nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒12‒14
fifty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Expectations, Bond Yields and Monetary Policy By Albert Lee Chun
  2. Inflation Premium and Oil Price Volatility By Paul Castillo; Carlos Montoro; Vicente Tuesta
  3. A New Framework for Yield Curve, Output and Inflation Relationships By Leo Krippner
  5. The natural real interest rate and the output gap in the euro area: A joint estimation By Julien Garnier; Bjørn-Roger Wilhelmsen
  6. Political Pressures and Monetary Mystique By Petra M. Geraats
  7. The Incredible Volcker Disinflation By Marvin Goodfriend; Robert G. King
  8. North-South Asymmetric Relationships : Does the EMU Business Affect Small African Economies ? By André, NYEMBWE; Konstantin, KHOLODILIN
  9. Money Demand in an EU Accession Country: A VECM Study of Croatia By Gillman, Max; Cziráky, Dario
  10. Speculation in Standard Auctions with Resale By Haiping Zhang
  11. Implications of State Dependent-Pricing for Dynamic Macroeconomic Models By Michael Dotsey; Robert G. King
  12. Business Cycle Synchronization and Regional Integration : A Case Study for Central America By Norbert Fiess
  14. Fiscal Stabilisers in Europe: The Macroeconomic Impact of Tax and Benefit Systems By Mabbett D
  15. Measurement Bias in the Canadian Consumer Price Index By James Rossiter
  16. Fiscal Space for Investment in Infrastructure in Colombia By Rodrigo Suescún
  17. Nonperforming Loans in Sub-Saharan Africa : Causal Analysis and Macroeconomic Implications By Hippolyte Fofack
  18. EMMA - A Quarterly Model of the Estonian Economy By Rasmus Kattai
  19. Investment, Consumption and Hedging under Incomplete Markets By Junjian Miao; Neng Wang
  20. Okun's Law, Asymmetries and Jobless Recoveries in the United States: A Markov-Switching Approach By Mark Holmes; Brian Silverstone
  21. Are External Shocks Responsible for the Instability of Output in Low Income Countries? By Claudio Raddatz
  22. The Relationship Between Government Size and Economic Growth: Evidence From a Panel Data Analysis By Yesim Kustepeli
  23. The Poverty and Distributional Impact of Macroeconomic Shocks and Policies : A Review of Modeling Approaches By B. Essama-Nssah
  24. The Overhang Hangover By Jean Imbs; Romain Ranciere
  25. The Response of Prices, Sales, and Output to Temporary Changes in Demand By Adam Copeland; George Hall
  26. Capital Structure, Credit Risk, and Macroeconomic Conditions By Dirk Hackbarth; Junjian Miao; Erwan Morellec
  27. The Zero-Root Property : Permanent vs Temporary Terms of Trade Shocks By Olivier, CARDI
  28. The Impact of the Strong Euro on the Real Effective Exchange Rates of the Two Francophone African CFA Zones By Ali Zafar
  29. New Capital Estimates for China By Carsten A Holz
  30. Openness Can be Good for Growth : The Role of Policy Complementarities By Roberto Chang; Linda Kaltani; Norman Loayza
  31. China's Pattern of Growth : Moving to Sustainability and Reducing Inequality By Louis Kuijs; Tao Wang
  32. Public Debt in Developing Countries : Has the Market-Based Model Worked? By Indermit Gill; Brian Pinto
  33. Global Monetary Conditions versus Country-Specific Factors in the Determination of Emerging Market Debt Spreads By Mansoor Dailami; Paul R. Masson; Jean Jose Padou
  34. Testing Genuine Saving By Kirk Hamilton
  35. Investment and Saving in China By Louis Kuijs
  36. Quantity, Quality, and Relevance: Central Bank Research, 1990-2003 By Pierre St-Amant; Greg Tkacz; Annie Guérard-Langlois; Louis Morel
  37. Wage diversity in the euro area - an overview of labour cost differentials across industries By Véronique Genre; Daphne Momferatou; Gilles Mourre
  38. Achieving the Millennium Development Goals in Sub-Saharan Africa : A Macroeconomic Monitoring Framework By Pierre-Richard Agénor; Nihal Bayraktar; Emmanuel Pinto Moreira; Karim El Aynaoui
  39. Booms, Busts and Ripples in British Regional Housing Markets By Gavin Cameron; John Muellbauer; Anthony Murphy
  40. Human Capital Accumulation in R&D-based Growth Models By Claudio, MATTALIA
  41. Pareto-Improving Unemployment Policies By Jorg, LINGENS; Klaus, WAELDE
  42. Modelling and Forecasting Housing Investment: The Case of Canada By Frédérick Demers
  43. The Co-movement between Cotton and Polyester Prices By John Baffes; Gaston Gohou
  44. Product Market Regulation and Macroeconomic Performance : A Review of Cross-Country Evidence By Fabio Schiantarelli
  45. Partial Adjustment without Apology By Robert G. King; Julia K. Thomas
  46. The Economic Consequences of Health Shocks By Adam Wagstaff
  47. The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account By Aart Kraay; Jaume Ventura
  49. Workers' Remittances to Developing Countries : A Survey with Central Banks on Selected Public Policy Issues By José de Luna Martínez
  50. Growth Trends in the Developing World : Country Forecasts and Determinants By Elena Ianchovichina; Pooja Kacker
  51. Quantitative Analysis of Crisis : Crisis Identification and Causality By Yoichiro Ishihara

  1. By: Albert Lee Chun (Stanford University)
    Abstract: Through explicitly incorporating analysts' forecasts as observable factors in a dynamic arbitrage- free model of the yield curve, this paper proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities. An empirical examination reveals that survey expectations about in°ation, output growth and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields. Although perceptions about in°ation are largely responsible for movements in long-term interest rates, an explicit slope factor is necessary to adequately capture the dynamics of the yield curve. Macroeconomic forecasts play an important role in explaining time-variation in the market prices of risk, with forecasted GDP growth playing a dominant role. The estimated coe±cients from a forward-looking monetary policy rule support the assertion that the central bank preemptively reacts to in°ationary expectations while suggesting patience in accommodating real output growth expectations. Models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations due to the arrival of news or central bank statements and announcements.
