IMF Research Bulletin -- March 2001

Research Summary
Exchange Rate Regimes in Developing Countries and Emerging Markets
Jeromin Zettelmeyer

Over the past two to three years, there has been a resurgence of interest in exchange rate regimes for developing and emerging market countries. In the early 1990s, attention focused mainly on stabilization from high levels of inflation and on the right regimes for the transition economies in Eastern Europe and the former Soviet Union. The emerging market crises of 199598 completely changed this focus. Sustainability and crisis prevention began to be viewed as key criteria for judging exchange rate regimes. Much more attention was directed at the "hardness" of alternative pegged regimes. The standard dichotomy of floats versus pegs was replaced by a three-way distinction: floats, intermediate regimes, and very hard pegs. More attention was also given to the distinction between exchange rate regimes "de jure" and "de facto," as revealed by ex-post behavior. Two main areas of research have arisen in this new context. The first concentrates on the sustainability of intermediate regimes, while the second deals with comparing and evaluating alternative regimes. This survey briefly traces the debate since 1997, and discusses some recent research conducted at the IMF.

In the aftermath of the Asian crisis, two propositions about exchange rate regimes attracted widespread support. The first asserted that either "extreme" (floats or hard pegs) was preferable to the "middle" (soft pegs, bands, and crawling pegs), largely on the grounds that intermediate regimes were hard to sustain and more crisis-prone than either extreme.¹ Prior to the mid-1990s, the mainstream literature had basically argued the opposite: in essence, because satisfying several objectives—flexibility versus commitment, inflation stabilization versus competitiveness, and insulation from monetary shocks versus insulation from real shocks—inevitably pointed to compromise solutions between hard pegs and pure floats.² The second proposition argued that, given the choice between the two extremes, floating exchange rates were best for most emerging market economies, with hard pegs reserved for "unusual circumstances."³ Underlying this was the belief that only very hard pegs were sustainable, that is, currency unions and currency boards supported by a strong national consensus, and, as such, unfeasible or overly constraining for many emerging market countries.

What appeared to be a new consensus did not last long, however. First, several authors reasserted the case that "intermediate solutions are often more likely to be appropriate than corner solutions."⁴ Second, the feasibility of floating was questioned by several authors, particularly with respect to emerging markets in Latin America. This "fear of floating" school argued that, because of credibility problems, worries about inflation pass-through, and dollarization in the domestic financial system, central banks sharply curtailed movements in the exchange rate even when officially floating. This resulted in "flexible regimes that are managed as if they were fixed, but without the benefits of precommitment."⁵

Two recent survey papers from the IMF can be viewed as proposing compromises between the initial "bipolar" view and arguments in favor of intermediate regimes.⁶ Fischer (2001) differs from the original bipolar view in two respects: first, by recognizing that developing countries which are not very exposed to international capital flows still face a wide range of intermediate exchange regime options; second, by defining flexible arrangements suitable for emerging markets more broadly to include "crawling bands with wide ranges." Mussa and others (2000) go somewhat further in defending intermediate regimes by making a distinction between the sustainability and the desirability of pegs. The fact that soft pegs may not be sustainable for many countries need not imply that they cannot play a useful role for a limited period of time (for example, as a nominal anchor during stabilization from high inflation). Of course, this assumes that these countries find a way to safely "exit" from the peg without a crisis.⁷

As an empirical matter, do intermediate regimes show signs of "vanishing"? Fischer (2001) presents evidence for emerging markets and developing countries indicating that the proportion of countries with intermediate regimes has indeed declined during the period 199199. But is this trend likely to continue until intermediate regimes become extinct? This question is addressed by Masson (2000), who estimates Markov transition probabilities between the three states (hard pegs, floats, and intermediate regimes) for various periods and sets of countries.⁸ His evidence suggests that intermediate regimes will continue to exist in steady state or, at least, take a very long time to disappear.⁹

No compromise seems to have developed, so far, in the central debate on whether floating regimes or hard pegs are preferable for the majority of emerging market economies. There is by now a substantial body of empirical work, however, that sheds light on specific aspects of the debate.

Studies that link exchange rate regimes and economic performance tend to find favorable effects of pegs, particularly hard pegs. Ghosh and others (1995, 1997) find that inflation tends to be lower under pegged regimes (which are defined to include both soft and hard pegs), while output volatility is higher under pegs.¹⁰ Ghosh, Gulde, and Wolf (1998, 2000) find that currency boards exhibit better inflation performance than soft pegs, mostly due to a credibility effect.¹¹ Regarding growth, both currency boards and floats seem to do better than soft pegs. A separate set of papers finds no systematic evidence linking pegs and banking crises; if anything, hard pegs seem to be associated with a lower probability of banking crises than both floats and soft pegs.¹²
Full dollarization is likely to imply a further credibility effect and lower real interest rates.¹³ In addition, there is evidence that currency unions have very large positive effects on trade.¹⁴
Floats, on the other hand, really do seem to have some of the insulating properties that are traditionally attributed to them. Borensztein, Zettelmeyer and Philippon (2001) find much smaller reactions in domestic interest rates, to both U.S. interest rate shocks and shocks to emerging market risk premia, for Singapore (managed float) than for Hong Kong (currency board).¹⁵ A similar comparison between Mexico and Argentina is not as clear cut; in particular, interest rates in both countries seem to react to common shocks to emerging market risk premia with about equal force. However, this is not easily attributable to a "fear of floating" because the Mexican exchange rate also shows a very large reaction to the same shocks.¹⁶

In summary, intermediate regimes—including soft pegs, bands, and crawling pegs—are unlikely to disappear, and they remain appropriate for a wide range of developing countries without large exposure to international capital flows, and as temporary regimes. When comparing soft pegs with more flexible arrangements, the latter seem to do better on growth and real volatility, while the former may be useful for stabilization purposes. As permanent arrangements for emerging markets, however, the choice is between floats and very hard pegs. How countries resolve this choice depends on how they trade off the benefits of some monetary autonomy and perhaps reduced real volatility on the one hand, and credibility, commitment, and integration on the other.

¹See, among others, Barry Eichengreen, Toward a New International Financial Architecture: A Practical Post-Asia Agenda (Washington: Institute for International Economics, 1999); Morris Goldstein, Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture (Washington: IIE, 1999), and, more cautiously, Stanley Fischer, "Reforming World Finance: Lessons from a Crisis," The Economist, October 3, 1998. This "bipolar view" goes back to Eichengreen, International Monetary Arrangements for the 21st Century (Washington: Brookings Institution, 1994).
²Bijan Aghevli, Mohsin Khan, and Peter Montiel, "Exchange Rate Policy in Developing Countries: Some Analytical Issues," IMF Occasional Paper No. 78, 1991.
³Goldstein (1999), p. 106.
⁴Jeffrey Frankel, "No Single Currency Regime is Right for All Countries of at All Times," NBER Working Paper No. 7338, 1999; John Williamson, Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option (Washington: IIE, 2000).
⁵Ricardo Hausmann, Michael Gavin, Carmen Pagés, and Ernesto Stein, "Financial Turmoil and the Choice of Exchange Rate Regime," IADB Research Department Working Paper No. 400, 1999 (the quote is from p. 11); Guillermo Calvo and Carmen Reinhart, "Fear of Floating," NBER Working Paper No. 7993, 2000.
⁶Stanley Fischer, "Is the Bipolar View Correct?," draft (available on the IMF's website, http://www.imf.org); Michael Mussa, Paul Masson, Alexander Swoboda, Esteban Jadresic, Paolo Mauro, and Andrew Berg, "Exchange Rate Regimes in an Increasingly Integrated World Economy," IMF Occasional Paper No. 193, 2000.
⁷Barry Eichengreen and others, "Exit Strategies: Policy Options for Countries Seeking Greater Exchange Rate Flexibility," IMF
⁸Paul Masson, "Exchange Rate Regime Transitions," IMF Working Paper 00/134, 2000.
⁹On the reasons why countries choose a particular regime, see Helene Poirson (IMF Working Paper, forthcoming).
¹⁰Atish R. Ghosh, Anne-Marie Gulde, Jonathan Ostry, and Holger Wolf, "Does the Nominal Exchange Rate Regime Matter?," IMF Working Paper 95/121, 1995. For a recent study with an alternative exchange rate regime classification and somewhat different results, see Eduardo Levy-Yeyati and Federico Sturzenegger, "Exchange Rate Regimes and Economic Performance," IMF Staff Papers (forthcoming).
¹¹Atish Ghosh, Anne-Marie Gulde, and Holger Wolf, "Currency Boards: The Ultimate Fix?," IMF Working Paper 98/8, 1998; idem, "Currency Boards: More than a Quick Fix?" Economic Policy, October 2000. For a model of credibility, under currency boards, see Luis Rivera Batiz and Amadou Sy, "Currency Boards, Credibility, and Macroeconomic Behavior," IMF Working Paper 00/97, 2000.
¹²See Ilker Domaç and Maria Soledad Martinez Pería, "Banking Crises and Exchange Rate Regimes: Is There a Link?" World Bank Working Paper 2489, 2000, and references therein.
¹³Andrew Berg and Eduardo Borensztein, "The Pros and Cons of Full Dollarization," IMF Working Paper 00/50, 2000.
¹⁴Andrew Rose, "One Money, One Market: The Effect of Common Currencies on Trade," Economic Policy, April 2000. For two studies evaluating the desirability of currency unions for specific regions, see Tamim Bayoumi and Paolo Mauro, "The Suitability of ASEAN for a Regional Currency Arrangement," IMF Working Paper 99/162, 1999; and Paul Masson and Catherine Pattillo, Monetary Union in West Africa (ECOWAS): Is It Desirable and How Could It Be Achieved?, IMF Occasional Paper No. 204, 2001.
¹⁵Eduardo Borensztein, Jeromin Zettelmeyer, and Thomas Philippon, "Monetary Independence in Emerging Markets: Does the Exchange Rate Regime Make a Difference?," IMF Working Paper 01/1, 2001. Christian Broda, "Coping with Terms of Trade Shocks: Pegs vs. Floats," in Alberto Alesina and Robert Barro eds., Currency Unions (Stanford: Hoover Institution, forthcoming) presents evidence on insulation relative to terms of trade shocks.
¹⁶The latter suggests that exchange rate volatility need not "buy" lower volatility elsewhere in the economy. See Olivier Jeanne and Andrew Rose, "Noise Trading and Exchange Rate Regimes," IMF manuscript (revised version of NBER Working Paper No. 7104, 1998) for a rationalization, and empirical evidence from industrialized countries.

