets, and dynamics with innovations. (4) Today's literature, however, still primarily addresses empirical and specific issues like particular functions of intermediaries. Analysis of intermediation in the context of general equilibrium, explanation of its role in the monetary transmission and non-neutrality have not been seriously undertaken. Only a few authors so far have put forward their proposals for this perspective. |
| Keywords: | monetary theory, financial intermediary, asymmetric information, microfoundations |
| JEL: | B41 E4 E51 G21 |
| Date: | 2005–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510018&r=mac |
| By: | C. Gabriel Di Bella; David Hauner |
| Abstract: | This paper revisits the usefulness of econometric monetary analysis in low-income countries in a case study on Rwanda, an interesting case given its floating exchange rate and reliance on indirect monetary policy instruments on the one hand, and its somewhat typical data and institutional shortcomings on the other hand. The findings are generally encouraging for the use of econometric models for monetary analysis in low-income countries. Notwithstanding substantial qualifications, time series and structural models of the money multiplier and money demand yield results that are statistically and economically reasonable enough to usefully inform policymaking. |
| Keywords: | Demand for money , Rwanda , Monetary policy , Economic models , |
| Date: | 2005–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/178&r=mac |
| By: | David Hauner; Kornélia Krajnyák; Martin Mühleisen; Ben Sutton; Stephan Danninger |
| Abstract: | This paper compares Canadian central government budget forecasting with forecasting by other industrial countries. While fiscal forecasting in Canada is governed by one of the strongest institutional frameworks, quantitative analysis suggests that budget projections of macroeconomic and fiscal aggregates have been more cautious than in other countries since the mid-1990s. The relatively volatile macroeconomic environment as well as institutional factors, such as Canada's asymmetric deficit target, have likely contributed to this outcome. |
| Keywords: | Revenues , Developed countries , Economic forecasting , Forecasting models , |
| Date: | 2005–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/66&r=mac |
| By: | Luis Ignacio Jácome; Francisco F. Vázquez |
| Abstract: | This paper reviews central bank legislation in 24 countries in Latin America and the Caribbean during the 1990s. Using panel regressions, we find a negative relationship between legal central bank independence (CBI) and inflation. This result holds for three alternative measures of CBI and after controlling for international inflation, banking crises, and exchange regimes. The result is also robust to the inclusion of a broader indicator of structural reforms that usually go along with changes in central bank legislation, illustrating the complementary nature of various aspects of economic reform. The paper fails, however, to find a causal relationship running from CBI to inflation. |
| Keywords: | Central bank legislation , Latin America , Central bank role , Inflation , Structural adjustment , |
| Date: | 2005–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/75&r=mac |
| By: | Andreas Billmeier |
| Abstract: | This paper investigates various output gap measures in a simple inflation forecasting framework. Reflecting the cyclical position of an economy, an (unobservable) output gap has important implications for economic analysis. I construct and compare common output gap measures for five European countries. Since output above potential reflects domestic inflationary pressures, including a gap could improve the accuracy of autoregressive inflation forecasting. This assertion is tested in a simple simulated out-of-sample forecasting exercise for the period 1990-2002. The main conclusions are that an output gap rarely provides useful information and that there is no single best output gap measure across countries. |
| Keywords: | Production , Inflation , Economic forecasting , |
| Date: | 2004–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/146&r=mac |
| By: | Alfred A. Haug (York University, Canada); Pierre L. Siklos (Wilfrid Laurier University, Canada) |
| Abstract: | This study tests whether changes in the short-term interest rate can best be modelled in a nonlinear fashion. We argue that there are good theoretical and empirical reasons for adopting this strategy. Using monthly data from several industrialized countries, namely Canada, Germany, Sweden, Switzerland, UK, and US, we show that the short-term interest rate movements are better explained, usually via the exponential smooth transition autoregression (ESTR). Unlike the existing literature on non-linear estimation, we consider a number of candidates for the transition variable. These include: an error correction term, estimated from an underlying cointegrating relationship predicted by the expectations hypothesis, the US spread, the domestic spread, inflation and output growth forecasts, and deviations from an inflation target in the case of Canada, the UK and Sweden. The sample spans the period from 1960-1998. We cannot reject non-linearity in the behavior of interest rate changes most often when the (lagged) domestic spread serves as the transition variable. In the case of the inflation targeting countries in our sample, the most appropriate transition variable can be the deviation from the publicly announced inflation target. We supplement estimates with extensive diagnostic testing to ensure that we can reject the linear alternative with reasonable confidence. We believe that changes in central bank policies and in the reaction of market participants over time to such changes argue in favor of the non-linear estimation approach. We would also argue that any model of the term spread over a fairly long span of time necessitates resort to non-linear estimation methods. |
| JEL: | C22 C11 E30 |
| Date: | 2002–08 |
| URL: | http://d.repec.org/n?u=RePEc:yca:wpaper:2002_08&r=mac |
| By: | Alexander F. Tieman; Maria Demertzis |
| Abstract: | We provide a framework for analyzing the choice between optimal and robust monetary policy rules in the presence of paradigm uncertainty. We first discuss the conditions on uncertainty that render a robust rule preferable to an optimal rule. Second, we show how the degree of risk aversion of the policymaker increases the region in which the robust rule is preferred. |
| Keywords: | Monetary policy , Economic models , Risk premium , |
| Date: | 2004–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/96&r=mac |
| By: | H. Takizawa; E. H. Gardner; Kenichi Ueda |
| Abstract: | We question the conventional view that it is optimal for government to maintain a stable level of spending out of oil wealth. We compare this conventional policy recommendation with one where government spends all of its oil revenues upfront, at the same rate as oil is extracted. Using a neoclassical growth model with positive external effects of public spending on consumption and productivity, we find that, if the economy is growing along the steady-state balanced path, the conventional view is validated. However, if the economy starts with a lower capital stock, the welfare ranking across two policies can be reversed. |
| Keywords: | Fiscal policy , Developing countries , Public investment , Oil revenues , Economic growth , Economic models , |
| Date: | 2004–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/141&r=mac |
| By: | Karim Abadir, Giovanni Caggiano and Gabriel Talmain |
| Abstract: | We detect a new stylized fact about the common dynamics of macroeconomic and financial aggregates. The rate of decay of the memory (or persistence) of these series is depicted by their autocorrelation functions (ACFs), and they all fit very closely a parsimonious four-parameter functional form that we present. Not only does our formula fit the data better than the ones that arise from autoregressive models, but it also yields the correct shape of the ACF. This can help policymakers understand the lags with which an economy evolves, and its turning points. |
| JEL: | E32 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_7&r=mac |
| By: | Kevin Greenidge; Karen Chase; Winston Moore; DeLisle Worrell |
| Abstract: | A banking system module is incorporated into the Central Bank of Barbados's multisectoral macroeconomic forecasting model, and a medium-term forecast is generated for bank capitalization, profitability, liquidity and nonperforming loans. Stress tests are performed for the first year of the forecast, to test the banking system's resilience to real sector shocks. The analysis, which would in practice be only part of the vulnerability assessment, indicates that the banking system is stable and resilient to macroeconomic shocks of a type and magnitude that Barbados has experienced in the past. |
| Keywords: | Financial stability , Barbados , Forecasting models , |
| Date: | 2005–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/76&r=mac |
| By: | Francis Y. Kumah; John Matovu |
| Abstract: | Unanticipated changes in commodity prices can generate significant movements in fiscal aggregates. This paper seeks to understand the dynamics of these fiscal movements in the context of transitory commodity price shocks using sample data from four CIS countries- two oil-producing and two non-oil commodity-intensive countries. It adopts a structural VAR approach and identifies the dynamic effects of commodity price shocks on fiscal performance under two broad tax regimes. Stochastic simulations indicate high probabilities of fiscal overperformance in the short term when commodity prices are high. These probabilities deteriorate significantly, however, in the long term after the transitory positive commodity price shock has dissipated, particularly when lax fiscal policy is adopted during the period of the price boom. |
| Date: | 2005–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/171&r=mac |
| By: | Roel M. W. J. Beetsma; Xavier Debrun |
| Abstract: | The paper analyzes some key policy trade-offs involved in the implementation of the Stability and Growth Pact. Greater "procedural" flexibility in the Pact's implementation may improve welfare. Procedural flexibility designates the enforcer's room to apply judgment on underlying policies and to set a consolidation path that does not discourage high-quality measures. Budgetary opaqueness may hinder the qualitative assessment of fiscal policy; therefore, better monitoring and greater transparency would increase the benefits from procedural flexibility. Overall, a simple deficit rule with conditional procedural flexibility can contain excessive deficits, lower unproductive spending, and increase high-quality outlays. |
| Keywords: | Fiscal reforms , Stabilization measures , Stabilization programs , Budget deficits , Structural adjustment , Economic growth , |
| Date: | 2005–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/59&r=mac |
| By: | Boonserm Booncharoenpol (Faculty of Economics Krirk University) |
| Abstract: | SAVING DOES NOT EQUAL INVESTMENT John Maynard Keynes confused economists and politicians all over the world when he wrote, “Saving is necessary to equal investment” together with a few equations to confirm his idea and finally concluding that S = I. There have been repeated discussions about how saving can equal investment, accidentally or with certainty. We may think that Keynes explained about how saving money is used in the same amount either to invest by savers or by borrowers. But this is not what he meant. Keynes merely wrote that saving is residual. Residual from what? This paper shows that S always equals I in a closed economy. But even as S equals I, saving does not equal investment. Because I is investment but S is not saving. |
| Keywords: | Keynes, saving, investment, S does not equal I, Confusion about saving |
| JEL: | E |
| Date: | 2005–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510014&r=mac |
| By: | Paolo Manasse |
| Abstract: | The paper presents a simple model for discussing the effects of deficit limits and budget rules on fiscal policy. I find that limits on deficit-output ratios provide incentives to implement procyclical policies when the economy is in intermediate states, and countercyclical policies only in very "good" and very "bad" economic times. As a result, fiscal "reaction functions" are not monotonically related to the state of the economy. Deficit limits are found to exert discipline only provided the limit is tight and the expected sanction large, albeit at a relatively large welfare cost. Moreover, when fiscal choices are made under a veil of ignorance about the output gap, an increase in volatility is likely to raise the level of the budget deficit. Finally, concerning the design of fiscal frameworks, when excessive deficits arise from a political bias, deficit limits should be symmetric and not state-contingent. |