    Keywords: term structure, interest rates, affine model, forward-looking policy rule, macro-finance, no-arbitrage, blue-chip forecasts, survey data
    JEL: E40 E43 E44 G12 D84 E52 E58
    Date: 2005–12–06
  2. By: Paul Castillo (Central Bank of Peru & London School of Economics); Carlos Montoro (Central Bank of Peru & London School of Economics); Vicente Tuesta (Central Bank of Peru)
    Abstract: In this paper we establish a link between the volatility of oil price shocks and a positive expected value of inflation in equilibrium (inflation premium). In doing so, we implement the perturbation method to solve up to second order a benchmark New Keynesian model with oil price shocks. In contrast with log linear approximations, the second order solution relaxes certainty equivalence providing a link between the volatility of shocks and inflation premium. First, we obtain analytical results for the determinants of the level of inflation premium. Thus, we find that the degree of convexity of both the marginal cost and the phillips curve is a key element in accounting for the existence of a positive inflation premium. We further show that the level of inflation premium might be potentially large even when a central bank implements an active monetary policy. Second, we evaluate numerically the second order solution of the model to explain the episode of high and persistent inflation observed in the US during the 70's. We find, in contrast with Clarida, Gali and Gertler (QJE, 2000), that even when there is no difference in the monetary policy rules between the pre-Volcker and post-Volcker periods, oil price shocks can generate high inflation levels during the 70's through a positive high level of inflation premium. As by product, our analysis shows that oil price shocks along with a distorted steady state can generate a time- varying endogenous trade-off between inflation and deviations of output from its efficient level. The previous trade-off, once uncertainty is taking into account, implies that a positive level of inflation premium is an optimal response to oil price shocks.
    Keywords: Phillips Curve, Second Order Solution, Oil Price shocks, Endogenous Trade off
    JEL: E52 E42 E12 C63
    Date: 2005–12–07
  3. By: Leo Krippner (AMP Capital Investors)
    Abstract: This article develops a theoretically-consistent and easy-to-apply framework for interpreting, investigating, and monitoring the relationships between the yield curve, output, and inflation. The framework predicts that steady-state inflation plus steady-state output growth should be cointegrated with the long-maturity level of the yield curve as estimated by a arbitrage-free version of the Nelson and Siegel (1987) model, while the shape of the yield curve model from that model should correspond to the profile (that is, the timing and magnitude) of expected future inflation and output growth. These predicted relationships are confirmed empirically using 51 years of United States data. The framework may be used for monitoring expectations of inflation and output growth implied by the yield curve. It should also provide a basis for using the yield curve to value and hedge derivatives on macroeconomic data.
    Keywords: yield curve; term structure of interest rates; inflation; real output growth; Nelson and Siegel model; Heath-Jarrow-Morton framework
    JEL: E31 E32 E43
    Date: 2005–12–08
  4. By: Stanley C. W. Salvary
    Abstract: Historically, informedness of economic agents via price stability has been the rationale for the money supply rule derived from the Quantity Theory of Money. The monetarists place the emphasis on the level of the money supply in the determination of price level changes and a money supply rule is adopted as the means of informing agents of expected price level changes. This paper advances an alternative, to the monetarist explanation of the determination of the price level, which does not rely on changes in the supply of money but on changes in the composition of aggregate demand and supply. In the absence of monetary dislocation or revaluation, change in the general price level is attributed to the net effect of the realignment of relative prices. Further, it is argued that economic agents are better informed under the relativist approach than under the monetarist approach.
    Keywords: price instability, monetary policy, monetary authority, price signalling, fiscal policy, the endogeneity of money, the money supply, the rate of inflation, nominal interest rates, the velocity of money, repudiation of paper money, the supply of credit, 'fully informed agents'.
    JEL: E
    Date: 2005–12–07
  5. By: Julien Garnier (European University Institute and University of Paris X-Nanterre); Bjørn-Roger Wilhelmsen (Norges Bank (Central Bank of Norway))
    Abstract: The notion of a natural real rate of interest, due to Wicksell (1936), is widely used in current central bank research. The idea is that there exists a level at which the real interest rate would be compatible with output at its potential level and stationary inflation. Such a consept is of primary concern for monetary policy because it provides a benchmark for the monetary policy stance. This paper applies the method recently suggested by T. Laubach and J. C. Williams to jointly estimate the natural real interest rate and the output gap in the euro area using data from 1960. Our results suggest that the natural real rate of interest has declined gradually over the past 40 years. They also indicate that monetary policy in the euro area was on average stimulative during the 1960s and the 1970s, while it contributed to dampen the output gap and inflation in the 1980s and 1990s.
    Keywords: Real interest rate gap, output gap, Kalman filter, euro area
    JEL: C32 E43 E52 O40
    Date: 2005–12–06
  6. By: Petra M. Geraats
    Abstract: Central bank independence and transparency have become best practice in monetary policy. This paper cautions that transparency about economic information may not be beneficial in the absence of central bank independence. The reason is that it reduces monetary uncertainty, which could make the government less inhibited to interfere with monetary policy. In fact, a central bank could use monetary mystique to obtain greater insulation from political pressures, even if the government faces no direct cost of overriding. As a result, economic secrecy could be beneficial and provide the central bank greater political independence.
    Keywords: Transparency, monetary policy, political pressures
    JEL: E58 E52 D82
    Date: 2005–12
  7. By: Marvin Goodfriend (Federal Reserve Bank of Richmond); Robert G. King (Department of Economics, Boston University)
    Abstract: The reduction in inflation that occurred in the early 1980s, when the Federal Reserve was headed by Paul Volcker, is arguably the most widely discussed and visible macroeconomic event of the last 50 years of U.S. history. Inflation had been dramatically rising, but under Volcker, the Fed first contained and then reversed this process. Using a simple modern macroeconomic model, we argue that the real effects of the Volcker disinflation were mainly due to its imperfect credibility. In our view, the observed upward volatility and subsequent stubborn elevation of long-term interest rates during the disinflation are key indicators of its imperfect credibility. Studying transcripts of the Federal Open Market Committee recently released to the public, we find — to our surprise — that Volcker and other FOMC members likewise regarded the long-term interest rates as indicative of inflation expectations and of the credibility of their disinflationary policy. Drawing from the transcripts and other contemporary sources, we consider the interplay of monetary targets, operating procedures, and credibility during the Volcker disinflation.
    Keywords: credibility, disinflation, monetary policy, Volcker
    JEL: E3 E4 E5 N1
    Date: 2005–06
  8. By: André, NYEMBWE; Konstantin, KHOLODILIN
    Abstract: In this paper we empirically investigate a possible transmission of the European business cycle to Sub-Saharan Africa’s economies. This linkage may be of interest because the EMU is the main trading partner of African countries, and many of these countries use the euro as either the official or a de facto anchor in order to keep the exchange rate fixed or stable. After identifying possible theoretical channels of transmission, we test whether the relevant economic variables in Africa are sensitive to the fluctuations of European economic activity. Using either a Euro area GDP series or a Stock and Watson approach in order to build indicators of economic fluctuations to Sub-Saharan Africa despite the appealing theoretical linkages between the two areas. The most important relationship we manage to disentangle is between the European and African monetary policies.