Research Summary
Systemic Banking Crises: Causes, Consequences, and Policy Lessons
Enrica Detragiache

The last two decades have seen a proliferation of systemic banking problems around the world. Banking crises have threatened macroeconomic stability through their effects on monetary control, the fiscal consequences of bank rescue packages, and the knock-on effects on capital outflows and the external balance. Banking sector problems have quickly assumed a prominent role in the IMF's operational work of surveillance and technical assistance, and have often posed difficult challenges to the design and implementation of IMF-supported programs. These developments have stimulated a large body of IMF research.

Recent research at the IMF on banking sector distress encompasses a variety of issues and methodologies. Some work remains close to operational experience, and approaches policy questions in a pragmatic way, while other work is more abstract, and arrives at policy recommendations through modeling and econometric analysis. In the first category are several case studies that review the causes and effects of banking crises and the policy responses.¹ These papers show that, while common elements are present, every banking crisis is different, and policymakers will always have to deal with unexpected circumstances.

Another group of studies asks more specific questions that can be addressed through econometric analysis. Gonzáles-Hermosillo and others (1997) study the determinants of the 1994 Mexican crisis using bank-level data. Ramos (1998) and Schumacher (2000) explore the behavior of Argentine banks during the Tequila episode.² An issue that has received special attention is the "credit crunch," namely whether the decline in bank credit observed after a crisis is due to bank financial distress or to weak demand.³ Using aggregate data, Pazarba¸sioglu (1997) finds some evidence of a credit crunch in Finland in 199192, while Ghosh and Ghosh (1999) reject the hypothesis for the recent Asian episodes. A negative result is also reported by Woo (1999), who finds that the shortage of capital affected credit supply in Japan only in one year. Using firm-level data for Korea, Borensztein and Lee (2000) show that bank lending policies reflected financial distress at the corporate level.

While each banking crisis is unique, case studies often point to a number of similar factors as proximate causes of distress. Cross-country econometric studies of banking crises test which (if any) common factors can be identified.⁴ Using a multivariate logit econometric model, Demirgüç-Kunt and Detragiache (1998, 1999, 2000) find that low output growth, high interest rates and inflation, and rapid credit expansion tend to be associated with banking crises. Also, financial liberalization and generous deposit insurance, when accompanied by poor institutions to regulate and supervise banks, tend to contribute to fragility. Hussain and Wilhborg (1999), using evidence from six Asian countries, show that bankruptcy procedures favoring corporate debt restructuring lead to a speedier crisis resolution. Gonzáles-Hermosillo (1999) integrates macroeconomic variables with bank-level data in a sample consisting of three regions in the U.S., Mexico, and Colombia, and shows that indicators of individual bank weakness are useful for predicting systemwide crises.

While most cross-country empirical papers focus on the determinants of crises, Demirgüç-Kunt and others (2000) study how the economy and the banking sector are affected by distress.⁵ Using both macroeconomic and bank-level data, they find that depositor runs are not a typical feature of banking crises, and that output growth recovers quickly while credit remains depressed for a longer period of time. Also, there is evidence that banks, even the healthier ones, reallocate their asset portfolios away from loans and into safer assets.

Research on banking crises at the IMF has also tackled a number of questions at a theoretical level.⁶ Inspired by the Asian crises, Chan-Lau and Chen (1998) develop a model in which a small change in fundamental variables may induce banks to stop monitoring their customers, triggering a collapse in financial intermediation. Challenging conventional wisdom, Cordella and Levy-Yeyati (1998, 1999) show that forcing banks to disclose their risk exposure does not necessarily increase bank stability, and that bank bailouts, by increasing bank charter value, may reduce excessive risk-taking. Detragiache (1999) shows that, when the bank deposit market becomes more integrated internationally but significant barriers remain on the lending side, bank fragility will increase, and the economy may be worse off. Huang and Xu (2000) analyze the conditions under which the interbank market may break down, causing a systemic crisis, while Goodhart and Huang (2000) develop a model of an international system under a fixed exchange rate. They argue that although an international interbank market can improve liquidity sharing among all the banks, it also leads to international financial contagion, which can be contained by an international lender of last resort.

Policy responses to banking crises have also been a focus of IMF research.⁷ This work, which typically draws more from practical experience than from theoretical or empirical results, has either offered general evaluations of the set of policies available and the trade-offs involved, or focused on specific policies. Among the latter, Woo (2000) evaluates asset management companies versus decentralized corporate workouts, while Garcia (2000) discusses the introduction of temporary blanket deposit guarantees during a crisis.

¹Alicia Garcia-Herrero, "Banking Crisis in Latin America in the 1990s: Lessons from Argentina, Paraguay, and Venezuela," IMF Working Paper 97/40, 1997; Burkhard Drees and Ceyla Pazarba¸sioglu, "The Nordic Banking Crises: Pitfalls in Financial Liberalization?," IMF Occasional Paper No. 161, 1998; Tomás J.T. Baliño and Angel Ubide, "The Korean Financial Crisis of 1997: A Strategy of Financial Sector Reform, IMF Working Paper 99/28, 1999; Akihiro Kanaya and David Woo, "The Japanese Banking Crisis: Sources and Lessons," IMF Working Paper 00/7, 2000; Juan C. Jaramillo, "An Overview of Paraguay's Banking Crisis during the1990s," unpublished, 2000.
²Brenda Gonzáles-Hermosillo, Ceyla Pazarba¸sioglu, and Robert Billings, "Determinants of Banking Sector Fragility: A Case Study of Mexico," IMF Staff Papers, September 1997; Alberto Ramos, "Capital Structures and Portfolio Composition During Banking Crisis: Lessons from Argentina 1995," IMF Working Paper 98/121, 1998; May Khamis and Alfredo M. Leone, "Can Currency Be Stable Under a Financial Crisis? The Case of Mexico," IMF Working Paper 99/53, 1999. Liliana Schumacher, "Bank Runs and Currency Runs in a System Without a Safety Net," Journal of Monetary Economics, August 2000.
³Ceyla Pazarba¸sioglu, "A Credit Crunch? A Case Study of Finland in the Aftermath of the Banking Crisis," IMF Staff Papers, September 1997; Swati R. Ghosh and Atish R. Ghosh, "East Asia in the Aftermath: Was There a Crunch?," IMF Working Paper 99/38, 1999; David Woo, "In Search of 'Capital Crunch': Supply Factors Behind the Credit Slowdown in Japan," IMF Working Paper 99/03, 1999; Eduardo Borensztein and Jong-Wha Lee, "Financial Crisis and Credit Crunch in Korea: Evidence from Firm-Level Data," IMF Working Papers, 00/25, 2000.
⁴Asli Demirgüç-Kunt and Enrica Detragiache, "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, March 1998; Edward J. Frydl, "The Length and Costs of Banking Crises," IMF Working Paper 99/30, 1999; Marco Rossi, "Financial Fragility and Economic Performance in Developing Economies: Do Capital Controls, Prudential Regulation and Supervision Matter?," IMF Working Paper 99/66, 1999; Daniel Hardy and Ceyla Pazarba¸sioglu, "Determinants and Leading Indicators of Banking Crises: Further Evidence," IMF Staff Papers, September/December 1999; Qaizar Hussain and Clas Wihlborg, "Corporate Insolvency and Bank Behavior: A Study of Selected Asian Economies," IMF Working Paper 99/135, 1999; Asli Demirgüç-Kunt and Enrica Detragiache, "Financial Liberalization and Financial Fragility," in Boris Pleskovic and Joseph E. Stiglitz, eds., 1998 Annual World Bank Conference on Development Economics (Washington: World Bank, 1999); Brenda Gonzáles-Hermosillo, "Determinants of Ex-Ante Banking System Distress: A Macro-Micro Empirical Exploration of Some Recent Episodes," IMF Working Paper 99/33, 1999; Asli Demirgüç-Kunt and Enrica Detragiache, "Monitoring Banking Sector Fragility: A Multivariate Logit Approach," IMF Working Paper 99/147, 1999, published in World Bank Economic Review, May 2000; Asli Demirgüç-Kunt and Enrica Detragiache, "Does Deposit Insurance Increase Banking Sector Stability? An Empirical Investigation," IMF Working Paper 00/3, 2000; Sonia Muñoz, "The Breakdown of Credit Relations Conditions of a Banking Crisis: A Switching Regime Approach, IMF Working Paper 00/135, 2000.
⁵Asli Demirgüç-Kunt, Enrica Detragiache, and Poonam Gupta, "Inside the Crisis: An Empirical Analysis of Banking Systems in Distress," IMF Working Paper 00/156, 2000.
⁶Tito Cordella and Eduardo Levy-Yeyati, "Public Disclosure and Bank Failures," IMF Staff Papers, March 1998; Jorge A. Chan-Lau and Zhaohui Chen, "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation: With Reference to the Asian Financial Crisis," IMF Working Paper 98/127, 1998; Haizhou Huang and Chenggang Xu, "Financial Institutions and the Financial Crisis in East Asia," European Economic Review, April 1999; Tito Cordella and Eduardo Levy-Yeyati, "Bank Bailouts: Moral Hazard vs. Value Effect," IMF Working Paper 99/106, 1999; Se-Jik Kim, "Bailout and Conglomeration," IMF Working Paper 99/108, 1999; Enrica Detragiache, "Bank Fragility and International Capital Mobility," IMF Working Paper 99/113, 1999, and forthcoming in the Review of International Economics; Charles E. Goodhart and Haizhou Huang, "A Simple Model of the Lender of Last Resort," IMF Working Paper 00/75, 2000; Haizhou Huang and Chenggang Xu, "Financial Institutions, Financial Contagion, and Financial Crises," IMF Working Paper 00/92, 2000; Poonam Gupta, "Aftermath of Banking Crises: Effects on Real and Monetary Variables," IMF Working Paper 00/96, 2000.
⁷Claudia Dziobek and Ceyla Pazarba¸sioglu, "Lessons from Systemic Bank Restructuring: A Survey of 24 Countries," IMF Working Paper 97/161, 1997; Claudia Dziobek, "Market-Based Policy Instruments for Systemic Bank Restructuring," IMF Working Paper 98/113, 1998; Charles Enoch, Gillian Garcia, and V. Sundararajan, "Recapitalizing Banks with Public Funds: Selected Issues," IMF Working Paper 99/130, 1999; David Woo, "Two Approaches to Resolving Non-Performing Assets During Financial Crises," IMF Working Paper 00/33, 2000; Gillian Garcia, "Deposit Insurance and Crisis Management," IMF Working Paper 00/57, 2000; R. Barry Johnston, Jingquing Chai, and Liliana Schumacher, "Assessing Financial System Vulnerabilities," IMF Working Paper 00/76, 2000; Andrew Feltenstein, "Bank Failures and Fiscal Austerity: Policy Prescriptions for a Developing Country," IMF Working Paper 00/90, 2000; Edward J. Frydl and Marc Quintyn, "The Benefits and Costs of Intervening in Banking Crises," IMF Working Paper 00/147, 2000.