| Keywords: | Fiscal management , Budget deficits , Economic growth , Economic stabilization , Economic policy , Economic models , |
| Date: | 2005–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/120&r=mac |
| By: | Andrés Arias; Lei Zhang; A. Javier Hamann |
| Abstract: | Based on the observed behavior of monetary aggregates and exchange rates, we classify inflation-stabilization episodes into two categories: de facto exchange rate-based stabilizations (ERBS) and non-ERBS. Unlike the standard de jure ERBS studied in the literature, de facto ERBS encompass cases in which the central bank intervenes in the foreign exchange market but does not preannounce the use of an exchange rate anchor. The number of the de facto ERBS is twice as large as that of de jure ERBS. Output dynamics during disinflation do not differ significantly between these two groups. We conclude that empirical studies on the effects of exchange rate anchors must seek to disentangle the effects of their announcement from those related to their role in the remonetization process. |
| Keywords: | Monetary policy , Disinflation , Exchange rates , Economic stabilization , |
| Date: | 2005–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/33&r=mac |
| By: | Ossama Mikhail (University of Central Florida); J. Walter Milon (University of Central Florida); Richard Hofler (University of Central Florida) |
| Abstract: | Assume that 'green accounting' has been adopted and implemented, does an investment in environmental quality play a role similar to the investment in capital in towing the economy out of a recession? To answer the question, we integrate 'green accounting' into a stochastic dynamic general equilibrium model to study the short-run consequences of investment in environmental quality and hereby addressing if there is an incentive-based fiscal environmental solution to recessions. Surprisingly and counter intuitive, we found that reducing the rate at which humans consume the environment renders a fiscal policy - that engage in environmental investment - less effective in providing a thrust out of a recession. Conditional on the proposed model and the calibrated parameters, we conclude that an increase of one percent in environmental investment will crowd out real quarterly consumption in a range from $ 102.74 billions to $ 171.11 billions, on average, in every quarter for seven years following the investment (measured in chained 2000 dollars). Therefore, we argue that investment in environmental quality is not a solution to recessions. This result is a striking contrast to the conclusion reached in Weitzman and Löfgren (1997, Journal of Environmental Economics and Management, 32 (2), 139-153). |
| Keywords: | Environmental Quality, Green Accounting, Stochastic Dynamic General Equilibrium models |
| JEL: | E32 |
| Date: | 2005–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0510010&r=mac |
| By: | Giovanni Ganelli |
| Abstract: | This paper studies, in the context of a New Open Economy Macroeconomics (NOEM) model, the effects of "public competition policies" aimed at improving the efficiency of public spending. Such measures are modeled as an increase in the price elasticity of public consumption. The paper finds that public competition policies significantly affect macroeconomic interdependence across countries. Following a domestic fiscal expansion, an higher public price elasticity increases the substitutability between goods purchased by the domestic and the foreign governments. The same exchange rate variation can therefore sustain larger shifts in relative demand for goods. The expenditure-switching effect is magnified, implying a larger change in relative output. In welfare terms, countries with a larger government sector have an incentive to promote public competition policies. |
| Keywords: | Government expenditures , Economic models , |
| Date: | 2004–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/102&r=mac |
| By: | Ebrima Faal |
| Abstract: | This paper analyzes the sources of Mexico's economic growth since the 1960s and compares various decompositions of historical growth into its trend and cyclical components. The role of the implied output gaps in the inflationary process is then assessed. Looking ahead, the paper presents medium-term paths for GDP based on alternative assumptions for productivity growth rates. The results indicate that the most important factor underlying the slowdown in output growth was a decline in trend total factor productivity growth. Economic policy reforms and the introduction of NAFTA may have raised trend productivity growth in recent years. Further increases in productivity growth would appear necessary, however, to raise medium-term growth. |
| Keywords: | Economic growth , Mexico , Inflation , Production , Economic models , |
| Date: | 2005–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/93&r=mac |
| By: | Tao Sun |
| Abstract: | This paper develops an approach for forecasting in Thailand core inflation. The key innovation is to anchor the projections derived from the short-term time-series properties of core inflation to its longer-run evolution. This involves combining a short-term model, which attempts to distill the forecasting power of a variety of monthly indicators purely on goodness-of-fit criteria, with an equilibrium-correction model that pins down the convergence of core inflation to its longer-run structural determinants. The result is a promising model for forecasting Thai core inflation over horizons up to 10, 24, and 55 months, based on a root mean-squared error criterion as well as a mean absolute error criterion. |
| Keywords: | Forecasting models , Thailand , Inflation , |
| Date: | 2004–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/90&r=mac |
| By: | Tao Wang |
| Abstract: | This paper reviews the evolution of China's real effective exchange rate between 1980 and 2002, and uses a structural vector autoregression model to study the relative importance of different types of macroeconomic shocks for fluctuations in the real exchange rate. The structural decomposition shows that relative real demand and supply shocks account for most of the variations in real exchange rate changes during the estimation period. The paper also finds that supply shocks are as important as nominal shocks in accounting for real exchange rate fluctuations, in contrast with other studies that show that, in industrial countries, nominal shocks are more important in explaining real exchange rate fluctuations. |
| Keywords: | Real effective exchange rates , China , |
| Date: | 2004–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/18&r=mac |
| By: | Günter Coenen; Roland Straub |
| Abstract: | In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non- Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also because of the large negative wealth effect induced by the highly persistent nature of government spending shocks. |
| Date: | 2005–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/159&r=mac |
| By: | Hristos Doucouliagos; Martin Paldam (Department of Economics, University of Aarhus, Denmark) |
| Abstract: | The AEL (aid effectiveness literature) studies the macroeconomic effect of development aid using cross-country or panel data econo¬metrics. It contains about 100 papers of which 43 study whether development aid increases accumulation in the recipient country. Taking all 43 aid-accumulation studies together, the results show that aid has a small insignificant positive effect on investment, and a (fairly) small significant negative effect on domestic savings. The aggregate result is thus an unclear effect on accumulation, but with regional differences. When only studies of Latin American or Asian economies are considered, a small positive and statistically significant investment effect is found, together with a small negative effect on domestic savings. We conclude that in Asia and Latin America, aid is a substitute to domestic savings, but has a net positive impact on investment. |
| Keywords: | Aid effectiveness, meta study, investments, savings |
| JEL: | B2 E21 E22 F35 |
| Date: | 2005–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2005-12&r=mac |
| By: | Antonio Spilimbergo; Goohoon Kwon |
| Abstract: | Russia's regions are heavily exposed to regional income shocks because of an uneven distribution of natural resources and a Soviet legacy of heavily skewed regional specialization. Also, Russia has a limited mobility of labor and lacks fiscal instruments to deal with regional shocks. We assess how these features influence the magnitude and persistence of regional income shocks, through a panel vector autoregression, drawing on extensive and unique regional data covering last decade. We find that labor mobility associated with regional shocks is far lower than in the United States yet higher than in the EU-15, and that regional expenditures tend to expand in booms and contract in recessions. We discuss institutional factors behind these outcomes and policy implications. |
| Keywords: | Fiscal policy , Russian Federation , Labor mobility , |
| Date: | 2005–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/185&r=mac |
| By: | Hamid Faruqee |
| Abstract: | Exchange rate pass-through in a set of euro area prices along the pricing chain is examined. Using a vector autoregression (VAR) approach, the empirics analyze the joint time-series behavior of the euro exchange rate and a system of euro-area prices in response to an exchange rate shock. The impulse-response functions from the VAR estimates are used to identify-in a 'new open economy macroeconomics model'-those key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. Area-wide prices are found to display incomplete pass-through, consistent with euro currency-pricing and pricing-to-market behavior. The results are compared to those for the other major industrial economies, and suggest that, as with the United States, "expenditure-switching" effects on the current account still operate but are generally small. |
| Keywords: | Exchange rates , Prices , Economic models , |
| Date: | 2004–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/14&r=mac |
| By: | Charles Engel; Akito Matsumoto |
| Abstract: | This paper develops a two-country monetary DSGE (dynamic stochastic general equilibrium) model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some goods prices are set without full information of the state. Home and foreign portfolios are not identical in equilibrium. In response to technology shocks, sticky prices generate a negative correlation between labor income and the profits of domestic firms, biasing portfolios in favor of home equities. In contrast, under flexible prices, labor income and the profits of the domestic firms are positively correlated. |
| Date: | 2005–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/165&r=mac |
| By: | Hamid Faruqee |
| Abstract: | This paper examines the impact of European Economic and Monetary Union (EMU) on trade within the euro area. Using panel data for 22 industrial countries, the analysis estimates the effect of the euro's arrival on area-wide trade compared to bilateral trade flows between other industrial countries. Controlling for other influences according to the "gravity" model of trade, the panel analysis employs cointegration techniques to obtain reliable point estimates of EMU trade effects. Cross-country differences with respect to EMU trade gains and underlying factors accounting for these differences are also further explored. |
| Keywords: | Trade , European Economic and Monetary Union , Bilateral trade , Euro area , |
| Date: | 2004–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/154&r=mac |
| By: | Gabriel Srour |
| Abstract: | The paper develops a simple three-sector model of a developing country with nominal wage rigidity, in which one sector is thought of as the primary sector and the other two are sectors in which the country can diversify. The paper then analyzes the relationship between the market structure of the nonprimary sectors and equilibrium adjustments to shocks in the primary sector. In particular, the paper examines under what conditions the country should promote one nonprimary sector over another. Among other things, it argues that developing countries should promote those sectors that are more integrated with the outside world |
| Keywords: | Exchange rate policy , Developing countries , Economic models , Production , Prices , Wages , Trade , Price elasticity , Demand elasticity , Consumption , Economic stabilization , |
| Date: | 2004–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/60&r=mac |
| By: | Valerie Cerra; Sweta Chaman Saxena |