    Keywords: North-South linkages; Business cycles; EMU; African economies; Sub-Saharan Africa
    JEL: C32 E31 E32 F41
    Date: 2005–08–15
  9. By: Gillman, Max (Cardiff Business School); Cziráky, Dario
    Abstract: The paper estimates the money demand in Croatia using monthly data from 1994 to 2002. A failure of the Fisher equation is found and adjustment to the standard money demand function is made to include the inflation rate as well as the nominal interest rate. In a two-equation cointegrated system, a stable money demand shows rapid convergence back to equilibrium after shocks. This function performs better than an alternative using the exchange rate instead of the inflation rate, as in the "pass-through" literature on exchange rates. The results provide a basis for inflaton rate forecasting and suggest the ability to use inflation targeting goals in transition countries during the EU accession process. Finding a stable money demand also limits the scope for central bank "inflation bias".
    Date: 2005–12
  10. By: Haiping Zhang
    Abstract: According to the theory of incomplete contracts, given nonverifiable entrepreneurial project choices together with divergent objectives between an entrepreneur and its outside financier, the entrepreneur can credibly pledge only part of its project outcome for external funding. Meanwhile, entrepreneurial net worth must be put as down payment to ameliorate agency costs. In a real dynamic general equilibrium model with heterogeneous agents and nonverifiable project choices, endogenous agency costs significantly change the businesscycle pattern in the sense that the model can replicate an important empirical fact, the amplified hump-shaped output behavior. Furthermore, variable asset prices can a ect entrepreneurial net worth and then subsequently change the dynamic features of aggregate output along business cycles.
    Keywords: Asset Prices, Business Cycles, Credit Constraints, Hump-Shaped Output Dynamics, Nonverifiable Project Choice
    JEL: E32 E44 G3
    Date: 2005–04
  11. By: Michael Dotsey (Federal Reserve Bank of Philadelpha); Robert G. King (Department of Economics, Boston University)
    Abstract: State-dependent pricing (SDP) models treat the timing of price changes as a profit-maximizing choice, symmetrically with other decisions of firms. Using quantitative general equilibrium models that incorporate a “generalized (S,s) approach,” we investigate the implications of SDP for topics in two major areas of macroeconomic research: the early 1990s SDP literature and more recent work on persistence mechanisms. First, we show that state-dependent pricing leads to unusual macroeconomic dynamics, which occur because of the timing of price adjustments chosen by firms as in the earlier literature. In particular, we display an example in which output responses peak at about a year, while inflation responses peak at about two years after the shock. Second, we examine whether the persistence-enhancing effects of two New Keynesian model features, namely, specific factor markets and variable elasticity demand curves, depend importantly on whether pricing is state dependent. In an SDP setting, we provide examples in which specific factor markets perversely work to lower persistence, while variable elasticity demand raises it.
    Keywords: Pricing, Macroeconomic models
    JEL: E0 E3
    Date: 2005–02
  12. By: Norbert Fiess (The World Bank)
    Abstract: In early January 2003, the United States and Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua launched official negotiations for the Central American Free Trade Agreement (CAFTA), a treaty that would expand NAFTA-style trade barrier reductions to Central America. With deeper trade integration between Central America and the United States, it is expected that there will be closer links in business cycles between Central American countries and the United States. The paper finds a relatively low degree of business cycle synchronization within Central America as well as between Central America and the United States. The business cycle synchronization is expected to increase only modestly with further trade expansion, making the coordination of macroeconomic policies within CAFTA somewhat less of a priority.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–04–01
  13. By: Guglielmo Maria Caporale; Alaa M. Soliman
    Abstract: This paper examines the monetary transmission mechanism in eight EU member states. It provides useful empirical evidence for assessing the impact of a common monetary policy in the early stages of EMU, and enables us to form a view on how the regime change represented by EMU is likely to be translated into changes in policy multipliers in the various EU countries. The empirical analysis applies techniques recently developed by Wickens and Motto (2001) for identifying shocks by estimating a VECM for the endogenous variables, and a stationary VAR in first differences for the exogenous variables. Our findings suggest that there are significant differences between EU countries in the transmission mechanism of monetary policy.
    Date: 2005–12
  14. By: Mabbett D
    Abstract: Tax and benefit systems generate aggregate intertemporal effects in addition to their interpersonal redistributive effects. These intertemporal effects appear in the cyclical fluctuations in the government’s fiscal position yielded by the ‘automatic stabilisers’. Using EUROMOD, it is possible to produce estimates of the automatic stabilisers which focus on the stabilisation of household income rather than the budgetary effects of cyclical changes in taxes and benefits. These estimates are used to explore theoretical propositions about the role of the tax and benefit system in providing temporary income insurance to households, and to identify some of the possible effects of taxes and benefits on the speed of labour market adjustment over the cycle. The results show that the size of the stabilisers varies widely across the states participating in European Monetary Union (and the other EU-15 states). However, more analysis of the crosscutting effects of private insurance and access to credit is needed to determine the implications for stabilisation policy.
    Keywords: Automatic stabilisation, European Monetary Union, Insurance Unemployment, Microsimulation
    JEL: C81 D31 E32 H31 J68
    Date: 2004–11
  15. By: James Rossiter
    Abstract: The consumer price index (CPI) is the most commonly used measure of inflation in Canada. As an indicator of changes in the cost of living, however, the CPI is subject to various types of measurement bias. The author updates previous Bank of Canada estimates of the bias in the Canadian CPI by examining four different sources of potential bias. He finds that the total measurement bias has increased only slightly in recent years to 0.6 percentage points per year, and is low when compared with other countries.
    Keywords: Inflation et prix; Cibles en matière d'inflation
    JEL: E31 E52
    Date: 2005
  16. By: Rodrigo Suescún (The World Bank)
    Abstract: For the evaluation of macroeconomic policies Colombian authorities rely heavily, if not exclusively, on the operational framework known as the Financial Programming Model developed by the International Monetary Fund in the 1950s. Based on this static framework, the formulation of fiscal policy in the country, just as in various Latin American countries, focuses primarily on fiscal deficit and gross debt targets. However, the type of fiscal policy advice derived from it is not useful for understanding the asset-creating nature and the inter-temporal tradeoffs involved in public investment decisions. The author develops a perfect foresight, dynamic small open economy model to provide an alternative framework for fiscal analysis and policy purposes. He shows that the two competing frameworks deliver differing paths for the expected behavior of the Colombian economy. He then uses the proposed framework to study the likely consequences of using public capital spending to achieve deficit targets since, in addition to an already high public debt, in the years ahead unfunded pension obligations will put enormous pressure on the Colombian government's solvency. The results indicate that public capital compression is costly in terms of foregone growth and very ineffective in achieving fiscal consolidation. The adoption of fiscal rules such as the golden rule or the permanent balance rule to shield public investment from undue budgetary pressures makes little sense in the presence of sustainability concerns. The author shows that a transitory capital spending increase is not self-amortizing in the long run; hence an extra peso of public capital spending deteriorates the inter-temporal fiscal position. A permanent increase largely pays for itself in terms of additional tax revenue but this effect is offset by a deterioration of infrastructure user charges, as long as public prices are determined competitively.