Country Study
Mexico
V. Hugo Juan-Ramón

During the late 1980s and early 1990s Mexico enjoyed strong capital inflows in response to an effective stabilization program, privatizations, structural reforms, and the Brady Plan. In 1994, in reaction to an increase in interest rates abroad and domestic political strife, capital began to flow out of the country and a financial crisis erupted on December 20, 1994. In response, Mexico adopted a floating exchange rate regime; prevented a collapse in the payments system; and implemented reforms to the pension system, and to the banking, fiscal, and external sectors. This article provides an overview of selected research conducted by the IMF staff on Mexico since the time of the crisis.

What were the factors behind the Mexican financial crisis? This question constitutes the theme of two papers—Savastano, Roldós, and Santaella (1995); and Masson and Agénor (1996).¹ The first article discusses three complementary views of the crisis: the adverse shocks view, the unsustainable external position view, and the policy-slippages view. The second article, which concentrates on credibility, asserts that investors appear to have seriously underestimated the risk of devaluation, despite early warning signals. Similarly, other literature, such as Ötker and Pazarba¸sioglu (1997) argue that the decline in foreign reserves and the increase in the share of short-term, foreign-currency-indexed debt seem to be the main factors explaining the timing of the Mexican crisis.²

Kalter and Ribas (1999) analyze the Mexican crisis with a focus on the role of expanding government operations, within the context of a quasi-fixed nominal exchange rate, in reducing the relative price of traded goods.³ Increases in government expenditures and taxation is associated with increased production costs, excess demand for nontraded goods, and a deterioration in the financial health of the traded goods sector. Becker, Gelos, and Richards (2000), using company-level data in Mexico during 199495, find that although interest rates failed to show a clear confidence loss in the exchange rate regime, the relative performance of net exporters suggests that expectations of devaluation increased continuously.⁴

As Mexico changed its exchange rate/monetary policy strategy after the crisis, IMF research shifted toward other key issues. Edwards and Savastano (1998) inquire whether during 199597 the peso-dollar exchange rate behaved in a manner compatible with a floating exchange rate regime.⁵ Their econometric analysis suggests that Mexico's exchange rate behavior has been largely consistent with that of (quasi) floating rates; and that during that period the Bank of Mexico (BOM) took into account exchange rate developments for conducting monetary policy.

As for monetary policy, issues such as the duration of the lags from instruments to targets, the main transmission mechanism, and the identification of shocks, which had been absent from the Latin American debate, became relevant for Mexico.⁶ Juan-Ramón (1996), and Aguilar and Juan-Ramón (1997) analyze these issues; they describe the daily conduct of monetary policy since September 1995 when the BOM started using a system of cumulative balances with commercial banks as an operational target. Using daily data from September 1995 to December 1996, both articles find that most liquidity shocks originated on the demand side, and that the BOM signaled to the market its desired monetary policy stance by announcing small changes in its operating target, which, in turn, promptly affected short-term interest rates in the desired direction. Castellanos (2000), a researcher at the BOM, using daily data from January 1996 to January 2000, confirms this first channel of transmission but also finds some instability in interest rate responses after June 1998.

The sizable devaluation, the sharp increase in interest rates, and the abrupt downturn of the economy in the aftermath of the crisis created serious liquidity and solvency problems for the banking sector. IMF research indicated that the Mexican banking crisis manifested on the asset side but did not cause a run on the system's deposits; however, it did lead to a flight from quality. Relatively sounder banks decided to reduce their cost of funding relative to other banks, while problem banks increased their share of deposits because of the higher interest rate paid and the government deposit guarantees. Developments in the Mexican banking sector have been the subject of ongoing research at the IMF. González-Hermosillo, Pazarba¸sioglu, and Billings (1997) use the case of Mexico to show that bank-specific variables and contagion effects explain the likelihood of bank failure, while macroeconomic variables largely determine the timing of bank failures; and González-Hermosillo (1999) empirically analyzes the contribution of microeconomic and macroeconomic factors in five recent episodes of systemic banking problems, including Mexico in 199495.⁷

Even before the crisis, policymakers and IMF staff were concerned by the disappointing performance of Mexico's per capita growth (see, e.g., Loser and Kalter, 1992). IMF research concluded that Mexico would improve national growth by following the well-established policy framework of macroeconomic stability, improving human capital and the functioning of the judicial system, and deepening structural reforms. Juan-Ramón and Rivera-Batíz (1996) analyze regional growth and find convergence of real per capita GDP in Mexico's states and regions during the periods of higher average national per capita growth (197085), and divergence during the lower-growth period (198593).⁸

The postcrisis resumption of capital inflows in Mexico has caused a market-driven real appreciation of the peso, raising concerns about Mexico's external competitiveness. In this connection, Dabós and Juan-Ramón (2000) study the long-run behavior of the relative price of Mexican exports to nontraded goods. Gelos and Werner (1999) study the role of financial liberalization, credit constraints, and collateral in investment in the Mexican manufacturing sector; and Gelos and Isgut (1999) examine capital adjustment patterns in the manufacturing sector of Colombia and Mexico.⁹

¹Miguel A. Savastano, Jorge Roldós, and Julio Santaella, "Factors Behind the Financial Crisis in Mexico," in World Economic Outlook, May 1995, World Economic and Financial Surveys (Washington: IMF, 1995), Annex I; Paul R. Masson and Pierre-Richard Agénor, "The Mexican Peso Crises: Overview and Analysis of Credibility Factors," IMF Working Paper 96/6, 1996; Alejandro M. Werner, "Mexico's Currency Risk Premia in 1992-94: A Closer Look at the Interest Rate Differentials," IMF Working Paper 96/41, 1996; Alejandro M. Werner, "Target Zones and Realignment Expectations: The Israeli and Mexican Experiences," IMF Staff Papers, Vol. 7, Supp. 1, 1995.
²Inci Ötker and Ceyla Pazarba¸sioglu, "Likelihood Versus Timing of Speculative Attacks: A Case Study of Mexico," European Economic Review, Vol. 41, No. 3 (April), 1997; Inci Ötker and Ceyla Pazarba¸sioglu, "Speculative Attacks and Currency Crises: The Mexican Experience," Open Economies Review, Vol. 7, Supp. 1, 1996.
³Eliot R. Kalter and Armando P. Ribas, "The 1994 Mexican Economic Crisis: The Role of Government Expenditure and Relative Prices," IMF Working Paper 99/160, 1999; Andrew Feltenstein and Juming Ha, "An Analysis of the Optimal Provision of Public Infrastructure: A Computational Model Using Mexican Data," IMF Working Paper 96/13, 1996.
⁴Torbjorn Becker, Gaston R. Gelos, and Anthony Richards, "Devaluation Expectations and the Stock Market: The Case of Mexico in 1994/95," IMF Working Paper 00/28, 2000.
⁵Sebastian Edwards and Miguel A. Savastano, "The Morning After: The Mexican Peso in the Aftermath of the 1994 Currency Crisis," National Bureau of Economic Research Working Paper No. 6516, April 1998.
⁶Alejandro Aguilar and V. Hugo Juan-Ramón, "Determinantes de las Tasas de Interés de Corto Plazo en México: Efecto de las Señales del Banco Central," Gaceta de Economía, Año 3, Núm. 5, 1997, pp. 209-20; Sara Gabriela Castellanos, "El Effecto del 'Corto' Sobre la Estructura de Tasas de Interes," Bank of Mexico, Research Document 2000-01, June 2000; V. Hugo Juan-Ramón, "The Daily Conduct of Monetary Policy in Mexico" (unpublished; Washington: IMF, 1996); May Khamis and Alfredo M. Leone, "Can Currency Demand Be Stable Under a Financial Crises? The Case of Mexico," IMF Working Paper 99/53, 1999.
⁷Brenda González-Hermosillo, "Determinants of Ex-Ante Banking System Distress: A Macro-Micro Empirical Exploration," Working Paper 99/33, 1999; Brenda González-Hermosillo, Ceyla Pazarba¸sioglu, and Robert Billings, "Banking System Fragility: Likelihood Versus Timing of Failure: An Application to the Mexican Financial Crisis," IMF Staff Papers, September 1997; Brenda González-Hermosillo, Ceyla Pazarba¸sioglu, and Robert Billings, "Determinants of Banking Sector Fragility: A Case Study of Mexico," IMF Staff Papers, September 1997; David Andrews and Shogo Ishii, "The Mexican Financial Crises: A Test of the Resilience of the Markets for Developing Country Securities," IMF Working Paper 95/132, 1995.
⁸Claudio Loser and Eliot Kalter, eds., Mexico: The Strategy to Achieve Sustained Economic Growth, IMF Occasional Paper No. 99, 1992; V. Hugo Juan-Ramón and Luis A. Rivera-Batíz, "Regional Growth in Mexico: 1970-93," IMF Working Paper 96/92, 1996.
⁹Marcelo Dabós, and V. Hugo Juan-Ramón, "Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis," IMF Working Paper 00/108, 2000; Gastón R. Gelos and Alberto Isgut, "Fixed Capital Adjustment: Is Latin America Different? Evidence from the Colombian and Mexican Manufacturing Sector," IMF Working Paper 99/59, 1999; Gastón R. Gelos and Alejandro M. Werner, "Financial Liberalization, Credit Constraints, and Collateral: Investment in the Mexican Manufacturing Sector," IMF Working Paper 99/25, 1999; Pierre-Richard Agénor and Alexander W. Hoffmaister, "Capital Inflows and the Real Exchange Rate: Analytical Framework and Econometric Evidence," IMF Working Paper 96/137, 1996; Julio A. Santaella and Abraham E. Vela, "The Mexican Disinflation Program: An Exchange Rate-Based Stabilization," IMF Working Paper 96/24, 1996.