| Abstract: | Using panel data for a large number of countries, we find that economic contractions are not followed by offsetting fast recoveries. Trend output lost is not regained, on average. Wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth, whereas we find absolute convergence in expansions. The output costs of political and financial crises are permanent on average and long-term growth is negatively linked to volatility. These results also imply that panel data studies can help identify the sources of growth and that economic models should be capable of explaining growth and fluctuations within the same framework. |
| Keywords: | Economic growth , Economic recovery , Production , Business cycles , |
| Date: | 2005–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/147&r=mac |
| By: | Michael Kumhof; Evan Tanner |
| Abstract: | The literature on optimal fiscal policy finds that highly volatile real returns on government debt, for example through surprise inflation, have very low costs. However, policymakers are almost always very apprehensive of this option. The paper discusses evidence concerning features of developing country financial markets that are missing in existing models, and that may suggest why this policy is considered so costly in practice. Most importantly, domestic banks choose to be highly exposed to government debt because the alternative, private lending, is more risky under existing legal and institutional imperfections. This exposure makes banks and their borrowers vulnerable to the government's debt policy. |
| Keywords: | Fiscal policy , Taxation , Inflation , Public debt , |
| Date: | 2005–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/57&r=mac |
| By: | Jens R. Clausen; Magda E. Kandil |
| Abstract: | The paper investigates cyclical fluctuations in the current and financial (formerly capital) accounts of the balance of payments and major underlying components for nine industrial countries. The empirical model uses as explanatory variables domestic output growth, price inflation, real exchange rate fluctuations, energy price inflation, global growth, and regional growth. The evidence from the estimation of the model indicates the importance of fluctuations in output growth to the cyclicality of the current and financial account balances. The necessary and sufficient condition to sustain a large current account deficit is high domestic growth, which tends to stimulate financial inflows and provides adequate resources for financing. Other factors appear to be less important to the cyclicality of the current and financial account balances and their negative correlations. |
| Keywords: | Current account , Australia , Canada , Denmark , France , Germany , Italy , New Zealand , Sweden , United Kingdom , Capital account , Production , Economic models , |
| Date: | 2005–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/56&r=mac |
| By: | Rouben Atoian; Alex Mourmouras; Saleh M. Nsouli |
| Abstract: | This paper assesses empirically the links among a country's institutions and political environment, its implementation of IMF-supported programs, and macroeconomic performance in a sample of 197 programs approved between 1992 and 2002. We find that a stronger institutional and political environment is associated with better macroeconomic outcomes, especially at longer time horizons. This direct beneficial effect of institutions on macroeconomic outcomes is in addition to their indirect effect through better program implementation. We also find that program implementation exerts an independent influence on macroeconomic outcomes, especially over shorter time horizons of up to two years. Better-implemented programs are associated with lower inflation and with initially weaker but ultimately stronger external and fiscal outcomes, but with a statistically insignificant impact on economic growth. |
| Keywords: | Fund-supported adjustment programs , Economic models , |
| Date: | 2004–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/184&r=mac |
| By: | Benoît Julien (Australian Graduate School of Management); John Kennes (Department of Economics, University of Copenhagen); Ian King (University of Otago) |
| Abstract: | This paper analyzes monetary exchange in a search model allowing for multilateral matches to be formed, according to a standard urn-ballprocess. We consider three physical environments: indivisible goods and money, divisible goods and indivisible money, and divisible goods and money. We compare the results with Kiyotaki and Wright (1993), Trejos and Wright (1995), and Lagos and Wright (2005) respectively. We find that the multilateral matching setting generates very simple and intuitive equilibrium allocations that are similar to those in the other papers, but which have important differences. In particular, surplus maximization can be achieved in this setting, in equilibrium, with a positive money supply. Moreover, with flexible prices and directed search, the first best allocation can be attained through price posting or through auctions with lotteries, but not through auctions without lotteries. Finally, analysis of the case of divisible goods and money can be performed without the assumption of large families (as in Shi (1997)) or the day and night structure of Lagos and Wright (2005). |
| Keywords: | monetary exchange; directed search; ex post bidding; multilateral matching |
| JEL: | C78 D44 E40 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0518&r=mac |
| By: | Tesfatsion, Leigh S. |
| Abstract: | Agent-based Computational Economics (ACE) is the computational study of economic processes modeled as dynamic systems of interacting agents. This essay discusses the potential use of ACE modeling tools for the study of macroeconomic systems. Points are illustrated using an ACE model of a two-sector decentralized market economy. |
| Keywords: | Agent-based computational economics; Complex adaptive systems; Macroeconomics; Microfoundations; |
| JEL: | B4 C6 C7 D4 D5 D6 D8 L1 |
| Date: | 2005–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12402&r=mac |
| By: | Yongzheng Yang; Sanjeev Gupta; Robert Powell |
| Abstract: | This paper surveys the economic literature on the scaling-up of aid to Africa. It provides a checklist of issues that need to be considered when preparing a long term macroeconomic projection for a country involving the assumption of a significant increase in aid. Such scaling-up scenarios are most likely to be developed in the context of a country's efforts to achieve the Millennium Development Goals (MDGs) with the support of the international donor community. The paper stresses that when preparing a scaling-up scenario it is critical to have a detailed understanding of the likely use of additional aid flows. |
| Keywords: | Development assistance , Africa , Exchange rates , Monetary policy , Fiscal policy , Governance , |
| Date: | 2005–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/179&r=mac |
| By: | Valerie Cerra; Sweta Chaman Saxena |
| Abstract: | Sweden represents an archetypal welfare state economy, with extensive government safety nets. Some scholars have attributed a decline in its per capita income ranking since 1970 to "eurosclerosis" or sluggish growth caused by distortionary policies. This paper argues rather, that the permanent loss in output following Sweden's banking crisis in the early 1990s explains the decline in its per capita GDP ratings. The paper finds no macroeconomic evidence that welfare state policies have deterred growth. The results warn that empirical growth analyses should distinguish between trend output growth and permanent output loss associated, for example, with financial crises. |
| Keywords: | Production , Sweden , Financial crisis , Social policy , Income , |
| Date: | 2005–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/29&r=mac |
| By: | Erdem Basci; M. Fatih Ekinci; Murat  Yülek |
| Abstract: | Fiscal rules are being increasingly used by both emerging and developed economies. This paper analyzes two alternative fiscal policy rules in terms of their impact on debt sustainability: a rule that fixes the ratio of primary surplus to GDP ("fixed surplus rule") and one that sets the primary surplus as a linear function of debt to GDP ratio ("variable surplus rule"). A simple debt dynamics equation, incorporating real shocks, is constructed, and the probability of exceeding the critical debt level is simulated using Monte Carlo techniques. The results show that the variable surplus rule performs better than the simple fixed surplus rule, by reducing debt sustainability concerns and the necessary medium-term primary surplus. This result hinges on the government's ability to make a credible commitment to the variable surplus rule in the medium run. |
| Keywords: | Debt , Fiscal policy , Debt restructuring , Economic models , |
| Date: | 2004–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/117&r=mac |
| By: | Charalambos G. Tsangarides |
| Abstract: | This paper attempts to identify robust patterns of cross-country growth behavior in the world as a whole and Africa. It employs a novel methodology that incorporates a dynamic panel estimator, and Bayesian Model Averaging to explicitly account for model uncertainty. The findings indicate that: (i) in addition to initial conditions, various economic factors such as higher investment, lower inflation, lower government consumption, better fiscal stance, improved political environment, exogenous terms-of-trade shocks, and fixed geographical factors are robustly correlated with growth; (ii) what is good for growth around the world is, in principle, also good for growth in Africa; and (iii) political and institutional variables are particularly important in explaining African growth. |
| Keywords: | Economic growth , Africa , Economic models , |
| Date: | 2005–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/18&r=mac |
| By: | George W. Evans; Seppo Honkapohja; Noah Williams |
| Abstract: | We study the properties of generalized stochastic gradient (GSG) learning in forward-looking models. We examine how the conditions for stability of standard stochastic gradient (SG) learning both differ from and are related to E-stability, which governs stability under least squares learning. SG algorithms are sensitive to units of measurement and we show that there is a transformation of variables for which E-stability governs SG stability. GSG algorithms with constant gain have a deeper justification in terms of parameter drift, robustness and risk sensitivity. |
| JEL: | C62 C65 D83 E10 E17 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberte:0317&r=mac |
| By: | S. Beidas; Magda E. Kandil |
| Abstract: | This paper sheds light on the quantitative behavioral responses of key economic variables in the Palestinian economy in the face of major economic shocks and draws implications for the choice of an exchange rate regime should a decision be taken to introduce a national currency. Time-series regression analysis shows that (i) wages and prices are flexible in the face of various shocks; (ii) the real wage appears rigid in the face of various shocks and increases despite higher unemployment; (iii) an appreciation of the new Israeli Sheqalim real effective exchange rate decreases exports and imports; and (iv) money demand appears stable in the face of exchange rate shocks. Although a fixed exchange rate system may initially be desirable to establish credibility of the new currency, some flexibility of the exchange rate is desirable over time. |
| Keywords: | Exchange rate regimes , West Bank and Gaza Strip , Currencies , Currency substitution , |
| Date: | 2005–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/70&r=mac |
| By: | Bernardin Akitoby; Benedict J. Clements; Sanjeev Gupta; Gabriela Inchauste |
| Abstract: | We examine the short- and long-term movements of government spending relative to output in 51 countries. We find that in the short term, the main components of government spending increase with output in about half of the sample countries, with some variation across spending categories and countries. Further, we find that there is a long-term relationship between government spending and output (in line with "Wagner's law") for the majority of countries for at least one spending aggregate. In the short term, we find that power dispersion and government size typically dampen the positive response of government spending to output. Output volatility and financial risk, on the other hand, contribute to the procylicality of government spending. |
| Keywords: | Fiscal policy , Developing Countries , Government Expenditures , Business cycles , |
| Date: | 2004–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/202&r=mac |
| By: | Etienne B. Yehoue |