    Keywords: Infrastructure, Macroeconomics and growth
    Date: 2005–06–01
  17. By: Hippolyte Fofack (The World Bank)
    Abstract: This paper investigates the leading causes of nonperforming loans during the economic and banking crises that affected a large number of countries in Sub-Saharan Africa in the 1990s. Empirical analysis shows a dramatic increase in these loans and extremely high credit risk, with significant differences between the CFA and non-CFA countries, and substantially higher financial costs for the latter sub-panel of countries. The results also highlight a strong causality between these loans and economic growth, real exchange rate appreciation, the real interest rate, net interest margins, and interbank loans consistent with the causality and econometric analysis, which reveal the significance of macroeconomic and microeconomic factors. The dramatic increase in these loans is largely driven by macroeconomic volatility and reflects the vulnerability of undiversified African economies, which remain heavily exposed to external shocks. Simulated results show that macroeconomic stability and economic growth are associated with a declining level of nonperforming loans; whereas adverse macroeconomic shocks coupled with higher cost of capital and lower interest margins are associated with a rising scope of nonperforming loans. These results are supported by long-term estimates of nonperforming loans derived from pseudo panel-based prediction models.
    Keywords: Domestic finance, Macroeconomics and growth
    Date: 2005–11–01
  18. By: Rasmus Kattai
    Abstract: This paper describes the first version of Eesti Pank\'s structural macro-econometric model EMMA. EMMA belongs to the second generation of macro models, with Neo-Classical supply determined long run properties and Keynesian demand driven short run adjustment. The model has been designed for forecasting as well as for simulation exercises. In order to fulfil both tasks, the emphasis has been put on capturing the main characteristics of the Estonian economy. The model describes a very small and open economy, in which long run economic growth and inflation are strongly influenced by real and nominal convergence towards EU15 levels.
    Keywords: Estonia, macro model
    JEL: C5 E12 E17
  19. By: Junjian Miao (Department of Economics, Boston University); Neng Wang (Columbia Business School)
    Abstract: Entrepreneurs often face undiversi¯able idiosyncratic risks from their business invest- ments. Motivated by this observation, we extend the standard real options approach to investment to an incomplete markets environment and analyze the joint decisions of busi- ness investments, consumption-saving and portfolio selection. Our analysis depends cru- cially on whether the investment payo®s are in lump-sum or in °ows. Precautionary saving e®ect plays a key role. In the lump-sum payo® case, risk aversion accelerates investment. Moreover, when the agent's precautionary motive is strong enough, an increase in volatility accelerates investment. These results may be reversed for the °ow payo® case. Finally, hedging a®ects investment decisions by changing the expected growth of wealth and reduc- ing the agent's exposure to idiosyncratic risk. The agent's hedging demand is higher when he is closer to exercising the investment option.
    Keywords: real options, idiosyncratic risk, hedging, risk aversion, precautionary saving,incomplete markets
    JEL: G11 G31 E2
    Date: 2005–10
  20. By: Mark Holmes (University of Waikato); Brian Silverstone (University of Waikato)
    Abstract: This paper offers a new perspective on Markov regime-switching approaches to asymmetries in Okun’s law by modeling the existing approaches as special cases. Prevailing models assume either asymmetry between unemployment and output across regimes or asymmetry within a single regime. Our specification combines both approaches. Our empirical results give an insight into the apparent ‘jobless recovery’ experiences that began in the United States in 1991 and 2001.
    Keywords: Okun’s law; Markov-switching; asymmetry; jobless recoveries; United States
    JEL: C22 E32
    Date: 2005–12–08
  21. By: Claudio Raddatz (The World Bank)
    Abstract: External shocks, such as commodity price fluctuations, natural disasters, and the role of the international economy, are often blamed for the poor economic performance of low-income countries. The author quantifies the impact of these different external shocks using a panel vector autoregression (VAR) approach and compares their relative contributions to output volatility in low-income countries vis-à-vis internal factors. He finds that external shocks can only explain a small fraction of the output variance of a typical low-income country. Internal factors are the main source of fluctuations. From a quantitative perspective, the output effect of external shocks is typically small in absolute terms, but significant relative to the historic performance of these countries.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–08–01
  22. By: Yesim Kustepeli (Department of Economics, Faculty of Business, Dokuz Eylül University)
    Abstract: Using a panel data analysis, the relationship between government size and economic growth is investigated for the 1994-2001 period. The results show that relatively small sizes of government are detrimental to economic growth, while medium sized government affects it positively.
    Keywords: government size, economic growth, panel data, new European Union members and candidates
    JEL: E62 O40
    Date: 2005–12
  23. By: B. Essama-Nssah (The World Bank)
    Abstract: The importance of distributional issues in policymaking creates a need for empirical tools to assess the social impact of economic shocks and policies. This paper reviews some of the modeling approaches that are currently in use at the World Bank and other international financial institutions. The specification of these models is dictated by the issues at stake, the knowledge about the nature of the process involved, and the availability and reliability of relevant data. Furthermore, shocks and policies have macroeconomic, structural, and distributional implications. This creates interdependence between such policy issues. Finally, the distributional impact of shocks and policies hinges on the heterogeneity of socioeconomic agents with respect to endowments and behavior. In the end, each modeling approach should be judged on how well it handles the interdependence between policy issues and the heterogeneity of the stakeholders, given other constraints.
    Keywords: Poverty, Macroeconomics and growth
    Date: 2005–08–01
  24. By: Jean Imbs (HEC Lausanne, FAME and CEPR); Romain Ranciere (CREI and IMF)
    Abstract: The authors revisit the debt overhang question. They first use nonparametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer Curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent) growth. On average, significantly negative coefficients appear when debt face value reaches 60 percent of GDP or 200 percent of exports, and when its present value reaches 40 percent of GDP or 140 percent of exports. Second, the authors depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, they ask whether, as the overhang level of debt is reached: (1) investment falls precipitously as it should when it becomes optimal to default; (2) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor; and (3) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to preempt default and exact punitive interest rates. The authors find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing or the burden of debt.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–08–01
  25. By: Adam Copeland (Bureau of Economic Analysis); George Hall (Cowles Foundation, Yale University)
    Abstract: We determine empirically how the Big Three automakers accommodate shocks to demand. They have the capability to change prices, alter labor inputs through temporary layoffs and overtime, or adjust inventories. These adjustments are interrelated, non-convex, and dynamic in nature. Combining weekly plant-level data on production schedules and output with monthly data on sales and transaction prices, we estimate a dynamic profit-maximization model of the firm. Using impulse response functions, we demonstrate that when an automaker is hit with a demand shock sales respond immediately, prices respond gradually, and production responds only after a delay. The size of the immediate sales response is linear in the size of the shock, but the delayed production response is non-convex in the size of the shock. For sufficiently large shocks the cumulative production response over the product cycle is an order of magnitude larger than the cumulative price response. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the September 11, 2001 terrorist attacks.