Conference on Fiscal Decentralization
Summary by Matt Davies

The IMF Fiscal Affairs Department hosted a conference on fiscal decentralization on November 2021, 2000, to discuss prerequisites for effective service delivery, macroeconomic management, and good governance in an increasingly decentralized world. The agenda and a brief summary of the conference proceedings follow.

On Fiscal Federalism: Issues to Worry About
Vito Tanzi (IMF)

An Introduction to Decentralization Failure
Albert Breton (University of Toronto)

Decentralization and the Quality of Government
Daniel Treisman (University of California at Los Angeles)

Localization and Corruption: Panacea or Pandora's Box?
Tugrul Gurgur and Anwar Shah (World Bank)

Does Decentralization Serve the Poor?
Joachim von Braun and Ulrike Grote (University of Bonn)

Fiscal Decentralization in East and Southern Africa:
A Selective Review of Experience and Thoughts on Moving Forward
Paul Smoke (New York University and MIT)

Decentralization in Africa
Giorgio Brosio (University of Turin)

Fiscal Decentralization in Indian Federalism
Govinda Rao (Institute for Social and Economic Change, Bangalore)

Indonesia: Managing Decentralization
Ehtisham Ahmad and Ali Mansoor (IMF)

Recent Developments on Federalism and
Decentralization: Lessons from the Argentine Experience
Ernest Rezk (University of Cordoba and Ministry of Finance, Argentina)

Subnational Borrowing in Argentina
Juàn Pablo Jimenez (Ministry of Economy, Argentina)

Brazil: An Evolving Federation
José Afonso (Brazilian National Development Bank) and Luiz de Mello (IMF)

Making Decentralization Work: The Case of Russia, Ukraine, and Kazakhstan
Jorge Martinez-Vazquez (Georgia State University), Era Dabla-Norris (IMF), and John Norregaard (IMF)

Fiscal Federalist Relations in Russia: A Case for Subnational Autonomy
Aleksei Lavrov (Ministry of Finance, Russian Federation), John Litwack (OECD), and Douglas Sutherland (OECD)

The Effectiveness of Decentralization in Hungary and Slovakia
Jean-Jacques Dethier (World Bank)

Recentralization in China?
Ehtisham Ahmad (IMF), Li Keping (Macroeconomic Division, State Council, Beijing), and Thomas Richardson (IMF)

Consensus Democracy and Interjurisdictional Fiscal Solidarity in Germany
Bernd Spahn and Oliver Franz (University of Frankfurt)

Decentralization in a Supranationality: The Case of the European Union
Pierre Salmon (Université de Bourgogne)

Intergovernmental Fiscal Relations in Italy
Piero Giarda (Ministry of Treasury, Rome)

Fiscal Decentralization in Spain
Julio Vinuela (IMF)

Round Table Discussion
Chair: Vito Tanzi (IMF)
Discussants: Ehtisham Ahmad (IMF), Ismail Momoniat
(Ministry of Finance, South Africa), Piero Giarda
(Ministry of Treasury, Italy), and Robert Ebel (World Bank)

Horst Köhler's opening remarks asked whether decentralization would enhance transparency and accountability at the local government level and whether it would lead to poverty reduction and better macroeconomic management. Vito Tanzi followed this by outlining the risks involved in decentralization programs; he emphasized the appropriate sequencing of measures so as to minimize risks.

Albert Breton argued that intergovernmental competition must be the primary economic rationale for decentralization. Daniel Treisman's empirical analysis, however, did not find that competition between decentralized jurisdictions either creates greater efficiency in governance or reduces corruption. Joachim von Braun found that fiscal decentralization, in itself, is unlikely to benefit the poor without prior, and effective, political and administrative decentralization. In contrast, Tugrul Gurgur and Anwar Shah found that decentralization supports greater accountability and reduced corruption. Michael Keen pointed out that increased corruption may not be a deciding factor against decentralization.

Paul Smoke and Giorgio Brosio separately identified preconditions for successful fiscal decentralization from diverse African experiences. Viable local political mechanisms, sufficient local capacity, and access to financial resources, including local tax revenues, are required. These conditions are only weakly met in many African countries. Ismail Momoniat stressed that effective budget management is also critical for success.

In Asia, Ehtisham Ahmad and Ali Mansoor argued that the absence of effective sequencing in the current, politically motivated decentralization process in Indonesia poses risks not just to the decentralization process, but to macroeconomic stability and interregional equity. Govinda Rao showed that the more gradual decentralization in India has had dangerous implications for the fiscal deficit. Ke-Young Chu pointed to the importance of a proper evaluation of subnational finances in order to understand macroeconomic prospects.

In Latin America, Jose Afonso and Luiz de Mello described the most recent fiscal decentralization reforms in Brazil, which have concentrated on strengthening the role of municipalities in service delivery. A Fiscal Responsibility Act has been instrumental in restoring subnational fiscal discipline by limiting expenditures and borrowing. Ernesto Rezk reviewed the Argentinean experience of decentralization which was damaged by inappropriate borrowing by provincial governments. Juan-Pablo Jimenez focused on the recent efforts in Argentina to implement a subnational Fiscal Responsibility Law and a Program of Fiscal Adjustment and Financial Restructuring. Teresa Ter-Minassian described some of the decentralization issues that were featured in the IMF's recent policy discussions with both Brazil and Argentina.

Martinez-Vasquez, John Norregaard, and Era Dabla-Norris focused on Russia, Ukraine and Kazakhstan, and Jean-Jacques Dethier described the decentralization process in Hungary and Slovakia. These countries tend to show unclear assignments of tax and expenditure responsibilities. Problems include unfunded expenditure mandates and soft budget constraints at the subnational level. Alexei Lavrov, John Litwack, and Douglas Sutherland examined the necessary conditions to make decentralization work in Russia. This assessment had clear parallels with the Chinese case examined by Ehtisham Ahmad, Li Keping, and Tom Richardson. Both papers argued for a centralization of social responsibilities, redefinition of tax assignments, and a proper system of equalization transfers, with lower administrations addressing truly local functions, such as education and health care. Christine Wallich argued that the success of reforms depends on three conditions—an effective central tax administration, adequate fiscal resources, and local hard budget constraints. Nicholas Stern, chief economist of the World Bank, agreed with this assessment.

The European session included papers by Piero Giarda on Italy, Julio Vinuela on Spain, and Bernd Spahn on Germany. They showed that the extent of regional equalization is strongly influenced by national characteristics, politics, and history. Pierre Salmon addressed the scope of decentralization in the EU and suggested issues that might be relevant in country and regional surveillance by the IMF. Pierre Pestieau considered national redistribution policies.

The concluding roundtable discussion among Vito Tanzi, Ehtisham Ahmad, Ismail Momoniat, Piero Giardia, and Robert Ebel identified points that would guide countries undertaking decentralization processes. Successful systems need to foster transparency and accountability and have genuine electoral competition. Wherever possible, the implementation of reform programs should be gradual and carefully sequenced. The assignment of function should follow the existence of capacity, and should precede the assignment of revenues. Strong central government is needed to coordinate, regulate, and monitor intergovernmental competition and to take responsibility for equalization. Technical assistance from the IMF, World Bank, and other donors is likely to be important for developing countries.

Proceedings of IMF conferences and seminars, including agendas and papers, can be obtained at http://www.imf.org/external/np/exr/seminars/index.htm.

First Annual Research Conference
Summary by Prakash Loungani

The IMF's First Annual Research Conference held on November 910, 2000 featured papers on a number of important and topical themes. The conference also commemorated an exciting period in the history of the IMF's Research Department when two of its staff members, Robert Mundell and Marcus Fleming, developed their famous and eponymous model. In an after-dinner talk at the conference, Mundell shared some background surrounding the development of the model during the 1960s, some influences that were important, "and, yes, some of the defects of the model." In a presentation, "International Macroeconomics: Beyond the Mundell-Fleming Model," Maurice Obstfeld—delivering the first Mundell-Fleming lecture—discussed how present research efforts have remedied some of those defects.