| Abstract: | This paper seeks to elucidate the debate over currency union in Africa. The paper examines whether empirical investigation points to the gradual emergence of currency blocs. Based on the historical data on inflation, trade, and the comovements of prices and outputs, I argue that the emergence of large-scale currency blocs in Africa will follow a gradual path and that this dynamic does not lead to the emergence of a single continental currency at this time. Rather, the pattern which emerges seems to suggest three blocs: one in West Africa, a second around South Africa, and a third in Central Africa. Although little evidence is found supporting the emergence of a single African currency at this time, the emergence of an African currency union is not necessarily precluded, since the ultimate decision to surrender a nation's monetary policy to a supranational institution is not made based solely on economic considerations. I then address the issue of a possible anchor for the union, were it to emerge and opt for an anchorage. I find- based on the trade criterion-that the euro seems to be a good choice. |
| Keywords: | Monetary unions , Africa , Financial crisis , Emerging markets , Production , Trade relations , Economic models , |
| Date: | 2005–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/45&r=mac |
| By: | Mark Huggett (Georgetown University) and Juan Carlos Parra (Georgetown University) (Department of Economics, Georgetown University) |
| Abstract: | How far is the US social insurance system from an efficient system? We answer this question within a model where agents receive idiosyncratic, labor-productivity shocks that are privately observed. When social security and income taxation comprise the social insurance system, the maximum possible efficiency gain is equivalent to a 10.5 percent increase in consumption. This occurs when labor productivity differences are set to the permanent differences estimated in US data. Classification-JEL Codes: D80, D90, E21 |
| Keywords: | Social Security, Idiosyncratic Shocks, Efficient Allocations, Private Information |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~05-05-16&r=mac |
| By: | Ari Aisen; Francisco José Veiga |
| Abstract: | While most economists agree that seigniorage is one way governments finance deficits, there is less agreement about the political, institutional, and economic reasons for relying on it. This paper investigates the main determinants of seigniorage using panel data on about 100 countries, for the period 1960-1999. Estimates show that greater political instability leads to higher seigniorage, especially in developing, less democratic, and socially polarized countries, with high inflation, low access to domestic and external debt financing and with higher turnover of central bank presidents. One important policy implication of this study is the need to develop institutions conducive to greater economic freedom as a means to lower the reliance on seigniorage financing of public deficits. |
| Keywords: | Political economy , Currency issuance , Money supply , Economic models , |
| Date: | 2005–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/175&r=mac |
| By: | Ratna Sahay |
| Abstract: | Although Caribbean countries have been largely successful in bringing annual inflation down to single digits in recent years-regardless of their exchange rate regime-their growth rates have been disappointing and their public debt has risen rapidly. By 2003, 14 of 15 Caribbean countries ranked in the top 30 of the world's highly indebted emerging market countries. Most of the increase in their public debt is accounted for by a deterioration in primary fiscal balances that has been largely due to a sharp increase in expenditures rather than a fall in revenues. With the countries of the region now increasingly facing unsustainable debt positions, innovative ways need to be found to raise their economic growth rates and generate fiscal savings to reverse the debt buildup, and to maintain or raise their current living standards. |
| Keywords: | Stabilization measures , Stabilization programs , Debt , Fiscal policy , |
| Date: | 2005–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/26&r=mac |
| By: | Papa M'B. P. N'Diaye; Steven Vincent Dunaway |
| Abstract: | This paper proposes an approach to setting fiscal policy that factors in the longer-term budgetary pressures that countries face owing, in particular, to population aging and rising health care costs. The approach attempts to overcome the difficulties in evaluating economic trade-offs and social welfare over extended periods. Long-term fiscal projections from the "Intergenerational Report" published as part of the Australian budget in May 2002 are used in a simple model of the Australian economy to illustrate some of the longer-term trade-offs that need to be considered in framing budgets over the medium term. These illustrative simulations, in particular, point out the importance of smoothing fiscal adjustment over time and, hence, the need for careful planning. Smoothing fiscal adjustment, however, raises a new set of questions regarding burden sharing across generations and what costs should be shared. |
| Keywords: | Fiscal policy , Australia , Population , Aging , Health care , Economic models , |
| Date: | 2004–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/113&r=mac |
| By: | Vladimir Klyuev |
| Abstract: | This paper introduces a tractable capital market friction mechanism that allows a break of the parity between domestic and external interest rates and generates a gradual evolution of capital stock and other macroeconomic variables-in contrast to the instantaneous convergence found in models with interest rate parity. The friction, derived from explicit microfoundations, is such that the cost of new loans is an increasing function of net borrowing. The paper also presents a two-sector, open economy model of capital accumulation, where the friction mechanism is combined with standard assumptions about household preferences and production technology, which generates plausible dynamics of macroeconomic variables. |
| Keywords: | Real effective exchange rates , Capital inflows , Capital accumulation , Economic models , |
| Date: | 2004–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/31&r=mac |
| By: | Hristos Doucouliagos; Martin Paldam (Department of Economics, University of Aarhus, Denmark) |
| Abstract: | The AEL consists of empirical macro studies of the effects of development aid. At the end of 2004 it had reached 97 studies of three families, which we have summarized in one study each using meta-analysis. Studies of the effect on investments show that they rise by 1/3 of the aid – the rest is crowded out by a fall in savings. Studies of the effect on growth show an insignificant positive effect. Studies of the effect on growth, conditional on something else, have till now shown weak results. The Dutch Disease effect of aid has been ignored. The best aggregate estimate is that since its start in the early 1960s aid has increased the standard of living in the poor countries by 20%. |
| Keywords: | Aid effectiveness, meta study, accumulation, growth |
| JEL: | B2 E21 E22 F35 |
| Date: | 2005–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2005-15&r=mac |
| By: | Etienne B. Yehoue |
| Abstract: | The recent experience of the European Economic and Monetary Union (EMU) has stimulated the debate over currency union and reinforced the incentive for the emergence of currency blocs in other regions of the world. This paper builds a dynamic stochastic model-based on network externalities operating through trade channels-to explain the emergence of currency blocs, and specifically, why some countries join a currency union earlier than others. The paper develops and formalizes the intuition that currency bloc formation is path dependent, and that countries join currency blocs sooner the more they trade with the bloc member countries, with each additional member serving in a dynamic way to attract more members into the bloc. Evidence from the current pattern of EMU expansion supports the model, which is later used to elaborate on the pattern of further expansion of the union. |
| Keywords: | Monetary unions , European Economic and Monetary Union , Trade relations , Economic models , |
| Date: | 2004–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/222&r=mac |
| By: | Ayumu Yamauchi |
| Abstract: | The paper examines fiscal sustainability issues for the case of Eritrea but has wider implications for addressing fiscal and debt sustainability. It begins with a formal definition and explanation of analytical sustainability indicators, followed by an assessment of the causes of fiscal deficits and their impact on the usual indicators of fiscal and external debt sustainability. The paper then goes beyond the usual analytical indicators by attempting to identify how and through which channels fiscal and other economic policies have affected the behavior of endogenous variables that in one way or another influence sustainability. |
| Keywords: | Fiscal policy , Eritrea , |
| Date: | 2004–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/7&r=mac |
| By: | Victor Duarte Lledo |
| Abstract: | This paper uses a dynamic computable general equilibrium model (CGE) to analyze the macroeconomic and redistributive effects of replacing turnover and financial transaction taxes in Brazil by a consumption tax. In order to approximate Brazil's compliance with its fiscal adjustment targets, the proposed reform is subject to a non increasing path for the level of public debt. Despite an increase in the average consumption tax rate in the first years after the reform, a majority of individuals experienced an increase in their lifetime welfare. This result rejects the hypothesis that the on-going fiscal adjustment effort carried on by the Brazilian government was an obstacle to the implementation of a more efficient tax system. |
| Keywords: | Tax reforms , Brazil , Fiscal reforms , Economic models , |
| Date: | 2005–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/142&r=mac |
| By: | Ari Aisen; Francisco José Veiga |
| Abstract: | Economists generally accept the proposition that high inflation rates generate inefficiencies that reduce society's welfare and economic growth. However, determining the causes of the worldwide diversity of inflationary experiences is an important challenge not yet satisfactorily confronted by the profession. Based on a dataset covering around 100 countries for the period 1960-99 and using modern panel data econometric techniques to control for endogeneity, this paper shows that a higher degree of political instability is associated with higher inflation. The paper also draws relevant policy implications for the optimal design of inflation-stabilization programs and of the institutions favorable to price stability. |
| Keywords: | Economic conditions , Inflation , Economic models , |
| Date: | 2005–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/49&r=mac |
| By: | Gerhard Fenz (Oesterreichische Nationalbank, Econometric Modelling Group, Otto-Wagner Platz 3, POB 61, A-1011 Vienna); Martin Spitzer (Oesterreichische Nationalbank, Econometric Modelling Group, Otto-Wagner Platz 3, POB 61, A-1011 Vienna) |
| Abstract: | The modelling strategy of the Austrian Quarterly Model (AQM) is in the tradition of the ”neoclassical synthesis”, a combination of Keynesian short-run analysis and neoclassical long-run analysis. The short run dynamics are based on empirical evidence, the long run relationships are derived from a neoclassical optimization framework. Adjustment processes to the real equilibrium are sluggish. Imperfections on goods and labour markets typically prevent the economy to adjust instantaneously to the long run equilibrium. In the current version of the AQM the formation of expectations is strictly backward looking. The relatively small scale of the model keeps the structure simple enough for projection and simulation purposes while incorporating a suciently detailed structure to capture the main characteristics of the Austrian economy. The main behavioural equations are estimated using the two-step Engle-Granger technique. The AQM constitutes the Austrian block of the ESCB multi-country model (MCM). |
| Date: | 2005–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:104&r=mac |
| By: | Fabio Giambiagi; Márcio Valério Ronci |
| Abstract: | We look into Brazil's public sector accounts during the two administrations of President Fernando Henrique Cardoso: 1995-98 and 1998-2002. We underline the fact that the authorities' attitude was as important as the pace of the structural reforms for understanding the dynamics of the public sector debt and deficit. The high deficit of the first administration (1995-98) resulted from an expansionary policy, while the adjustment of 1999 is seen as proof of a commitment to fiscal rigor and the need to finance public spending adequately. We present a detailed breakdown of the fiscal outcomes. Two important messages come out: (a) the principal cause of the fiscal deterioration in the first Cardoso administration was the deterioration in the primary balance rather than the increase in the interest payments on public debt; and (b) the fiscal adjustment was entirely on account of increased revenues, as the federal primary public expenditure grew in real terms during the eight years of the two administrations. We consider the outlook for fiscal sustainability, and conclude that, to preserve the hard-won fiscal discipline, the authorities' recent austere fiscal attitude should be permanently embedded into the fiscal institutions. |