    Keywords: automobile pricing, inventories, revenue management, indirect inference
    JEL: D21 D42 E22 E23 L11 L62
    Date: 2005–12
  26. By: Dirk Hackbarth (Finance Department, Olin School of Business, Washington University in St. Louis); Junjian Miao (Department of Economics, Boston University); Erwan Morellec (University of Lausanne, FAME, and CEPR)
    Abstract: This paper develops a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing policies to the position of the economy in the business cycle phase. We then demonstrate that this simple observation has a wide range of empirical implications for corporations. Notably, we show that our model can replicate observed debt levels and the countercyclicality of leverage ratios. We also demonstrate that it can reproduce the observed term structure of credit spreads and generate strictly positive credit spreads for debt contracts with very short maturities. Finally, we characterize the impact of macroeconomic conditions on the pace and size of capital structure changes, and debt capacity.
    Keywords: Dynamic capital structure; Credit spreads; Macroeconomic conditions
    JEL: G12 G32 G33
    Date: 2005–11
  27. By: Olivier, CARDI
    Abstract: This contribution shows that the persistence and the time of occurence of the shock matter in determining the long-run macroeconomic aggregates’ responses after permanent and transitory terms of trade shocks. Within a simple two-good small open economy model, we differentiate analyticaly between the (long-run) effects of four types of negative terms of trade disturbances of different degrees of persistence and occurence. We distinguish between permanent and transitory shocks, on the one hand, and between anticipated and unanticipated shocks, on the other hand, and finally we consider a permanent perturbation but viewed as temporary by agents. The application of a new analytical two-step procedure to the zero-root property case allows to obtain new conclusions not developed by previous studies : (i) a strong persistent terms of trade worsening may induce a decline in the long-run in the real expense and in the stock of net foreign assets greater than after a permanent disturbance, (ii) real expense may rise or fall in the long-run after an anticipated future permanent negative external shock depending on the time of occurence of the disturbance, and (iii) fails in expectation may induce large cut in real expense and translate into large losses in welfare
    Keywords: Small open economy; Terms of trade; Savings; Temporary shock
    JEL: F32 F41 E21
    Date: 2005–06–15
  28. By: Ali Zafar (The World Bank)
    Abstract: The author estimates the degree of misalignment of the CFA franc since the introduction of the euro in 1999. Using a relative purchasing power parity-based methodology, he develops a monthly panel time series dataset for both the Economic and Monetary Community of Central Africa (CEMAC) zone and the West African Economic and Monetary Union (UEMOA) zone to compute a trade-weighted real effective exchange rate indexed series from January 1999 to December 2004. The author's main finding is that the real effective exchange rate appreciated by close to 8 percent in UEMOA and 7 percent in CEMAC, influenced by volatility in the euro-dollar bilateral exchange rate and conservative monetary policies in the two zones, resulting in a partial loss of competitiveness in export markets. The lower appreciation in Central Africa can be explained by lower inflation in CEMAC than in UEMOA and by the greater trade with higher inflation East Asian countries, partially offset by the peg to the dollar. However, the inclusion of "unrecorded trade" results in an appreciation of only 6 percent in the UEMOA zone and 6 percent in the CEMAC zone due to higher inflation in the two countries with unmonitored cross-border flows, Ghana and Nigeria. Using time series econometrics, an Engle-Granger two stage procedure for cointegration, and an error correction framework, a single equation modeling of the real exchange rate from 1970 to 2005 as a function of terms of trade, economic openness, aid inflows, and a dummy representing the 1994 devaluation, the author finds little statistical evidence of a long-run equilibrium exchange rate that is a vector of economic fundamentals. The dummy explains most of the real exchange rate behavior in the two zones, while openness in UEMOA has contributed to an appreciation of the real effective exchange rate.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–10–01
  29. By: Carsten A Holz (Hong Kong University of Science & Technology)
    Abstract: Data on physical capital are an indispensable part of economic growth and efficiency studies. In the case of China, economy-wide fixed asset series are usually derived by aggregating gross fixed capital formation (net of depreciation) over time, and sectoral/ownership-specific series by correcting the limited official fixed asset data available. These procedures, to varying degrees, ignore that (i) gross fixed capital formation does not equal investment, (ii) investment does not equal the value of fixed assets newly created through investment, (iii) depreciation is an accounting measure that bears no necessary relation to changes in the production capacity of fixed assets, (iv) official fixed asset data, where available, incorporate significant revaluations in the 1990s, and (v) “net fixed assets” do not measure the contribution of fixed assets to production. This paper derives economy-wide fixed asset values for 1953-2003, correcting for these shortcomings. It uses both the traditional, cumulative approach and a new, so far unexplored method of combining economy-wide depreciation values and an economy-wide depreciation rate to directly yield economy-wide fixed assets. The derived fixed asset time series are evaluated in a comparison with each other as well as with series in the literature, leading to the recommendation of a specific choice of fixed asset time series.
    Keywords: Capital, investment, national income accounting, production function estimations, Chinese statistics, fixed assets, measurement of economic growth
    JEL: E22 C80 D24 O47 P23 P24
    Date: 2005–12–02
  30. By: Roberto Chang (Rutgers University); Linda Kaltani (American University); Norman Loayza (The World Bank)
    Abstract: The authors study how the effect of trade openness on economic growth depends on complementary reforms that help a country take advantage of international competition. This issue is illustrated with a simple Harris-Todaro model where output gains after trade liberalization depend on the degree of labor market flexibility. In that model, trade protection may ameliorate the problem of underemployment (and underproduction) in sectors affected by labor market distortions. Hence, trade liberalization unambiguously increases per capita income only when labor markets are sufficiently flexible. The authors then present some panel evidence on how the growth effect of openness depends on a variety of structural characteristics. For this purpose, they use a non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation stabilization, public infrastructure, governance, labor-market flexibility, ease of firm entry, and ease of firm exit. They find that the growth effects of openness are positive and economically significant if certain complementary reforms are undertaken.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–11–01
  31. By: Louis Kuijs (The World Bank); Tao Wang (International Monetary Fund)
    Abstract: The authors study the sources and pattern of China's impressive economic growth over the past 25 years and show that key issues currently of concern to policymakers-widening inequality, rural poverty, and resource intensity-are to a large extent rooted in China's growth strategy, and resolving them requires a rebalancing of policies. Using both macroeconomic level and sector data and analyses, the authors extend the growth accounting framework to decompose the sources of labor productivity growth. They find that growth of industrial production, led by a massive investment effort that boosted the capital/labor ratio, has been the single most important factor driving GDP and overall labor productivity growth since the early 1990s. The shift of labor from low-productivity agriculture has been limited, and, hence, contributed only marginally to overall labor productivity growth. The productivity gap between agriculture and the rest of the economy has continued to widen, leading to increased rural-urban income inequality. Looking ahead, the authors calibrate two alternative scenarios. They show that continuing with the current growth pattern would further increase already high investment and saving needs to unsustainable levels, lower urban employment growth, and widen the rural-urban income gap. Instead, reducing subsidies to industry and investment, encouraging the development of the services industry, and reducing barriers to labor mobility would result in a more balanced growth with an investment-to-GDP ratio that is consistent with the medium-term saving trend, faster growth in urban employment, and a substantial reduction in the income gap between rural and urban residents.