Currency Crises and Monetary Policy in an Economy
with Credit Constraints
Philippe Aghion (Harvard University), Philippe Bacchetta
(Studienzentrum Gerzensee), and Abhijit Banerjee (MIT)
Discussant: Guillermo Calvo (University of Maryland)

Monetary Policy in a Financial Crisis
Lawrence Christiano (Northwestern University),
Chris Gust (Board of Governors, Federal Reserve Bank),
and Jorge Roldós (IMF)
Discussant: Martin Uribe (University of Pennsylvania)

The Interest Rate-Exchange Rate Nexus in Currency Crises
Gabriela Basurto (IADB) and Atish Ghosh (IMF)
Discussant: Philip Lane (Trinity College, Dublin)

The Effects of IMF and World Bank Programs on Poverty
Bill Easterly (World Bank)
Discussant: Michael Kremer (Harvard University)

Moral Hazard in International Crisis Lending: A Test
Giovanni Dell'Ariccia (IMF), Isabel Goedde (Mannheim University),
and Jeromin Zettelmeyer (IMF)
Discussant: Carmen Reinhart (University of Maryland)

Inequality, Transfers, and Growth: New Evidence from the
Economic Transition in Poland
Michael Keane (New York University and Yale University)
and Eswar Prasad (IMF)
Discussant: Jennifer Hunt (Yale University)

Mundell-Fleming Lecture:
International Macroeconomics: Beyond the
Mundell-Fleming Model
Maurice Obstfeld (University of California, Berkeley)

Crisis Resolution and Private Sector Adaptation
Gabrielle Lipworth and Jens Nystedt (IMF)
Discussant: Andrew Haldane (Bank of England)

Bail Ins and Borrowing Costs
Barry Eichengreen (University of California, Berkeley)
and Ashoka Mody (World Bank)
Discussant: Charles Adams (IMF and Asian Development Bank)

Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in
Extreme Exchange Rate Regimes
Antonio Fatás (INSEAD) and Andrew K. Rose
(University of California, Berkeley)
Discussant: Tamim Bayoumi (IMF)

Exchange Rate Regimes and Economic Performance
Eduardo Levy-Yeyati and Federico Sturzenegger
(Universidad Torcuato Di Tella)
Discussant: Miguel Savastano (IMF)

What Happened to Asian Exports During the Crisis
Rupa Duttagupta and Antonio Spilimbergo (IMF)
Discussant: Susan Collins (Georgetown University)

Panel Discussion on Private Sector Involvement
Chair: Alexander Swoboda (IMF)
Panelists: Amer Bisat (Morgan Stanley Dean Witter),
Lee C. Buchheit (Cleary, Gottlieb, Steen, & Hamilton),
Nouriel Roubini (New York University)

Interest Rate Response to Crises

During the 199798 Asian crisis, Joseph Stiglitz and others urged a reversal of the standard IMF prescription for a country facing a currency crisis, that of raising interest rates temporarily to stem currency devaluation and to restore financial stability. This group of economists argued that raising interest rates would worsen the condition of corporate balance sheets, thus, prompting further capital flight and weakening the currency. Far from defending the currency, interest rate increases could instead have the "perverse" impact of depreciating the exchange rate.

Should this warning of a perverse impact be taken seriously? Several papers at the conference addressed this question. For the Asian crisis countries, Atish Ghosh and Gabriela Basurto found little econometric evidence that increases in interest rates depreciate the exchange rate, leading them to conclude that "the perverse effect . . . remains a theoretical curiosum."

The answer from theoretical models was less definitive. In the model by Philippe Aghion, Philippe Bacchetta, and Abhijit Banerjee, the main burden imposed by the financial crisis is that the devaluation raises the foreign currency debt obligations of the corporate sector. Consequently, limiting the depreciation through increases in interest rates is, in most cases, good policy.

Lawrence Christiano, Chris Gust, and Jorge Roldos were more agnostic about whether or not interest rate increases are the right policy in the face of a currency crisis. In their model, the burden on the foreign currency debts may be overwhelmed by a rise in asset prices (the asset side of the country's balance sheet). The response of asset prices hinges, in turn, on the degree of substitutability and diminishing returns in production. If the substitution between labor and imported inputs is easy to make, interest rate cuts to maintain output may be a good option. If the economy is unable to adjust factors that are complementary to imported inputs—something that may be quite plausible in the short run—then an interest rate cut could have a recessionary impact.

Impacts of IMF Lending

Critics of IMF lending to emerging markets during crises argue that rescue packages foster "investor moral hazard." That is, investors are willing to make more loans, and at better terms, to these countries than they would otherwise make because they believe that the IMF will bail out the countries (and, indirectly, the investors) in the event of a crisis.

Detecting moral hazard is an empirical challenge. Giovanni Dell'Ariccia, Isabel Goedde, and Jeromin Zettelmeyer suggest that the Russian crisis of August 1998 provided an opportunity to observe this effect. The widespread expectation by market participants that Russia would receive a rescue package because it was "too nuclear to fail" turned out to be wrong. The sign that the international community appeared less willing to rescue emerging markets should have led investors to exercise greater caution in lending to these markets, thereby raising emerging market spreads and strengthening the link between spreads and economic fundamentals. The authors found modest evidence that spreads did increase in the aftermath of the Russian crisis; moreover, investors appear to have started paying greater attention to countries' risks, as countries with sounder economic policies experienced a smaller increase in spreads.

Proponents of IMF lending argue that it has a "catalytic effect" in overcoming asymmetric information or sovereign risk distortions that create too little lending to some emerging markets. Barry Eichengreen and Ashoka Mody reported some evidence of such an effect. Using data on interest rate spreads for emerging market bonds issued over the 1990s, they found that IMF lending under the Extended Fund Facility programs improves the terms of borrowing and market access to private lending. In their empirical work, however, this effect appears to hold only for countries with intermediate credit ratings.

Engaging the Private Sector in Crisis Resolution

Exactly how to involve the private sector in crisis resolution is one of the most difficult issues being tackled in international financial architecture reforms. Noriel Roubini noted that there had been important shifts in the language and tone of the discussions from the coercive-sounding "bailing-in" of the private sector, to "burden-sharing," and, more recently, to "constructive engagement." The private sector involvement (PSI) policies followed by the official sector have, to date, struck a balance between the need to establish some rules—to reduce uncertainty and unpredictability of policy—and the need for discretion to deal with the particular circumstances of each country. Roubini noted that while, over time, the buildup of these case histories might yield some clear rules to be followed with regards to PSI, there will likely always be a need for constructive ambiguity in the overall PSI framework.

Gabrielle Lipworth and Jens Nystedt cautioned that, in the absence of clearly established rules of the game concerning PSI, the private sector will have a stronger incentive to seek new instruments that are better insulated from restructurings. They noted that the large-scale restructurings of syndicated bank loans in the aftermath of the 1980s debt crisis had provided an impetus to the use of the international bond market for emerging market borrowers. It would be natural to expect that as bond restructurings become more common, private sector creditors will try to use instruments, such as securitized or guaranteed debt, which are harder to restructure.

Poverty, Inequality, and IFI Policies

There are few ailments of modern economies that have not been blamed, at one time or another, on policies recommended by the international financial institutions (IFIs). One steady refrain has been that structural adjustment programs hurt the poor. Bill Easterly, however, found mixed evidence on the issue. While the programs appear to shield the poor from some of the pain of economic contractions, they also moderate the income gains of the poor during economic expansions. This result may come about because adjustment lending has greater impact on the formal sector than on the informal sector, to which many of the poor tend to be attached. Hence, "the poor may be ill-placed to take advantage of new opportunities created by structural adjustment reforms," but they may also suffer less "from the loss of old opportunities in sectors that were artificially protected prior to reforms." The inclusion of provisions to strengthen social safety nets in lending programs also cushions the impact of recessions on workers' incomes.

IFI lending and policy prescriptions are also often blamed for increasing income inequality, particularly in transition economies that have undergone tremendous economic change over the last decade. Michael Keane and Eswar Prasad, however, challenged this conventional wisdom for one of the more successful transition countries—Poland. Using very comprehensive data on the incomes and consumption of Polish households, they found that the increase in income inequality during the transition was quite modest, leaving Poland with income inequality "closer to those of Scandinavian countries than that of the United States." Though changes in income inequality were modest, labor earnings inequality did increase substantially during transition; however, government transfer programs mitigated the rise in overall income inequality.

Effects of Exchange Rate Regimes

With countries increasingly experimenting with their choice of exchange rate regimes, the issue of how regimes affect economic performance has become even more critical. One immediate challenge for researchers is how to classify a country's exchange rate regime, particularly because there is often great divergence between a country's stated regime and the one it follows in practice. The IMF provides a detailed classification based on countries' stated regimes in its Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). Eduardo Levy-Yeyati and Federico Sturzenegger, however, attempt an alternate classification based on observed volatility in exchange rates—both in the level of the exchange rate and in its rate of change—and the volatility of reserves. To take an example, a country with low volatility of exchange rates and high volatility of reserves is classified as a fixed exchange rate regime, regardless of its declared regime.

With this new classification, the authors find that intermediate exchange rate regimes tend to have higher inflation rates (controlling for other influences) than either fixed or floating exchange rate regimes. This result is somewhat at odds with the findings of a comprehensive 1996 IMF study by Ghosh, Gulde, Ostry, and Wolf.¹ Using a classification of regimes based on the AREAER and input from IMF country experts, they found fixed regimes to deliver lower inflation than other regimes. Other results of the Levy-Yeyati and Sturzenegger study were that output growth is lower, and output volatility higher, in countries with fixed exchange rate regimes than in others with intermediate or floating regimes.

Rupa Duttagupta and Antonio Spilimbergo tackled the puzzle of why exports of Asian crisis countries responded with a substantial lag to the large real depreciations of their currencies. They presented evidence that the near-simultaneous depreciationof these currencies neutralized the competitive advantage that any one country might have gained had its currency been the only one devalued.

¹Atish Ghosh, Ann-Marie Gulde, Jonathan D. Ostry, and Holger Wolf, Does the Exchange Rate Matter for Inflation and Growth?, IMF Economic Issues No. 2, 1996.

The IMF's First Annual Research Conference will be the subject of a special issue of IMF Staff Papers in 2001. Proceedings of IMF conferences and seminars, including agenda and papers, are available at http://www.imf.org/external/np/exr/seminars/index.htm.

Emerging Market Financing Report

As part of its surveillance of international financial markets, the IMF began publishing a quarterly report on Emerging Market Financing (EMF) in 2000. This report regularly reviews developments in emerging markets and the outlook for capital flows to these markets, and it examines issues related to the functioning of international capital markets. The latest EMF report (fourth quarter, 2000) analyzes periodic bouts of contagion across emerging markets and sporadic closures of emerging debt primary markets.