| Keywords: | Fiscal policy , Brazil , External debt , Structural adjustment , Economic reforms , |
| Date: | 2004–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/156&r=mac |
| By: | Shintaro Yamaguchi |
| Abstract: | This paper reviews several methods to measure wage flexibility, and their suitability for evaluating the extent of such flexibility during times of structural change, when wage distributions and wage curves can be particularly volatile. The paper uses nonparametric estimation to capture possible nonlinearities in the wage curve and relaxes the assumption of a stable wage distribution over time by linking the shape of the wage change distribution to macroeconomic variables. The proposed methodology is applied to Polish micro data. The estimates confirm that wages are less elastic in a high-unemployment/low-wage environment. Based on a comparison of actual and counterfactual wage distributions, the effects of nominal wage rigidities on real wages, and thus, on the labor market and the real economy, were limited until 1998, but have been quite significant thereafter. |
| Keywords: | Wages , Poland , Europe , Labor markets , Wage adjustments , |
| Date: | 2005–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/134&r=mac |
| By: | Andreas Billmeier |
| Abstract: | The output gap-which measures the deviation of actual output from its potential-is frequently used as an indicator of slack in an economy. This paper estimates the Finnish output gap using various empirical methods. It evaluates these methods against economic history and each other by a simulated out-of-sample forecasting exercise for Finnish CPI inflation. Only two gap measures, stemming from a frequency domain approach and the Blanchard-Quah decomposition, perform better than the naïve prediction of no change in inflation-but do not improve upon a simple autoregressive forecast. The pronounced volatility of output in Finland makes it particularly difficult to estimate potential output, producing considerable uncertainty about the size (and sign) of the gap. |
| Keywords: | Production , Finland , Inflation , Economic forecasting , |
| Date: | 2004–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/57&r=mac |
| By: | Theodore Panagiotidis (Dept of Economics Univ. of Loughborough); Gianluigi Pelloni (University of Bologna) |
| Abstract: | The non-linearity of macroeconomic processes is becoming an increasingly important issue both at theoretical and empirical level. This trend holds for labour market variables as well. Reallocation theory of unemployment relies on non-linearities. At the same time there is mounting empirical evidence of business cycles asymmetries. Thus the assumption of linearity /non-linearity becomes crucial for the corroboration of labour market theories. This paper turns on the microscope on the assumption of linearity and investigates the presence of asymmetries on aggregate and disaggregate labour market variables. The assumption of linearity is tested using five statistical tests for the US and Canadian unemployment rates, growth rates of the employment sectoral shares of construction, finance, manufacturing and trade sectors. An AR(p) model was used to remove any linear structure from the series. Evidence of non-linearity is found for the sectoral shares with all five statistical tests in the US case but not in the aggregate level. The results for Canada are not clear-cut. Evidence of unspecified non-linearity is found in the unemployment rate and in the sectoral shares. Overall important asymmetries are found in disaggregated labour market variables in the univariate setting. The linearity hypothesis was also examined in a multivariate framework. Evidence is provided that important asymmetries exist and a linear VAR cannot capture the dynamics of employment reallocation. |
| Keywords: | Non-linearity, Sectoral Shares. |
| JEL: | C22 C50 E24 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2005_8&r=mac |
| By: | Luis Ignacio Jácome |
| Abstract: | This paper stresses three factors that amplified the 1990s financial crisis in Ecuador, namely institutional weaknesses, rigidities in public finances, and high financial dollarization. Institutional factors restricted the government's ability to respond in a timely manner and efficiently enough to prevent the escalation of the banking crisis and spurred the adoption of suboptimal policy decisions. Public finance rigidities limited the government's capacity to correct existing imbalances and the deteriorating fiscal stance associated with the costs of the financial crisis. Financial dollarization increasingly reduced the effectiveness of financial safety nets, fostered foreign currency demand, and accelerated a currency crisis, thereby further worsening the solvency of banks. These three factors reinforced each other, exacerbating costs as the economy went through a triple banking, currency, and fiscal crisis. |
| Keywords: | Financial crisis , Ecuador , Fiscal policy , Dollarization , |
| Date: | 2004–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/12&r=mac |
| By: | M. Ayhan Kose; Roberto Cardarelli |
| Abstract: | This paper examines the effect of the major Canada-U.S. trade agreements on the dynamics of business cycles and productivity in Canada. The North American Free Trade Agreement (NAFTA) and its predecessor, the Canada-U.S. Free Trade Agreement (CUSFTA), have led to a substantial expansion of trade flows. Although common factors have played a larger role in explaining business cycles in Canada and the United States since the early 1980s, country-specific and idiosyncratic factors remain important for Canada. At the same time, while increased trade integration seems to have positively contributed to total factor productivity of Canadian industries, the persistence of structural differences between the two countries has prevented convergence of aggregate labor productivity. While these findings seem to weigh against moving toward a monetary union, they also suggest that substantial benefits could be reaped from further reducing remaining barriers to trade. |
| Keywords: | Business cycles , Canada , United States , Productivity , Trade , International trade agreements , |
| Date: | 2004–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/138&r=mac |
| By: | Jacques Miniane |
| Abstract: | I study the implications of productivity shocks in a model where agents observe the aggregate level of productivity but not its permanent and transitory components separately. The model's predictions under learning differ substantially from those under full information and are in line with several empirical findings: (i) the response of investment to a permanent shock is sluggish and peaks with delay; (ii) permanent shocks generate positive rather than negative savings on impact; and (iii) saving and investment are highly correlated despite the assumption of capital mobility. Unlike other standard explanations of the Feldstein-Horioka puzzle, learning induces high correlations irrespective of the assumed persistence of shocks. |
| Keywords: | Productivity , Current account , Savings , Economic models , |
| Date: | 2004–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/88&r=mac |
| By: | David Hauner |
| Abstract: | Projections of age-related public expenditure growth have raised widespread concerns about fiscal sustainability. This paper examines how total expenditure would develop under four policy rules on public expenditure growth. Some simple arithmetic of expenditure, GDP, and population is reviewed and applied in simulations for 19 member countries of the Organization for Economic Cooperation and Development (OECD) over 2000-50. A general and a specific conclusion arise from the results in this paper: Generally, long-term expenditure projections could benefit from revisiting common assumptions on non-agerelated expenditure growth. Specifically, under realistic assumptions, the belt-tightening required to maintain fiscal sustainability under age-related spending pressures could be less painful than commonly thought. |
| Keywords: | Aging , OECD , Fiscal management , Government expenditures , |
| Date: | 2005–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/71&r=mac |
| By: | Carol S. Carson; Sarmad Khawaja; Thomas K. Morrison |
| Abstract: | This paper proposes a set of good practices for the revision of macroeconomic data. The authors argue that revisions are a routine part of disseminating quality data. Revisions are made not just to correct errors but also to incorporate better source data, update base periods, and make other improvements. It is argued, using country examples and views from policymakers and other users, that national statistical agencies should have explicit revisions policies. |
| Keywords: | Data collection , Statistics , Governance , Monetary policy , |
| Date: | 2004–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/87&r=mac |
| By: | Juan Zalduendo |
| Abstract: | This paper examines the design of economic policies using factor analysis, which has several advantages; in particular, it limits the problems that typically arise from the high correlation of economic policy indicators, it helps in identifying clusters of economic policy, and it facilitates the derivation of policy design indicators that represent the pace and sequence of economic policies. Econometric results show that the introduction of sound economic policies has both level effects and growth effects, suggesting it is necessary to exercise caution when assessing a country's growth prospects immediately following the introduction of new policies. In addition, the results suggest that growth strengthens when a country implements policies that outpace either a notional measure of "world average policies" or a country's own policy trend, and highlight the critical role played by macroeconomic vis-à-vis microeconomic policies. The latter also reveals the existence of sequencing factors in policy implementation; for example, trade liberalization and financial liberalization positively affect growth, but more so if economic stability and fiscal sustainability have been secured. |
| Date: | 2005–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/118&r=mac |
| By: | Jan Kakes; Garry J. Schinasi; Aerdt G. F. J. Houben |
| Abstract: | This paper examines the emergence of financial stability as a key policy objective. It discusses the underlying trends in the financial system, as well as the role of finance in relation to money, the real economy, and public policy. Financial stability is defined in terms of its ability to help the economic system allocate resources, manage risks, and absorb shocks. Moreover, financial stability is considered a continuum, changeable over time and consistent with multiple combinations of its constituent elements. On the basis of these concepts, a framework is presented that comprises an encompassing analysis and assessment of financial stability, and maps out broad policy implications. |
| Keywords: | Financial stability , Financial systems , Public finance , |
| Date: | 2004–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/101&r=mac |
| By: | Marcello M. Estevão |
| Abstract: | Slow productivity growth has plagued the euro area since the mid-1990s. That is particularly striking in view of the large productivity gains in the United States during the same period. This paper shows that the deceleration in labor productivity in the euro area was caused by structural changes in wage formation that have affected the relative price of labor, increased the labor intensity of growth and, thus, reduced the rate of capital deepening. Technological shocks seem to have played a minor role in explaining slower productivity growth in the euro area. In addition, a surge in capital deepening and, mainly, TFP growth in key service industries in the United States explain a large part of the productivity growth gap between the two regions in the second half of the 1990s. |
| Keywords: | Economic growth , Euro Area , Productivity , Labor markets , |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/200&r=mac |
| By: | Carlo Cottarelli; Julio Escolano |