    Keywords: Labor and employment, Macroeconomics and growth
    Date: 2005–11–01
  32. By: Indermit Gill (The World Bank); Brian Pinto (The World Bank)
    Abstract: Over the past 25 years, significant levels of public debt and external finance are more likely to have enhanced macroeconomic vulnerability than economic growth in developing countries. This applies not just to countries with a history of high inflation and past default, but also to those in East Asia, with a long tradition of prudent macroeconomic policies and rapid growth. The authors examine why with the help of a conceptual framework drawn from the growth, capital flows, and crisis literature for developing countries with access to the international capital markets (market access countries or MACs). They find that, while the chances of another generalized debt crisis have receded since the turbulence of the late 1990s, sovereign debt is indeed constraining growth in MACs, especially those with debt sustainability problems. Several prominent MACs have sought to address the debt and external finance problem by generating large primary fiscal surpluses, switching to flexible exchange rates, and reforming fiscal and financial institutions. Such country-led initiatives completely dominate attempts to overhaul the international financial architecture or launch new lending instruments, which have so far met with little success. While the initial results of the countries' initiatives have been encouraging, serious questions remain about the viability of the model of market-based external development finance. Beyond crisis resolution, which has received attention in the form of the sovereign debt restructuring mechanism, the international financial institutions may need to ramp up their role as providers of stable long-run development finance to MACs instead of exiting from them.
    Keywords: Macroeconomics and growth
    Date: 2005–08–01
  33. By: Mansoor Dailami (The World Bank); Paul R. Masson (University of Toronto); Jean Jose Padou (University of Toronto)
    Abstract: The authors offer evidence that U.S. interest rate policy has an important influence in the determination of credit spreads on emerging market bonds over U.S. benchmark treasuries and therefore on their cost of capital. Their analysis improves on the existing literature and understanding by addressing the dynamics of market expectations in shaping views on interest rate and monetary policy changes and by recognizing nonlinearities in the link between U.S. interest rates and emerging market bond spreads, as the level of interest rates affect the market's perceived probability of default and the solvency of emerging market borrowers. For a country with a moderate level of debt, repayment prospects would remain good in the face of an increase in U.S. interest rates, so there would be little increase in spreads. A country close to the borderline of solvency would face a steeper increase in spreads. Simulations of a 200 basis points (bps) increase in U.S. interest rates show an increase in emerging market spreads ranging from 6 bps to 65 bps, depending on debt/GDP ratios. This would be in addition to the increase in the benchmark U.S. 10 year Treasury rate.
    Keywords: Infrastructure, International economics, Macroeconomics and growth, Public sector management
    Date: 2005–06–01
  34. By: Kirk Hamilton (The World Bank)
    Abstract: The World Bank has been publishing estimates of adjusted net or "genuine" saving since 1999. This measure of saving treats depletion of natural resources as a type of economic depreciation. Hamilton uses recent theoretical results relating growth in saving to growth in future consumption to provide a test of genuine saving using historical data. Did measured genuine saving in 1976, for example, "predict" the observed changes in consumption over subsequent decades? The author tests four alternative measures of saving econometrically. The worst measure, in terms of explained variation, is traditional net saving. Genuine saving adjusted to reflect population growth exhibits the worst fit with theory. Both gross saving and genuine saving perform better, with good concordance with theory, while genuine saving exhibits a moderate advantage in terms of goodness of fit.
    Keywords: Environment, Macroeconomics and growth
    Date: 2005–04–01
  35. By: Louis Kuijs (The World Bank)
    Abstract: The author analyzes sectoral patterns of investment and saving in China-over time and compared with other countries-to shed light on the factors driving high investment and on how saving is channeled into investment. The findings inform several policy debates. Key findings include: (1) investment by enterprises distinguishes China from other countries and explains most of the variation over time; (2) high household saving explains only a part of the large difference in national saving between China and other countries-the majority is explained by high saving of the government and enterprises (through retained earnings); and (3) only about one-third of enterprise investment is financed via the financial sector, a lower share than in the early 1990s. The author also explores explanations behind high saving of the government and enterprises. His findings have three sets of policy implications. First, the identified financing patterns put in perspective the exposure of the financial sector to investment-related risks but, against a background of concerns about suboptimal allocation of capital, bring to the fore corporate governance, dividend policy, and transparency and accountability of public funds. Second, the findings suggest policy adjustments that would help in achieving the government's goals of improving the quality of growth and increasing the role of consumption. Third, long term saving prospects and the impact of financial sector and pension policies are discussed.
    Keywords: Domestic finance, Governance, Macroeconomics and growth
    Date: 2005–06–01
  36. By: Pierre St-Amant; Greg Tkacz; Annie Guérard-Langlois; Louis Morel
    Abstract: The authors document the research output of 34 central banks from 1990 to 2003, and use proxies of research inputs to measure the research productivity of central banks over this period. Results are obtained with and without controlling for quality and for policy relevance. The authors find that, overall, central banks have been hiring more researchers and publishing more research since 1990, with the United States accounting for more than half of all published central bank research output, although the European Central Bank is rapidly establishing itself as an important research centre. When controlling for research quality and relevance, the authors generally find that there is no clear relationship between the size of an institution and its productivity. They also find preliminary evidence of positive correlations between the policy relevance and the scientific quality of central bank research. There is only very weak evidence of a positive correlation between the quantity of external partnerships and the productivity of researchers in central banks.
    Keywords: Central bank research
    JEL: E59
    Date: 2005
  37. By: Véronique Genre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Daphne Momferatou (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gilles Mourre
    Abstract: This Paper provides an overview of the magnitude of sectoral wage differentials in the euro area as a whole. Even when adjusting for structural sectoral features such as the skill structure or the proportion of part-timers, average wage levels in services are substantially lower than in manufacturing. The paper also studies how the euro area wage structure compares with that of the United States and the United Kingdom. It discusses some possible determinants of intersectoral wage differentials in the euro area and their likely implications from a policy perspective. A number of worker characteristics (e.g. age, skills, the proportion of temporary or self-employed) are highly correlated with the structure of wage differentials. At the same time, wage differentials are also highly correlated with sector-specific features such as average firm size or capital intensity. Finally, the paper presents some stylised facts on how the euro area wage structure has evolved since the early 1980s.
    Keywords: Intersectoral wage differential; wage determination; euro area.