Several effects collectively took a toll on emerging bond and equity markets in the last quarter of 2000, including heightened expectations of a slowdown in the U.S. economy; lowered earnings potential of the technology, media, and telecommunications sectors; and a deterioration in U.S. credit markets. As emerging market spreads widened sharply, tighter external liquidity conditions focused investor attention on prospects for the two largest emerging market borrowers in international bond markets—Argentina and Turkey. Despite an almost complete drying up in bond issuance, total emerging markets fundraising on international capital markets, nevertheless, held up relatively well, supported by a surge in equity placements from China and a robust syndicated loan market. For the year as a whole, fundraising reached its second highest level, behind only the peak boom year of 1997.

The outlook for emerging market assets and financing remains closely tied to developments in the external environment. Changing expectations of the relative probabilities of "soft" versus "hard" landing scenarios for the United States are likely to keep markets volatile. The baseline outlook for 2001 is for moderation in bond financing, selective equity placements, and a supportive loan market.

The EMF report is available at http://www.imf.org/external/pubs/ft/emf/index.htm

IMF Staff Papers
Volume 47, Number 3

Herd Behavior in Financial Markets
Sushil Bikhchandani and Sunil Sharma

Exchange Market Pressure and Monetary Policy:
Asia and Latin America in the 1990s
Evan Tanner

A Survey of Recent Empirical Money Demand Studies
Subramanian S. Sriram

Inflation and Sovereign Default
Turalay Kenc, William Perraudin, and Paolo Vitale

Exchange Rate Regimes and Inflation Persistence
Michael Bleaney

IMF Staff Papers, the IMF's scholarly journal, edited by Robert Flood, publishes selected high-quality research produced by IMF staff and invited guests on a variety of topics of interest to a broad audience, including academics and policymakers in IMF member countries. The papers selected for publication in the journal are subject to a rigorous review process using both internal and external referees. The journal and its contents (including an archive of articles from past issues) are available online at http://www.imf.org/external/pubs/ft/staffp/index.htm

IMF Occasional Paper No. 199
Ghana: Economic Development in a Democratic Environment
Sergio Pereira Leite, Anthony Pellechio, Luisa Zanforlin, Girma Begashaw,
Stefania Fabrizio, and Joachim Harnack

This study reviews main economic developments and policies in Ghana during the 199299 period and highlights the challenges and trade-offs that a small open economy faces when developing in a democratic environment. The paper underscores how a democratic and participatory approach to policymaking can contribute to better decision making, broader popular support for economic programs, and prevention of backtracking. But it also makes clear that consensus building takes time and effort, and that, by itself, a participatory approach does not ensure success. Ghana's Vision 2020 program was a good start, but it still falls short of what is needed to achieve middle- income status within one generation. The next phase of economic reforms should focus on the areas most likely to make a large contribution to reducing poverty and raising sustainable growth, that is, agricultural development, trade, public sector reforms, privatization, and governance.

Detailed contents of IMF Occasional Papers are available at http://www.imf.org/external/pubind.htm.

IMF Occasional Paper No. 200
Pension Reform in the Baltics: Issues and Prospects
Jerald Schiff, Niko Hobdari,
Axel Schimmelpfennig, and Roman Zytek

This paper summarizes efforts by the Baltic countries to reform their pension systems, and examines the choices these countries face in their continued reform efforts. Early in their transition, these countries enacted measures that were aimed at correcting the flaws of the inherited Soviet system, in particular, by shoring up the finances of the pension systems and reducing their distortionary impacts. While these efforts were largely successful, they have been partially undone in subsequent years.

Estonia, Latvia, and Lithuania have recently turned their attention to addressing adverse demographic trends, moving toward a three-pillar pension system incorporating a fully-funded scheme. The paper emphasizes that, while such pension reforms can have significant benefits, they do not allow countries to "escape" problems associated with changing demographics. Rather, reforms can help to address demographic concerns only to the extent that they contribute to higher national savings and growth. In this context, the details of the operations and financing of the fully funded scheme are crucial.

Detailed contents of IMF Occasional Papers are available at http://www.imf.org/external/pubind.htm.

IMF Occasional Paper No. 201
Developments and Challenges in the Caribbean Region
Samuel Itam, Simon Cueva, Erik Lundback, Janet Stotsky, and Stephen Tokarick

This study concludes that economic growth in the Caribbean region is expected to increase over the medium term, averaging about 3.5 percent a year during 200005, compared with 2.6 percent during 199099. The inflation differential with the United States is also expected to narrow, resulting in some gains in competitiveness for the region. However, Caribbean countries face several tough challenges, as their preferential trade arrangements with industrial countries are likely to be progressively eroded and concessional assistance will become more difficult to attract. A slowing U.S. economy could also adversely affect the region's foreign currency earnings.

The members of the Caribbean Community (CARICOM) will therefore need to take a number of measures to preserve economic gains made over the past two decades. These include accelerating privatization of state-owned financial institutions, expanding trade liberalization, holding down local production costs and diversifying exports. Reducing public sector deficits will require a balanced combination of tax reform and spending restraint. Progress toward achieving the goal of a single market economy in the Caribbean region has been slow, but some success has been achieved in harmonizing domestic tax regimes.

Detailed contents of IMF Occasional Papers are available at http://www.imf.org/external/pubind.htm.

IMF Occasional Paper No. 202
Adopting Inflation Targeting: Practical Issues for
Emerging Market Countries
Andrea Schaechter, Mark R. Stone, and Mark Zelmer

This paper assesses the institutional and operational practicalities of inflation targeting for the increasing number of emerging market countries that are adopting this type of regime. The motivation for the paper is the increasing number of emerging market countries that are asking the IMF for technical assistance in this area. The assessment draws largely on the relatively long inflation-targeting experiences of certain industrial countries, as well as the more recent experiences of some emerging market countries. A comparison between the practices of emerging and industrial countries suggests that the former tend to prefer more formal institutional frameworks, shorter target horizons, target bands rather than points, and more frequent foreign exchange market intervention. These distinctions are largely attributable to differing economic structures and history—for example, emerging market economies tend to be more prone to volatile capital flows and other shocks, have less developed financial systems, and have higher and more variable rates of inflation.

Detailed contents of IMF Occasional Papers are available at http://www.imf.org/external/pubind.htm.

IMF Occasional Paper No. 203
Modern Banking and OTC Derivatives Markets:
The Transformation of Global Finance and
Its Implications for Systemic Risk
Garry Schinasi, R. Sean Craig, Burkhard Drees, and
Charles Kramer

This paper notes that the rapid growth, development, and widespread use of over-the-counter (OTC) derivatives have accompanied, and in many ways made possible, the modernization of banking and the globalization of finance. While acknowledging the considerable benefits that derivatives have provided, the paper identifies and examines sources of risk to market stability and imperfections in the underlying institutional and market infrastructures.

The authors propose a rebalancing of public and private roles in ensuring stability in OTC derivatives markets. They argue that the potential for instability can be reduced through more effective market discipline, improved private risk management, greater public disclosure, and market transparency. The authors also propose that public authorities become more proactive in providing incentives for effective market discipline, and also consider changes in prudential regulations—in particular, raising capital adequacy requirements—if market discipline does not improve. More effective monitoring of OTC derivatives markets and the removal of legal and regulatory uncertainties are also called for.

Detailed contents of IMF Occasional Papers are available at http://www.imf.org/external/pubind.htm.

Books from IMF

Full-text versions (or, in some cases, detailed summaries) of books published by the IMF are available online at the IMF Publications website, http://www.imf.org/external/pubind.htm.

Equity and Efficiency in the Reform of Price Subsidies: A Guide for Policymakers
Sanjeev Gupta, Marijn Verhoeven, Robert Gillingham, Christian Schiller, Ali Mansoor, and
Juan Pablo Cordoba

Price-subsidy reform, when it is done well, can release resources for social services, improve efficiency, and facilitate economic growth for the poor. Price increases, however, can also result in income losses for the poor and, in some cases, lead to political unrest. This guide draws on the experiences in 28 countries to advise policymakers on how to design price-subsidy reforms. It discusses economic and political considerations and makes recommendations concerning the speed of reforms and social protection mechanisms.

The guide finds that large budgetary savings from price-subsidy reforms are difficult to achieve in the short run and that rapid reform has been the exception in the cases reviewed. Mechanisms for protecting the poor should be established before reforms are initiated and should be temporary. The risk of political disruption is highest when rapid reform is attempted without social protection mechanisms and when the government is unpopular. This risk can be minimized by distributing the initial burdens of reform fairly and by clearly explaining the cost and benefits to the public.

External Publications by IMF Staff
July -- December 2000

A full listing of external publications of IMF staff in the second half of 2000 will appear in the next issue of this bulletin. A searchable database with updated information on recent external publications of IMF staff is available at http://www.imf.org/external/pubs/res/nletter/pubhome.asp.