| Abstract: | This paper provides a framework for evaluating the decision to enter a currency area, including the best timing for entry, and uses it to evaluate the assessment of the five tests for euro entry published by the U.K. Treasury in June 2003. The breadth and depth of its assessment is impressive by any standard. Nonetheless, this paper points at some areas that deserve to be explored further in future assessments. Covering these areas would not necessarily have changed the assessment's conclusion, namely that the case for entry is not yet "clear and unambiguous,." but it would have strengthened any conclusion reached. In addition, the paper highlights that in several areas relevant to the entry decision, the margin for uncertainty will remain significant, regardless of any reasonable attempt to reduce it. |
| Keywords: | Monetary policy , United Kingdom , Euro area , |
| Date: | 2004–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/116&r=mac |
| By: | François Leroux; Roland Daumont; Françoise Le Gall |
| Abstract: | The purpose of this paper is to study the origins of banking crises in sub-Saharan Africa, drawing upon the experience of ten countries during the period 1985-95. It examines, in particular, which factors were the most important sources of these crises. The conclusions underscore that the banking crises examined did not represent an entirely special case-a number of factors identified in the general literature, including macroeconomic shocks, were highly relevant-but note that several of their features were nonetheless specific to this part of the world. These banking crises were the very prototype of endemic crises associated with heavy government intervention in the banking system. In this regard, the paper analyzes the complex role of the government in banking in sub-Saharan Africa, the many channels through which governments intervened, and the economic and institutional environment in which the banks operated. |
| Keywords: | Banking systems , Africa , Financial crisis , Intervention , Bank regulations , |
| Date: | 2004–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/55&r=mac |
| By: | Abdoul Aziz Wane |
| Abstract: | This paper investigates convergence and dynamic effects of human and physical capital on growth, in WAEMU countries. Using recently developed models for panel data and a growth accounting model, the study finds that growth is largely explained by changes in literacy rates and factor accumulation, but not by growth of total factor productivity (TFP). Nevertheless, the panel estimation identifies aid, government spending, credit to the private sector, and openness as positive determinants of TFP growth, and government deficits as a negative determinant. The study also finds that per capita income in lower-income WAEMU countries converge to per capita income in higher-income ones when economic policies are similar. These results suggest opportunities for policymakers to enhance growth and convergence. |
| Keywords: | Economic growth , West African Economic and Monetary Union , Economic models , |
| Date: | 2004–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/198&r=mac |
| By: | Jeus Fernandez-Villaverde |
| Abstract: | This paper studies the econometrics of computed dynamic models. Since these models generally lack a closed-form solution, their policy functions are approximated by numerical methods. Hence, the researcher can only evaluate an approximated likelihood associated with the approximated policy function rather than the exact likelihood implied by the exact policy function. What are the consequences for inference of the use of approximated likelihoods? First, we find conditions under which, as the approximated policy function converges to the exact policy, the approximated likelihood also converges to the exact likelihood. Second, we show that second order approximation errors in the policy function, which almost always are ignored by researchers, have first order effects on the likelihood function. Third, we discuss convergence of Bayesian and classical estimates. Finally, we propose to use a likelihood ratio test as a diagnostic device for problems derived from the use of approximated likelihoods. |
| JEL: | C11 C15 D9 E10 E32 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberte:0315&r=mac |
| By: | Abdul Abiad; Taimur Baig |
| Abstract: | Using a panel dataset of 34 emerging market countries for the period 1990-2002, we examine the roles of various economic, political, and institutional variables in determining fiscal effort, as proxied by the primary surplus. We find that while fiscal effort increases, as expected, with the level of lagged debt, this effect tapers off beyond a certain threshold. We also find an inverse U-shaped relationship between the primary balance and revenue. Fiscal effort rises with positive shocks to oil prices (for oil exporters), when the economy grows above its potential, and in the presence of an IMF-supported program. In contrast, high democratic accountability and strong and impartial bureaucracies help lower market risk and hence lower the relative need for fiscal adjustment. Finally, fiscal effort tends to decline when too many constraints are faced by the executive. |
| Keywords: | Public debt , Emerging markets , Fiscal policy , Economic models , |
| Date: | 2005–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/106&r=mac |
| By: | Ivan Tchakarov; Selim Elekdag; Alejandro Justiniano |
| Abstract: | This paper develops a small open economy model where entrepreneurs partially finance investment using foreign currency denominated debt subject to a risk premium above and beyond international interest rates. We use Bayesian estimation techniques to evaluate the importance of balance sheet vulnerabilities combined with the presence of the financial accelerator for emerging market countries. Using Korean data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, our estimates of the Taylor rule imply a strong preference to smooth both exchange rate and interest rate fluctuations. |
| Keywords: | Financial sector , Current account , Exchange rates , Savings , Economic models , |
| Date: | 2005–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/44&r=mac |
| By: | Dalia Hakura |
| Abstract: | The paper finds that exchange rate flexibility in emerging market countries has increased over the past decade. This "learning to float" appears to have involved a strengthening of monetary and financial policy frameworks aimed at directly addressing the key vulnerabilities that give rise to the "fear of floating." The results in the paper suggest that the trend toward greater exchange rate flexibility, alongside a strengthening of banking supervision, has afforded emerging market countries more monetary policy independence. |
| Keywords: | Emerging markets , Developed countries , Floating exchange rates , Monetary policy , |
| Date: | 2005–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/98&r=mac |
| By: | Kenneth Sullivan |
| Abstract: | The IMF's development of the Code of Good Practices on Transparency in Monetary and Financial Policies and the introduction of safeguards assessments have increased emphasis on transparency of the disclosures made in central bank financial statements. This paper, which updates WP/00/186, looks at the disclosure requirements for central banks under International Financial Reporting Standards and provides practical guidance for those responsible for preparing central bank financial statements. |
| Keywords: | Central banks , Transparency , Bank accounting , |
| Date: | 2005–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/80&r=mac |
| By: | Zafar Iqbal; Henri Lorie |
| Abstract: | The main findings are as follows: (1) an increase in private national saving during 2001-03 was the key contributor to the turnaround in Pakistan's external current account during this period; (2) while Pakistan's growth was mainly export-led before 2003-04, it was largely led by domestic demand in 2004, especially consumer demand but also private and public investment; and (3) the structural reforms implemented in Pakistan during the past four years should make the observed strengthening in domestic savings and rise in domestic investment permanent, auguring well for accelerated growth within a sustainable external balance. The country's growth prospects would be further enhanced by a more externally driven growth process, and by an acceleration of structural reforms to further improve productivity and the investment climate. |
| Keywords: | Economic growth , Pakistan , Structural adjustment , |
| Date: | 2005–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/139&r=mac |
| By: | Thomson Fontaine |
| Abstract: | This paper takes a step in empirically testing the implications of a number of theoretical models that attempt to highlight the dynamics behind currency crises. By focusing on countries with broadly disparate economic and political arrangements, the study attempts to determine the extent to which these variables matter in affecting the probabilities of currency crises occurring. The empirical findings provide support for the view that, in general, a deterioration in economic fundamentals and the pursuit of lax monetary policy can contribute to currency crises. The experiences of several emerging market economies suggests that the sustainability of exchange rate policy depends both on adequate policy responses to the shocks to the economy and on the fragility of the economic, financial, and political system. |
| Keywords: | Currencies , Developed countries , Emerging markets , Financial crisis , Exchange rates , |
| Date: | 2005–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/13&r=mac |
| By: | Joseph Ntamatungiro |
| Abstract: | This paper proposes a framework for assessing fiscal sustainability in heavily indebted countries dependent on exhaustible resources, with reference to Gabon. It finds that fiscal sustainability could be achieved by: (i) developing a fiscal rule for the non-oil primary fiscal balance compatible with an objective for reducing the debt-to-non-oil GDP ratio; (ii) introducing a constant oil-based income transfer per capita allowing intergenerational equity; and (iii) building up an oil savings fund. Long-term simulations show that Gabon's fiscal position is fragile and that a fiscal policy path consistent with the proposed framework could help achieve comfortable levels of net wealth. |
| Keywords: | Fiscal policy , Gabon , Heavily indebted poor countries , Oil , Debt , |
| Date: | 2004–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/30&r=mac |
| By: | Nicholas Staines |
| Abstract: | The paper finds a significant shift in the economic characteristics of civil conflicts during the1990s. Conflicts have become shorter but with more severe contractions and a stronger recovery of growth. The overall length and cost of the conflict cycle has probably declined. The stance of macroeconomic policy was an important factor while the underlying "conflict process" remained unchanged. This shift seems related to changes in aid flows since the Cold War: donors became disinclined to provide support during conflict, but more inclined after conflict. These findings are buttressed by the post-conflict experience of countries that received financial assistance from the IMF and of the Democratic Republic of Congo (DRC). These findings have implications for policy and aid priorities after conflict. |
| Keywords: | Financial assistance , Congo, Democratic Republic of the , Multilateral aid , Development assistance , |
| Date: | 2004–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/95&r=mac |
| By: | David Hauner; Peter S. Heller |
| Abstract: | A number of uncertainties about long-term expenditure commitments in industrial countries are examined: (i) the assumptions underlying the projections, (ii) the potential to further reduce non-age-related expenditures, (iii) the implicitly assumed absence of "shocks," and (iv) the potential for raising revenue. This paper concludes that (i) there is scope, but within narrow limits, to reduce non-age-related expenditures; (ii) fiscal policy frameworks tend to understate risks; and (iii) prevailing tax rates leave little room for increasing taxation in the countries facing the strongest aging pressures. In sum, governments will have to adopt a much more ambitious fiscal policy stance to cope with aging populations. |
| Keywords: | Government Expenditures , Developed countries , Fiscal reforms , |
| Date: | 2005–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/91&r=mac |
| By: | James M. Boughton |
| Abstract: | The International Monetary Fund was designed during World War II by men whose worldview had been shaped by the Great War and the Great Depression. Their views on how the postwar international monetary system should function were also shaped by their economics training and their nationalities. After the IMF began functioning as an institution, its evolution was similarly driven by a combination of political events (Suez, African independence, the collapse of global communism), economic events (the rising economic power of Europe, the Middle East, and Asia), and trends and cycles in economic theory (the monetary approach to the balance of payments, new classical economics, the rise and fall of the Washington Consensus). As they happened, these forces had effects that were perceived as adaptations to current events and new ideas within a fixed institutional structure and mandate. The cumulative effect of history on the institution has been rather more profound and requires a longer and larger perspective. |