    JEL: J31 E24 J41
    Date: 2005–02
  38. By: Pierre-Richard Agénor (University of Manchester and Center for Growth and Business Cycle Research); Nihal Bayraktar (The World Bank and Penn State University); Emmanuel Pinto Moreira (The World Bank); Karim El Aynaoui (The World Bank and Central Bank of Morocco)
    Abstract: The authors present an integrated macroeconomic approach to monitoring progress toward achieving the Millennium Development Goals (MDGs) in Sub-Saharan Africa. At the heart of their approach is a macroeconomic model that captures key linkages between foreign aid, public investment (disaggregated into education, infrastructure, and health), the supply side, and poverty. The model is linked through cross-section regressions to indicators of malnutrition, infant mortality, life expectancy, and access to safe water. A composite MDG indicator is also calculated. The functioning of the framework is illustrated by simulating the impact of an increase in aid and a debt write-off for Niger at the MDG horizon of 2015, under alternative assumptions about the degree of efficiency of public investment. The authors' approach can serve as the building block of Strategy Papers for Human Development (SPAHD), a more encompassing concept than the current "Poverty Reduction" Strategy Papers.
    Keywords: Macroeconomics and growth
    Date: 2005–10–01
  39. By: Gavin Cameron (Dept of Economics, University of Oxford); John Muellbauer (Nuffield College, Oxford); Anthony Murphy (Nuffield College, Oxford)
    Abstract: We present and discuss an annual econometric model of regional house prices in Britain estimated over the period 1972 to 2003. The model, which consists of a system of inverted housing demand equations, is data consistent, incorporates spatial lags and errors, has some spatial coefficient heterogeneity, has a plausible long run solution and includes a full range of explanatory variables. We use our results to explain the periods of boom and bust and the ripple effect from London house prices to house prices elsewhere. We also address the issue of whether there has been a bubble in the British housing market
    Keywords: House Prices; Ripple Effect; Bubble
    JEL: C51 E39
    Date: 2005–12–06
  40. By: Claudio, MATTALIA
    Abstract: This paper considers a multi-sectoral endogenous growth model, that reproduces the essental aspects of an ‘ICT-based economy’, in which a central role is played by human capital accumulation. Indeed, households also invest in human capital through schooling, and this turns out to be the thrue engine of growth. Furthermore, this model displays no scale effect and the stimulations allow to get interesting results concerning the link between market power and growth, the presence of ‘imbalance effects’ and the consequences of different types of subsidies
    Keywords: Information technology; endogenous growth; imbalance effect
    JEL: E22 O40 C63
    Date: 2005–09–15
  41. By: Jorg, LINGENS; Klaus, WAELDE
    Abstract: We investigate how continental European unemployment can be reduced without reducing unemployment benefits and without reducing the net income of low-wage earners. Lower unemployment replacement rates reduce unemployment, the net wage and unemployment benefits. A lower tax on labour increases net wages and - for certain benefit-systems - unemployment benefits as well. Combining these two policies allows to reduce unemployment in countries with “net-Bismarck” and Beveridge systems without reducing net income of workers or the unemployed. Such a policy becomes self-financing under realistic parameter constellations when taxes are reduced only for low-income workers.
    Keywords: Inequality; Unemployment; Taxation; Policy reform
    JEL: J38 J51 H23 E60
    Date: 2005–08–15
  42. By: Frédérick Demers
    Abstract: The author proposes and evaluates econometric models that try to explain and forecast real quarterly housing expenditures in Canada. Structural and leading-indicator models of the Canadian housing sector are described. The long-run relationship between expenditure and its determinants is shown to have shifted during the late 1970s, which implies that important changes have occurred in how the housing market is driven. The author finds that the response of housing investment to interest rates has become more pronounced over time. He compares out-of-sample forecasts from linear and non-linear cointegration models (which make use of information on fundamentals such as wealth and demographics) with forecasts from simple leading-indicator models (which exploit information such as housing starts or household indebtedness). The author finds that simple leading-indicator models can provide relatively accurate near-term forecasts. The preferred structural model, which allows for a shift in the cointegrating vector, provides a rich analysis of the housing sector, with good forecast accuracy on the construction side but not on the resale side, which is more difficult to predict.
    Keywords: Economic models; Econometric and statistical methods
    JEL: R21 E27
    Date: 2005
  43. By: John Baffes (The World Bank); Gaston Gohou (University of Maryland)
    Abstract: The authors examine the price linkages among polyester (the dominant chemical fiber), cotton (the dominant natural fiber), and crude oil (the dominant energy commodity), based on monthly data between 1980 and 2002. The modeling framework incorporates several aspects of the unit root econometrics literature. They find that: a) There is strong co-movement between cotton and polyester prices, well above the co-movement observed between these two prices and prices of other primary commodities. b) Crude oil prices have a stronger effect on polyester prices compared with cotton prices. c) Price shocks originating in the polyester market are transmitted at much higher speed to the cotton market than vice-versa.
    Keywords: Agriculture, International economics
    Date: 2005–03–01
  44. By: Fabio Schiantarelli (Boston College and IZA)
    Abstract: The main purpose of this paper is to provide a critical overview of the recent empirical contributions that use cross-country data to study the effects of product market regulation and reform on a country's macroeconomic performance. After a brief review of the theoretical literature and of relevant micro-econometric evidence, the paper discusses the main data and methodological issues related to empirical work on this topic. It then critically evaluates the cross-country evidence on the effects of product market regulation on mark-ups, firm dynamics, investment, employment, innovation, productivity, and output growth. The paper concludes with a summary of lessons learned from the econometric results.
    Keywords: Governance, Labor and employment, Macroeconomics and growth
    Date: 2005–11–01
  45. By: Robert G. King (Department of Economics, Boston University); Julia K. Thomas (Department of Economics, University of Minnesota)
    Abstract: Many kinds of economic behavior appear to be governed by discrete and occasional individual choices. Despite this, econometric partial adjustment models perform relatively well at the aggregate level. Analyzing the classic employment adjustment problem, we show how discrete and occasional microeconomic adjustment is well described by a new form of partial adjustment model that aggregates the actions of a large number of heterogeneous producers facing fixed costs of factor adjustment. In the market equilibrium of this model, employment responses to aggregate disturbances include changes both in a target employment selected by establishments and in the measure of establishments actively adjusting to this target. Yet the model retains a partial adjustment flavor in its aggregate responses. Previous research involving discrete factor adjustment has been conducted almost exclusively under the assumption of exogenous prices, given the complications presented by nontrivial heterogeneity in production. We demonstrate how such complications can be limited, allowing both general equilibrium analysis and the convenience of linear solution methods. We also show how our framework is easily generalized to accommodate persistent idiosyncratic shocks. This generalization allows both greater consistency with the microeconomic dynamics of factor adjustment, as well as application to a much broader set of questions involving discrete individual choices, within a tractable equilibrium model.