Journal Articles

Adachi, Mitsutoshi
Product Market Competition in Transition Economies: Increasing Varieties and Consumer Loyalty
Journal of Comparative Economics

Agénor, Pierre-Richard; McDermott, C. John; Prasad, Eswar
Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts
World Bank Economic Review

Agulnik, Phil; Cardarelli, Roberto; Sefton, James
The Pensions Green Paper: A Generational Accounting Perspective
Economic Journal

Alesina, Alberto; Baqir, Reza; Easterly, William
Redistributive Public Employment
Journal of Urban Economics

Barajas, Adolfo; Steiner, Roberto; Salazar, Natalia
The Impact of Liberalization and Foreign Investment in Colombia's Financial Sector
Journal of Development Economics

Bayoumi, Tamim; Eichengreen, Barry; Mauro, Paolo
On Regional Monetary Arrangements for ASEAN
Journal of the Japanese and International Economies

Bensaid, Bernard; Jeanne, Olivier
Self-Fulfilling Currency Crises and Central Bank Independence
Scandinavian Journal of Economics

Bigman, D.; Dercon, S.; Guillaume, Dominique; Lambotte, M.
Community Targeting for Poverty Reduction in Burkina Faso
World Bank Economic Review

Bonin, Holger; Raffelhüschen, Bernd; Walliser, Jan
Can Immigration Alleviate the Demographic Burden?
Finanzarchiv

Cardarelli, Roberto; Sefton, James; Kotlikoff, Laurence J.
Generational Accounting in the UK
Economic Journal

Chami, Ralph; Fischer, Jeffrey
Do Private Income Transfers Increase Labor Market Risk?
Economics Letters

Christou, Costas; Haliassos, Michael
Consumption Smoothing and Financial Integration in the European Union
The Manchester School

Cihak, Martin; Holub, Tomas
Monetary Conditions Indices
Finance a Uver

de Mello, Luiz
Consumption Behavior and Persistent High Inflation: Evidence from Latin America
Revista Brasileira de Economia

de Mello, Luiz; Fukasaku, Kiichiro
Trade and Foreign Direct Investment in Latin America and Southeast Asia: Temporal Causality Analysis
Journal of International Development

Debrun, Xavier
Fiscal Rules in a Monetary Union: A Short-Run Analysis
Open Economies Review

Demirgüç-Kunt, Asli; Detragiache, Enrica
Monitoring Banking Sector Fragility: A Multivariate Logit Approach
World Bank Economic Review

Dicks-Mireaux, Louis; Mecagni, Mauro; Schadler, Susan
Evaluating the Effect of IMF Lending to Low-Income Countries
Journal of Development Economics

Drudi, Francesco; Prati, Alessandro
Signaling Fiscal Regime Sustainability
European Economic Review

Frenkel, Michael; Mehrez, Gil
Inflation and the Misallocation of Resources
Economic Inquiry

Gershenson, Dmitry
Civil Conflict: Ended or Never Ending?
Journal of Conflict Resolution

Goodhart, Charles; Huang, Haizhou
A Simple Model of an International Lender of Last Resort
Economic Notes

Hongyi, Li; Xie, Danyang; Zou, Heng-fu
Dynamics of Income Distribution
Canadian Journal of Economics

Kandil, Magda E.
Demand Shifts Across U.S. Industries and the Stabilizing Function of Wage and Price Flexibility
Applied Economics

Kandil, Magda E.
On Differences between East and West Germany in 19701990
International Journal of Social Economics

Kletzer, Kenneth; Wright, Brian
Sovereign Debt as Intertemporal Barter
American Economic Review

Larson, C. Erik; Olson, Lars J.; Sharma, Sunil
Optimal Inventory Policies When the Demand Distribution Is Not Known
Journal of Economic Theory

Ley, Eduardo; Macauley, Molly; Salant, Steve
Spatially and Intertemporally Efficient Solid Waste Management
Journal of Environmental Economics and Management

Ligthart, Jenny; Heijdra, Ben J.
The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model
Oxford Economic Papers

Lockwood, Ben; Sloek, Torsten; Tranæs, Torben
Progressive Taxation and Wage Setting: Some Evidence for Denmark
Scandinavian Journal of Economics

Moers, Lucas
Determinants of Enterprise Restructuring in Transition: Description of a Survey in Russian Industry
Post-Communist Economies

Moers, Lucas
What Determines Enterprise Performance in Russia? A Survey of the Evidence
Journal for Institutional Innovation, Development, and Transition

Moers, Lucas
Coordination Problems in Reforming Plan to Market
Tijdschrift voor Politieke Ekonomie

Nadal-De Simone, Francisco
Monetary and Fiscal Policy Interaction in a Small Open Economy: The Case of Singapore
Asian Economic Journal

Schwartz, Gerd; Ter-Minassian, Teresa
The Distributional Effects of Public Expenditure
Journal of Economic Surveys

Senhadji, Abdelhak
How Significant Are Departures from Certainty Equivalence?: Some Analytical and Empirical Results
Review of Economic Dynamics

Spilimbergo, Antonio
Growth and Trade: The North Can Lose
Journal of Economic Growth

Walliser, Jan
Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security
Scandinavian Journal of Economics

Xie, Danyang
Power Risk Aversion Utility Function
Annals of Economics and Finance

Zavras, Athanasios; Edelstein, Burton; Vamvakidis, Athanasios
Health Care Savings from Microbiological Caries Risk Screening of Toddlers: A Cost Estimation Model
Journal of Public Health Dentistry

Zee, Howell
Sanding Short-Term Capital Inflows Through Withholding Tax
Tax Notes International

Contributions to Books and Conference Volumes

Arnone, Marco; Bellavite Pellegrini, Carlo; Timpano, Franco
Modelli di Agenzie di Sviluppo Regionale: Analisi Teorica ed Evidenza Empirica
Economia, Territorio e Istituzioni, ed. by E. Ciciotti and A. Spazianti (Milan, Italy: F. Angeli Publisher).

Braunerhjelm, Pontus; Faini, Riccardo; Norman, Victor; Seabright, Paul
Integration and the Regions of Europe: How the Right Policies Can Prevent Polarization
Monitoring European Integration (London, U.K.: Center for Economic Policy Research).

Chinn, Menzie; Kletzer, Kenneth
International Capital Inflows, Domestic Financial Intermediation and Financial Crises Under Imperfect Information
Financial Crises in Emerging Markets, ed. by Reuven Glick (New York, NY: Cambridge University Press).

Danninger, Stephan; Mincer, Jacob
Technology, Unemployment, and Inflation
Research in Labor Economics: Worker Well-Being (Greenwich, CT: JAI Press)

Edwards, Sebastian; Savastano, Miguel
Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?
Economic Policy Reform: What We Know and What We Need to Know, ed. by Anne Krueger (Chicago, IL: University of Chicago Press).

Edwards, Sebastian; Savastano, Miguel
The Mexican Peso in the Aftermath of the 1994 Currency Crisis
Currency Crises, ed. by Paul Krugman (Chicago, IL: University of Chicago Press for the NBER).

Eichengreen, Barry; Jeanne, Olivier
Currency Crisis and Unemployment: Sterling in 1931
Currency Crises, ed. by Paul Krugman (Chicago, IL: University of Chicago Press).

Evenett, Simon; Lehmann, Alexander; Steil, Benn
Antitrust Policy in an Evolving Global Marketplace
Antitrust Goes Global: What Future for Transatlantic Cooperation?, ed. by Simon Evenett, Alexander Lehmann, and Benn Steil (Washington, D.C.: Brookings Institution).

Faini, Riccardo
Increasing Returns, Migration and Convergence: A Rejoinder to Gillen and Guccione
Journal of Development Economics

Gupta, Sanjeev; Hammond, Brian; Swanson, Eric
Setting the Goals
OECD Observer (Paris, France: OECD).

Haque, Nadeem U.; Pesaran, M. Hashem; Sharma, Sunil
Neglected Heterogeneity and Dynamics in Cross-Country Savings Regressions
Panel Data Econometrics: Future Directions, Papers in Honour of Professor Balestra, ed. by J. Krishnakumar and E. Ronchetti (Amsterdam, Holland: North Holland).

He, Dong; Ingves, Stefan
Facilitating Bank and Corporate Restructuring: The Role of Government
Managing Financial and Corporate Distress: Lessons from Asia, ed. by Charles Adams, Robert E. Litan, and Michael Pomerleano (Washington, D.C.: Brookings Institution).

Kletzer, Kenneth; Mody, Ashoka
Will Self-Protection Policies Safeguard Emerging Markets from Crises?
Emerging Markets in the New Financial System, ed. by Robert Litan (Washington D.C.: Brookings Institution).

Laxton, Douglas; Prasad, Eswar
International Spillovers of Macroeconomic Shocks: A Quantitative Exploration
EMU, Financial Markets and the World Economy, ed. by T. Moser and B. Schips (Nowell, MA: Kluwer Academic Publishers).

Ley, Eduardo
Frontier Models
Encyclopedia of Environmetrics (London, U.K.: John Wiley and Sons).

Milesi-Ferretti, Gian Maria; Razin, Assaf
Current-Account Reversals and Currency Crises: Empirical Regularities
Currency Crises, ed. by Paul Krugman (Chicago, IL: University of Chicago Press).

Mussa, Michael; Savastano, Miguel
The IMF Approach to Economic Stabilization
NBER Macroeconomics Annual 1999, ed, by Ben Bernanke and Julio Rotemberg (Cambridge, MA: The MIT Press).

Okogu, Bright
Nigeria's Economic Reform Experience: An Application of Negotiation Theory
International Economic Negotiation: Models Versus Reality, ed. by Victor Kremenyuk and Gunnar Sjostedt (Cheltenham, UK and Northampton Massachusetts, USA: Edward Elgar Publishing Ltd).

Olters, Jan-Peter
Similar Shades of Purple
World Economic Affairs (Montreal, Canada: World Economic Policy Institute).

Rosenberg, Christoph; Ruocco, Anna; Wiegard, Wolfgang
Explicit and Implicit Taxation in Uzbekistan
Herausforderungen an die Wirtschaftspolitik zum 21. Jahrhundert. Festschrift fhr Lutz Hoffman zum 65, ed. by Irmgard Nhbler and Harald Trabold (Geburtstag, Berlin: Duncker und Humboldt).

Savastano, Miguel
On the Recent Proposals for the Full Dollarization of Emerging Economies
Dollarizing the Peruvian Economy, ed. by F. Du Bois and E. Moron (Lima, Peur: Universidad del Pacifico).

Seelig, Steven
Banking Trends and Deposit Insurance Risk Assessment in the 21st Century
The New Financial Architecture: Banking in the 21st Century, ed. by Benton E. Gup. (Westport, CT: Quorum Books).

Sriram, Subramanian Sivaraman
The Demand for Money in Malaysia
Southern Economist (Bangalore, India).