| Keywords: | Fund , Fund history , Financial institutions , International capital markets , Debt problems , Monetary measures , Balance of payments , Floating exchange rates , Supply-side policy , Inflation targeting , Globalization , |
| Date: | 2004–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/75&r=mac |
| By: | Etienne B. Yehoue |
| Abstract: | This paper explores income and consumption smoothing patterns among the member countries of each of the CFA zones-the CEMAC2 and the WAEMU3-during the period 1980-2000. I find that for the CEMAC, only about 15 percent of shocks to GDP are smoothed through the standard channels (that is, capital market, credit market, and remittances). On the other hand, I find that 44 percent of shocks are smoothed via foreign aid from France, and 5 percent via central bank contributions, while reserves pooling provides no shock smoothing. For the WAEMU, I find that only 13 percent of shocks are smoothed through the standard channels, while 63 percent are smoothed via foreign aid from France, 7 percent via central bank contributions, and no smoothing via reserves pooling. I compare these results with the risksharing pattern in the Unites States. I argue that creating public venture capital at a regional level might help promote free capital flows within each zone and alleviate the apparently insufficient degree of risk-sharing observed through the standard channels. |
| Date: | 2005–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/95&r=mac |
| By: | Ricardo Hausmann; Catriona M. Purfield |
| Abstract: | India's fiscal problem has deep roots in its federal fiscal system, where multiple players find it difficult to coordinate adjustment. The size and closed nature of the Indian economy, aided by its deep domestic capital market and large captive pool of domestic savings, has disguised the cost of fiscal laxity and complicated the building of a consensus on reform. The new fiscal responsibility act establishes a new rules-based system to overcome this coordination failure. To strengthen the framework, we recommend an autonomous scorekeeper and the extension of similar rules to the state governments as part of a comprehensive reform of the federal system. |
| Keywords: | Fiscal management , India , Debt , Fiscal reforms , |
| Date: | 2004–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/168&r=mac |
| By: | Garry J. Schinasi |
| Abstract: | This paper articulates a logical foundation-drawn from disparate literatures-for understanding why safeguarding financial stability is an important economic policy objective. The paper also explains why private aspects of finance provide broader social economic benefits and have the characteristics of public goods. Unique aspects of finance are examined, as are the linkages between finance, money, and the real economy. Sources of market imperfections in finance are identified and their implications are analyzed. The arguments imply that reaping the full private and social economic benefits of finance requires both private-collective and public-policy involvement as well as a delicate balance between maximizing the benefits of positive externalities (and public goods) and minimizing the costs (including potential instabilities) of other sources of market imperfections in finance. |
| Keywords: | Private sector , Financial sector , Markets , Money , Public finance , |
| Date: | 2004–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/120&r=mac |
| By: | Mehmet S. Tosun |
| Abstract: | This paper uses an overlapping generations model with international labor mobility and a politically responsive fiscal policy to examine aging in developed and developing regions. Migrant workers change the political structure composed of young and elderly voters in both labor-receiving and labor-sending countries. Numerical simulations show that the developed region benefits more from international labor mobility through the contribution of migrant workers as laborers, savers, and voters. The developing region experiences significant growth in all specifications but benefits more under international capital mobility. Restricting political participation of migrant workers in the developed region produces inferior growth results. |
| Keywords: | Population , Aging , Fiscal policy , Labor mobility , Capital flows , Economic models , Political economy , |
| Date: | 2005–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/140&r=mac |
| By: | Sibel Yelten |
| Abstract: | This paper uses the Sjaastad model to estimate the optimal currency area for the Nepalese rupee and concludes that, currently, Nepal may be reasonably well off with its peg to the Indian rupee. As its economy opens and its trade base and trading partners expand, it may want to reevaluate whether moving toward an exchange rate basket including the U.S. dollar may be a better policy choice. The regression results indicate that, currently, the prices of imported goods in Nepal are solely influenced by India, suggesting that with the peg to the Indian rupee, Nepal can isolate the import side of its economy completely from external shocks. On the export side, the regression results indicate that Nepalese export prices seem, to a large extent, to be influenced by U.S. prices. However, the export price index had to be constructed, and the construction methodology is likely to entail an overestimation of the impact of the U.S. dollar. |
| Keywords: | Monetary unions , Nepal , Asia , Financial crisis , Exchange rates , Currencies , Currency pegs , Economic models , |
| Date: | 2004–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/142&r=mac |
| By: | Carlos Mulas-Granados; Emanuele Baldacci; Benedict J. Clements; Sanjeev Gupta |
| Abstract: | This paper investigates the political and economic determinants of successful fiscal adjustment in 25 emerging market economies from 1980 to 2001. The results show that large and back-loaded fiscal adjustments have the highest likelihood of success. Fiscal consolidations based on expenditure cuts increase the probability of approaching and achieving fiscal sustainability but are insufficient to maintain it unless accompanied by revenue reforms. Adjustment episodes launched in countries where governments enjoy a parliamentary majority and do not face imminent elections, are found to be more successful. Fiscal consolidations undertaken under IMF-supported programs also have a higher probability of success. |
| Keywords: | Emerging markets , Transition economies , Fiscal policy , Economic models , Structural adjustment , |
| Date: | 2004–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/157&r=mac |
| By: | David Hauner |
| Abstract: | This paper examines the (quasi-)fiscal impact of the (opportunity) cost of international reserves. It proposes a conceptual framework, with particular emphasis on two hitherto somewhat neglected aspects: a more appropriate measure of gross opportunity cost, and potential savings from lower external debt spreads that countries "buy" by holding reserves. The framework is then applied to 100 countries over 1990-2004. The results suggest that a turning point has been reached in recent years: while most countries made money on their reserves during 1990-2001, most have been losing money during 2002-04. |
| Keywords: | Reserves , External debt , |
| Date: | 2005–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/81&r=mac |
| By: | Andrew Powell; Alain Ize |
| Abstract: | We develop a theoretical framework that encompasses four distinct motives for dollarization and discuss appropriate policy responses to help contain dollarization and its attendant risks. "Moral hazard" dollarization provides a clear case for prudential policy activism. However, prudential reform will have only a limited impact on dollarization when the main culprits are fear of floating and lack of monetary credibility. In such cases, a concerted and comprehensive reform agenda, including market-oriented and institutional reforms, would be needed to shift the balance of risks in favor of the domestic currency. While quantitative limits on dollarization could also be used to speed up de-dollarization, risks could be high. |
| Keywords: | Dollarization , Monetary policy , Financial crisis , Financial systems , Currencies , Exchange risk , Economic models , |
| Date: | 2004–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/66&r=mac |
| By: | Christophe Kamps |
| Abstract: | The issue of whether government capital is productive has received a great deal of recent attention. Yet empirical analyses of public capital productivity have generally been limited to the official capital stock estimates available in a small sample of countries. Alternatively, many researchers have investigated the output effects of public investment-recognizing that investment may be a poor proxy for the corresponding capital stock. This paper attempts to overcome the data shortage by providing internationally comparable capital stock estimates for 22 Organization for Economic Cooperation and Development (OECD) countries. |
| Keywords: | Capital goods , OECD , Public investment , Productivity , |
| Date: | 2004–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/67&r=mac |
| By: | Guillermo R. LeFort-Varela |
| Abstract: | After the failure of the early 1980s, a second attempt at capital account liberalization was gradually carried out in Chile during the 1990s, this time in parallel with increased exchange rate flexibility. Capital account regulations were applied to support the independent monetary policy committed to the inflation target, while the exchange rate was quasi-pegged within a band that targeted the real exchange rate (RER). Still, the policy framework directed at stabilizing the RER appears to have been of limited effectiveness, with the surges and sudden-stops in capital flows playing an important role in RER dynamics. Foreign exchange market intervention appears not to have affected the RER while reserve requirement appears to have exerted a depreciating effect. Government spending and import tariffs, appear to be significant tools to moderate the real appreciation thus providing one additional reason for adopting a countercyclical fiscal policy and accelerating trade openness |
| Keywords: | Capital account liberalization , Chile , Real effective exchange rates , Foreign exchange , Intervention , Reserve requirements , Capital flows , |
| Date: | 2005–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/132&r=mac |
| By: | Catriona M. Purfield |
| Abstract: | The formulation of fiscal policy in Kiribati faces unusual challenges. Kiribati's revenue base is among the most volatile in the world, and it possesses sizeable financial assets. Drawing on lessons from some other countries who experience high volatility in their revenues, this paper proposes a fiscal policy rule for Kiribati which is nested within a medium-term macroeconomic framework that aims to ensure the sustainable use of Kiribati's financial assets while managing the impact of extreme revenue volatility. It also discusses improvements in the institutional fiscal policy framework that could support such a framework. |
| Date: | 2005–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/154&r=mac |
| By: | Alain Ize; Eduardo Levy Yeyati |
| Abstract: | De facto (unofficial) dollarization, defined as the holding by residents of assets and liabilities denominated in a foreign currency, is a policy concern in an increasing number of developing economies. This paper addresses the dollarization debate from this perspective, with the goal of setting the stage for a more detailed and focused discussion of whether de-dollarization should be a policy objective and, if so, how best to pursue this objective. We review existing theories of de facto dollarization and the extent to which they are supported by the available evidence, presents the main strategies for reform, and proposes a list of policy recommendations. |
| Keywords: | Dollarization , Monetary policy , |
| Date: | 2005–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/187&r=mac |
| By: | Ketil Hviding; M. Nowak; Luca Antonio Ricci |