    Keywords: dynamic factor demand, generalized partial adjustment, discrete individual
    JEL: E2 E3
    Date: 2005–02
  46. By: Adam Wagstaff (The World Bank)
    Abstract: While there is a great deal of anecdotal evidence on the economic effects of adverse health shocks, there is relatively little hard empirical evidence. The author builds on recent empirical work to explore in the context of postreform Vietnam two related issues: (1) how far household income and medical care spending responds to health shocks, and (2) how far household consumption is protected against health shocks. The results suggest that adverse health shocks - captured by negative changes in body mass index (BMI) - are associated with reductions in earned income. This appears to be only partly - if at all - due to a reverse feedback from income changes to BMI changes. By contrast, there is a hint - the relevant coefficient is not significant - that adverse BMI shocks may result in increases in unearned income. This may reflect additional gifts, remittances, and so on, from family and friends following the health shock. Medical spending is found to increase following an adverse health shock, but not among those with health insurance. The impact for the uninsured is large, equal in absolute size to the income loss associated with a BMI shock. The lack of impact for the insured points to complete insurance against the medical care costs associated with health shocks, and is consistent with the very generous coverage of Vietnam's health insurance program in this period. The question arises: have Vietnamese households been able to hold their food and nonfood consumption constant in the face of these income reductions and extra medical care outlays? The results suggest not. For the sample as a whole, both food and nonfood consumption are found to be responsive to health shocks, indicating an inability to smooth nonmedical consumption in the face of health shocks. Further analysis reveals some interesting differences across different groups within the sample. Households with insurance come no closer to smoothing nonmedical consumption than uninsured households. Furthermore, and somewhat counterintuitively, better-off households - including insured households - fare worse than poorer households in smoothing their nonmedical consumption in the face of health shocks, despite the fact that in the case of insured households there are no medical bills associated with an adverse health event. Why the poor rely on dissaving and borrowing to such an extent, and do not apparently reduce their food and nonfood consumption following an adverse health shock while the better-off do, may be because the levels of food and nonfood consumption of the poor are simply too low relative to basic needs to enable them to cut back in the face of an adverse BMI shock.
    Keywords: Poverty, Health and population
    Date: 2005–06–01
  47. By: Aart Kraay (The World Bank); Jaume Ventura (CREI and Universitat Pompeu Fabra)
    Abstract: Over the past decade the United States has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fueled by foreign investment in a booming U.S. stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing U.S. government debt. A somewhat surprising aspect of the current debate is that stock market movements and fiscal policy choices have been largely treated as unrelated events. Stock market movements are usually interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits are usually understood as a mainly political decision. The authors challenge this view here and develop two alternative interpretations. Both are based on the notion that a bubble (the "dot-com" bubble) has been driving the stock market, but differ in their assumptions about the interactions between this bubble and fiscal policy (the "Bush" deficits). The "benevolent" view holds that a change in investor sentiment led to the collapse of the dot-com bubble and the Bush deficits were a welfare-improving policy response to this event. The "cynical" view holds instead that the Bush deficits led to the collapse of the dot-com bubble as the new administration tried to appropriate rents from foreign investors. The authors discuss the implications of each of these views for the future evolution of the U.S. economy and, in particular, its net foreign asset position.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–08–01
    Abstract: Efikasiteti i përdorimit të instrumenteve të politikës monetare dhe të politikës valutore, varet nga shkalla e pavarsisë së bankës qendrore. Sa më e pavarur të jetë ajo në kryerjen e funksioneve dhe veprimtarisë së vet, aq më vital dhe efikas do të jetë sistemi financiar dhe ekonomik i vendit. Kjo sot po shprehet veçmas në vendet e zhvilluara. Sot nuk ekziston një mendim i pranuar përgjithsishtë sa i përket pavarsisë së bankës qendrore. Megjithkëtë, në literaturën më të re dominojnë kryesisht dy qasje në definimin e pavarsisë së bankës qendrore: qasja legale dhe jolegale.
    Keywords: Banka Qendrore
    JEL: G
    Date: 2005–12–07
  49. By: José de Luna Martínez (The World Bank)
    Abstract: This paper presents the findings of a survey conducted by the World Bank of central banks in 40 developing countries across different regions in the world. The survey focused on the following topics: (1) coverage of national statistics on remittances, (2) cost of transferring and delivering remittances, (3) regulatory regime for remittance transactions, and (4) efforts of developing countries to channel remittance flows through formal financial institutions. The study finds that in most countries existing data do not reflect the full amount of remittance inflows that they receive every year. Coverage of instruments and financial institutions through which remittances take place is limited. Moreover, only a few countries measure remittances that take place through informal channels. It also finds that the scope of financial authorities in developing countries to reduce remittance fees is limited because a large part of the fees charged to customers are set by financial institutions located in the countries where transactions originate. Cooperation between sending and recipient countries is needed to reduce remittance costs. The survey finds that in several countries money transfer companies are not properly supervised. Given the increasing international concerns with money laundering and terrorism financing issues, it is important that basic registration and reporting requirements are introduced for money transfer companies. Registration and reporting requirements should be designed in such a way that they do not deter the further development of this type of financial institution. Finally, the survey finds that most countries need to establish better mechanisms that would allow them to maximize the developmental effect of remittance inflows. By establishing new savings and investment instruments for remittance recipient households, a larger part of remittance flows might be channeled to finance productive investments, thus fostering economic growth.
    Keywords: Domestic finance, Poverty, Labor and employment
    Date: 2005–06–01
  50. By: Elena Ianchovichina (The World Bank); Pooja Kacker (The World Bank)
    Abstract: The authors present real per capita GDP growth forecasts for all developing countries for the period 2005-14. For 55 of these countries, representing major world regions and accounting for close to 80 percent of the developing world's GDP, they forecast the growth effects of the main forces underpinning growth, assuming that these evolve following past trends. The authors find that for the average developing country the largest growth dividend comes from continued improvement in public infrastructure, followed by the growth contributions of rising secondary school enrollment, trade openness, and financial deepening. The joint contribution of these four growth determinants to average, annual per capita GDP growth in the next decade is estimated to be 1 percentage point. Failure to keep improving public infrastructure alone could reduce this growth dividend by 50 percent. The forecasted growth contributions differ by country qualitatively and quantitatively.
    Keywords: ???
    Date: 2005–11–01
  51. By: Yoichiro Ishihara (The World Bank)
    Abstract: Studies use different conceptual and operational definitions of crises. The different crisis identifications can lead to inconsistent conclusions and policy formulation even if the same analytical framework is applied. Also, most studies focus on only a few types of crises. This narrow focus on crises may not capture the multidimensionality of crises. Seven crisis types are analyzed, namely (1) liquidity type banking crises, (2) solvency type banking crises, (3) balance of payments crises, (4) currency crises, (5) debt crises, (6) growth rate crises, and (7) financial crises. Crisis data were collected from 15 emerging economies in 1980-2002 on a quarterly basis. The crisis identification exercise finds that multidimensionality in which different crisis types occur in short periods is one of the most important characteristics of recent crises. Further, the Granger causality tests in five Asian economies (Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand) find that currency crises tend to trigger other types of crises, and therefore exchange rate management is essential.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–05–01

This nep-mac issue is ©2005 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.