| Abstract: | This paper studies the role of an increase in foreign exchange reserves in reducing currency volatility for emerging market countries. The study employs a panel of 28 countries over the period 1986-2002. Several control variables are introduced in the regressions to account for other factors affecting exchange rate volatility (monetary and external indicators as well as conventional macroeconomic fundamentals). The paper controls for the endogeneity induced by the role of the exchange rate regime, since the regime can affect both the level of reserves and exchange rate volatility. The results provide ample support for the proposition that holding adequate reserves reduces exchange rate volatility. The effect is strong and robust; moreover, it is nonlinear and appears to operate through a signaling effect. |
| Keywords: | Exchange rate variability , Reserves , Reserves adequacy , |
| Date: | 2004–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/189&r=mac |
| By: | Jay Surti |
| Abstract: | This paper develops a theory of the onset of financial crises by solving for the optimal trading strategies of speculators in financial markets, in a model where each speculator tries to coordinate her trades with the market's by observing the decisions of other speculators, while simultaneously trying to preempt the market. The interaction and resolution of these two conflicting incentives are analyzed under alternate central bank policy regimes. Our model explains how imperfect information structures prevent traders from exploiting profitable opportunities and suggests how large traders help alleviate this problem by undertaking risky arbitrage early in the investment process, in return for higher profits, if successful. The central bank's defense strategy is a parameter of this model. We compare the likelihood of a crisis under alternate defense strategies and show that credible monetary authorities can provide a better defense of exchange rate regimes against adverse shocks by not disclosing their commitment value to the market. |
| Keywords: | Central bank policy , Financial crisis , Trade , Markets , Economic models , |
| Date: | 2004–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/25&r=mac |
| By: | Neville Francis; Valerie A. Ramey |
| Abstract: | Structural vector autoregressions give conflicting results on the effects of technology shocks on hours. The results depend crucially on the assumed data generating process for hours per capita. We show that the standard measure of hours per capita has significant low frequency movements that are the source of the conflicting results. HP filtered hours per capita produce results consistent with the those obtained when hours are assumed to have a unit root. We provide an alternative measure of hours per capita that adjusts for low frequency movements in government employment, schooling, and the aging of the population. When the new measure is used to determine the effect of technology shocks on hours using long-run restrictions, both the levels and the difference specifications give the same answer: hours decline in the short-run in response to a positive technology shock. |
| JEL: | E2 E3 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11694&r=mac |
| By: | François Fontaine (GREMARS, Université Lille 3 and IZA Bonn) |
| Abstract: | We provide a matching model where identical workers are embedded in ex-ante identical social networks. Job arrival rate is endogenous and wages are bargained. We study the evolution of networks over time and characterize the equilibrium distribution of unemployment rates across networks. We emphasize that wage dispersion arises endogenously as the consequence of the dynamics of networks, firms’ strategies and wage bargaining. Moreover, contrary to a generally accepted idea, social networks do not necessary induce stickiness in unemployment dynamics. Our endogenous matching technology shows that the effects of networks on the dynamics mostly hinge on search externalities. Our endogenous framework allows us to quantify these effects. |
| Keywords: | social networks, matching, wage dispersion |
| JEL: | E24 J64 J68 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1786&r=mac |
| By: | Kenji Moriyama; Gian Maria Milesi-Ferretti |
| Abstract: | Several European Union countries have recently implemented or are envisaging fiscal that operations improve budgetary figures but have no structural impact on government finances. This paper evaluates some of these measures using a balance sheet approach. In particular, it examines the degree to which reductions in government debt in EU countries has been accompanied by a decumulation of government assets. In the run-up to Maastricht (1997) it finds a strong correlation between changes in government liabilities and government assets, and larger declines in government assets in countries starting from higher public debt levels. |
| Keywords: | Fiscal reforms , European Union , Debt , Privatization , Government expenditures , |
| Date: | 2004–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/143&r=mac |
| By: | Natalia T. Tamirisa |
| Abstract: | This paper examines how the macroeconomic effects of capital controls vary depending on which type of international financial transaction they cover. Drawing on Malaysia's experiences in regulating the capital account during the 1990s, it finds, in an error-correction model, that capital controls generally have statistically insignificant effects on the exchange rate. Controls on portfolio outflows and on bank and foreign exchange operations facilitate reductions in the domestic interest rate, while controls on portfolio inflows have the opposite effect, in line with the theoretical priors. Controls on international transactions in the domestic currency and stock market operations have statistically insignificant effects on the interest rate differential. |
| Keywords: | Capital controls , Malaysia , Capital flows , Investment , |
| Date: | 2004–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/3&r=mac |
| By: | Tobias N. Rasmussen |
| Abstract: | Each year natural disasters affect about 200 million people and cause about $50 billion in damage. This paper compares the incidence of natural disasters across countries along several dimensions and finds that the relative costs tend to be far higher in developing countries than in advanced economies. The analysis shows that small island states are especially vulnerable, with the countries of the Eastern Caribbean standing out as among the most disaster-prone in the world. Natural disasters are found to have had a discernible macroeconomic impact, including large effects on fiscal and external balances, pointing to an important role for precautionary measures. |
| Keywords: | Emergency assistance , Developing countries , |
| Date: | 2004–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/224&r=mac |
| By: | Juan Zalduendo; Catia Batista |
| Abstract: | Numerous reports have noted that the IMF's medium-term growth projections are overly optimistic, raising questions as to how these can be improved. To this end, we estimate a growth model and examine its out-of-sample forecasting properties relative to those of IMF projections. The model's projections outperform those of the IMF in all regions and among most income groups-projections are less biased (one-quarter of the IMF bias) and have smaller standard errors (20 percent lower root mean squared errors) even after controlling for the IMF's macroeconomic assumptions. The paper does not attempt to address the criticisms that have been leveled against the empirical growth literature, but the results suggest that benefits can be derived from bringing systematic analysis to bear on cross-country information. |
| Keywords: | Economic growth , Forecasting models , |
| Date: | 2004–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/203&r=mac |
| By: | K. Vela Velupillai |
| Abstract: | It is shown that Paul Romer’s suggestion to model algorithmically the use and production of ideas in an endogenous growth model is formally feasible. Such a modelling exercise imparts a natural evolutionary flavour to growth models. However, it is also shown that the policy implications are formally indeterminate in a precise and effective sense. |
| Keywords: | endogenous growth,algorithmic ideas,computable growth |
| JEL: | C63 D24 E10 O41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0516&r=mac |
| By: | Francesco Busato; Bruno Chiarini; Pasquale de Angelis; Elisabetta Marzano (Department of Economics, University of Aarhus, Denmark) |
| Abstract: | In this paper we investigate the effects of different fiscal policies on the firm choice to produce underground. We consider a tax evading firm operating simultaneously both in the regular and in the underground economy. We suggest that such a kind of firm, referred to as moonlighting firm, is able to offset the specific costs usually stressed by literature on underground production, such as those suggested by Loayza (1994) and Anderberg et al. (2003). Investigating the effects of different fiscal policy interventions, we find that taxation is a critical parameter to define the size of capital allocation in the underground production. In fact, a strong and inverse relationship is found, and tax reduction is the best policy to reduce the convenience to produce underground. We also confirm the depressing effect on investment of taxation (see, for instance, Summers, 1981), so that tax reduction has no cost in terms of investment. By contrast, the model states that while enforcement is an effective tool to reduce capital allocation in the underground production, it also reduce the total capital stock. Moreover, we also suggest that the allowance of incentives to capital accumulation may generate, in this specific typology of firm, some unexpected effects, causing, together with a positive investment process, also an increase in the share of irregularity. This finding could explain, in a microeconomic framework, the evidence of Italian southern regions, where high incentives are combined with high irregularity ratios. |
| Keywords: | evasion, moonlighting, capital subsidies, underground production. |
| JEL: | E22 H25 H26 |
| Date: | 2005–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2005-10&r=mac |
| By: | M. Ayhan Kose; Guy Meredith; Christopher M. Towe |
| Abstract: | This paper provides a comprehensive assessment of the impact of NAFTA on growth and business cycles in Mexico. The effect of the agreement in spurring a dramatic increase in trade and financial flows between Mexico and its NAFTA partners, and its impact on Mexican economic growth and business cycle dynamics, are documented with reference both to stylized facts and recent empirical research. The paper concludes by drawing lessons from Mexico's NAFTA experience for policymakers in developing countries. The foremost of these is that in an increasingly globalized trading system, bilateral and regional free trade arrangements should be used to accelerate, rather than postpone, needed structural reform. |
| Keywords: | International trade agreements , Mexico , Economic growth , Business cycles , |
| Date: | 2004–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/59&r=mac |
| By: | Lucie Laliberté |
| Abstract: | This paper aims to promote harmonization between macroeconomic statistics guidelines and accounting standards. It first highlights recent development that act as drivers to the harmonization of the two systems. It then compares the two systems and reviews approaches aimed at further harmonization. This is followed by a description of the specificity of each system in terms of the emphasis each puts on various aspects of data quality. The paper concludes that through differences between the two systems will remain, they are more likely to be documented, via statistical metadata, than in the past; in the public sector, there is a promising potential for data reconciliation in the form of bridging items; and convergence is likely to be achieved in selected areas. |
| Keywords: | National accounts , Accounting , Statistics , |
| Date: | 2004–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/233&r=mac |
| By: | Alberto Alesina; Nichola Fuchs Schuendeln |
| Abstract: | Preferences for redistribution, as well as the generosities of welfare states, differ significantly across countries. In this paper, we test whether there exists a feedback process of the economic regime on individual preferences. We exploit the "experiment" of German separation and reunification to establish exogeneity of the economic system. From 1945 to 1990, East Germans lived under a Communist regime with heavy state intervention and extensive redistribution. We find that, after German reunification, East Germans are more in favor of redistribution and state intervention than West Germans, even after controlling for economic incentives. This effect is especially strong for older cohorts, who lived under Communism for a longer time period. We further find that East Germans' preferences converge towards those of West Germans. We calculate that it will take one to two generations for preferences to converge completely. |
| JEL: | H3 E6 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11700&r=mac |