Visiting Scholars at the IMF, October -- December 2000

Jasmina Arifovic; Simon Fraser University, Canada
David Begg; Birbeck College, U.K.
Laurence Boone; OECD, France
Michael Bordo; Rutgers University
Fabio Canova; Universitat Pompeu Fabra, Spain
Sujit Chakravorti; Federal Reserve Bank of Dallas
Peter Christoffersen; McGill University, Canada
Paul Conway; Westpac Institutional Bank
Thomas Cosimano; University of Notre Dame
Isabel Goedde; University of Mannheim, Germany
Andrew Hughes-Hallett; University of Strathclyde, U.K.
Alberto Isgut; Wesleyan University
Theo Jerome; University of Ibadan, Nigeria
Koichiro Kamada; Bank of Japan
Michael Keane; New York University and Yale University
Thomas Kraus; University of St. Gallen, Switzerland
Francois Leroux; Ecole des Hautes Etudes Commerciales, France
Marcus Miller; University of Warwick, England
Oswald Mungule; University of Zambia, Zambia
James Njeru; Moi University, Kenya
Arvind Panagariya; University of Maryland
Assaf Razin; Tel Aviv University, Israel
Luis Rivera-Batiz; McGill University, Canada
Andrew Rose; University of California at Berkeley
Aderonke Sobodu; University of Ibadan, Nigeria
Helmut Wagner; University of Hagen, Germany
Abdoul Wane; Universite Cheikh Anta DIOP de DAKAR, Senegal
Shang-Jin Wei; Brookings Institution

IMF Working Papers

Working Paper No. 00/155
Determinants of Barter in Russia: An Empirical Analysis
Commander, Simon; Dolinskaya, Irina; Mumssen, Christian

Working Paper No. 00/156
Inside the Crisis: An Empirical Analysis of Banking Systems in Distress
Demirguc-Kunt, Asli; Detragiache, Enrica; Gupta, Poonam

Working Paper No. 00/157
What Caused the 1991 Currency Crisis in India?
Cerra, Valerie; Saxena, Sweta Chaman

Working Paper No. 00/158
Inflation Targeting Under Potential Output Uncertainty
Gaiduch, Victor; Hunt, Benjamin

Working Paper No. 00/159
An Interest Rate Defense of a Fixed Exchange Rate?
Flood, Robert P.; Jeanne, Olivier

Working Paper No. 00/160
The Russian Default and the Contagion to Brazil
Goldfajn, Ilan; Baig, Taimur

Working Paper No. 00/161
Technological Adaptation, Trade, and Growth
Chong, Alberto; Zanforlin, Luisa

Working Paper No. 00/162
Forecasting Inflation in Chile Using State-Space and Regime-Switching Models
Simone, Francisco Nadal-De

Working Paper No. 00/163
Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention
Bartolini, Leonardo; Bertola, Giuseppe; Prati, Alessandro

Working Paper No. 00/164
The Impact of Tax and Welfare Policies on Employment and Unemployment in OECD Countries
Disney, Richard

Working Paper No. 00/165
The Effects of Monetary and Fiscal Policy on Aggregate Demand in a Small Open Economy: An Application of the Structural Error Correction Model
Konuki, Tetsuya

Working Paper No. 00/166
Health Care and Its Financing in Italy: Issues and Reform Options
Reviglio, Franco

Working Paper No. 00/167
The Plutocratic Bias in the CPI: Evidence from Spain
Ruiz-Castillo, Javier

Working Paper No. 00/168
Does IMF Financing Result in Moral Hazard?
Lane, Timothy; Phillips, Steven

Working Paper No. 00/169
Tales From Two Neighbors: Productivity Growth in Canada and the United States
Cerisola, Martin; Chan-Lau, Jorge

Working Paper No. 00/170
Fiscal Policy Through Time-Varying Tax Rates: If and How
Kaufman, Martin

Working Paper No. 00/171
Pension Reform, Private Saving, and the Current Account in a Small Open Economy
Schimmelpfennig, Axel

Working Paper No. 00/172
Good, Bad or Ugly? On The Effects of Fiscal Rules with Creative Accounting
Milesi-Ferretti, Gian Maria

Working Paper No. 00/173
The Disappearing Tax Base: Is Foreign Direct Investment (FDI) Eroding Corporate Income Taxes?
Gropp, Reint E.; Kostial, Kristina

Working Paper No. 00/174
Voting on the "Optimal" Size of Government
Olters, Jan-Peter

Working Paper No. 00/175
Trade and Domestic Financial Market Reform Under Political Uncertainty: Implications for Investment, Savings, and the Real Exchange Rate
Bhattacharya, Rina

Working Paper No. 00/176
Smuggling, Currency Substitution, and Unofficial Dollarization: A Crime-Theoretic Approach
Mourmouras, Alex; Russell, Steven H.

Working Paper No. 00/177
International Debt and the Price of Domestic Assets
Auernheimer, Leonardo; Garcia-Saltos, Roberto

Working Paper No. 00/178
Israeli Inflation from an International Perspective
Fischer, Stanley; Orsmond, David

Working Paper No. 00/179
Inflation, Debt, and Default in a Monetary Union
Jahjah, Samir

Working Paper No. 00/180
The Cost of Government and the Misuse of Public Assets
Tanzi, Vito; Prakash, Tej

Working Paper No. 00/181
Globalization, Technological Developments, and the Work of Fiscal Termites
Tanzi, Vito

Working Paper No. 00/182
Corruption, Growth, and Public Finances
Tanzi, Vito; Davoodi, Hamid

Working Paper No. 00/183
Optimal Inventory Policies When the Demand Distribution Is Not Known
Larson, Erik; Olson, Lars; Sharma, Sunil

Working Paper No. 00/184
The Asymmetric Effects of Exchange Rate Fluctuations: Theory and Evidence from Developing Countries
Kandil, Magda

Working Paper No. 00/185
How Can Fiscal Policy Help Avert Currency Crises?
Kopits, George

Working Paper No. 00/186
Transparency in Central Bank Financial Statement Disclosures
Sullivan, Kenneth

Working Paper No. 00/187
Poverty, Inequality, and Unethical Behavior of the Strong
Hillman, Arye

Working Paper No. 00/188
Endogenous Money Supply and Money Demand
Choi, Woon Gyu; Oh, Seonghwan

Working Paper No. 00/189
To "B" or not to "B": A Welfare Analysis of Breaking Up Monopolies in an Endogenous Growth Model
Xie, Danyang

Working Paper No. 00/190
Emerging Market Spreads: Then Versus Now
Mauro, Paolo; Sussman, Nathan; Yafeh, Yishay

Working Paper No. 00/191
Effects of Volatile Asset Prices on Balance of Payments and International Investment Position Data
Committeri, Marco

Working Paper No. 00/192
Northwest of Suez: The 1956 Crisis and the IMF
Boughton, James M.

Working Paper No. 00/193
Explaining Economic Growth with Imperfect Credit Markets
Carranza, Luis

Working Paper No. 00/194
The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution
Choi, Woon Gyu

Working Paper No. 00/195
Loan Review, Provisioning, and Macroeconomic Linkages
Cortavarria, Luis; Dziobek, Claudia; Kanaya, Akihiro;
Song, Inwon

Working Paper No. 00/196
External Debt Management in Low-Income Countries
Bangura, Sheku; Kitabire, Damoni; Powell, Robert

Working Paper No. 00/197
Demand-Side Stabilization Policies: What Is the Evidence of Their Potential?
Kandil, Magda

Working Paper No. 00/198
A Panic-Prone Pack? The Behavior of Emerging Market Mutual Funds
Borensztein, Eduardo R.; Gelos, R. Gaston

Working Paper No. 00/199
Dual Currency Boards: A Proposal for Currency Stability
Oppers, S. Erik; Office in Europe

Working Paper No. 00/200
What Happened to Asian Exports During the Crisis?
Duttagupta, Rupa; Spilimbergo, Antonio

Working Paper No. 00/201
Cooption and Repression in the Soviet Union
Gershenson, Dmitry; Grossman, Herschel

Working Paper No. 00/202
Measuring Off-Balance Sheet Leverage
Breuer, Peter

Working Paper No. 00/203
El Nino and World Primary Commodity Prices: Warm Water or Hot Air?
Brunner, Allan

Working Paper No. 00/204
Comprehensive Measures of GDP and the Unrecorded Economy
Bloem, Adriaan M.; Shrestha, Manik

Working Paper No. 00/205
Government Spending, Rights, and Civil Liberties
de Mello, Luiz; Sab, Randa

Working Paper No. 00/206
Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate
Bartolini, Leonardo; Bertola, Giuseppe; Prati, Alessandro

Working Paper No. 00/207
Inflation in Albania
Rother, Philipp

Working Paper No. 00/208
Will the Emergence of the Euro Affect World Commodity Prices?
Cuddington, John; Hong Liang

Working Paper No. 00/209
Financial Development and Economic Growth: An Overview
Khan, Mohsin S.; Senhadji, Abdelhak S.

Working Paper No. 00/210
The U.K. Business Cycle, Monetary Policy, and EMU Entry
Kontolemis, Zenon G.; Samiei, Hossein

Working Paper No. 00/211
An Incentive Approach to Identifying Financial System Vulnerabilities
Johnston, R. Barry; Chai, Jingqing

Working Paper No. 00/212
Measuring Integrated Market and Credit Risks in Bank Portfolios: An Application to a Set of Hypothetical Banks Operating in South Africa
Barnhill, Theodore; Papapanagiotou, Panagiotis; Schumacher, Liliana

Working Paper No. 00/213
Issues in the Unification of Financial Sector Supervision
Abrams, Richard K.; Taylor, Michael

Working Paper No. 00/214
Depositor Behavior and Market Discipline in Colombia
Barajas, Adolfo; Steiner, Roberto

Working Paper No. 00/215
The Role of Subordinated Debt in Market Discipline: The Case of Emerging Markets
Karacadag, Cem; Shrivastava, Animesh

Working Paper No. 00/216
The New Economy and Global Stock Returns
Brooks, Robin; Catao, Luis

IMF Working Papers and other IMF publications can be downloaded in full-text format from the IMF website at http://www.imf.org/external/pubind.htm.

World Economic Outlook, October 2000
Summary by Maitland MacFarlan and Torsten Sløk

The October 2000 World Economic Outlook (WEO) states that global growth in 2000 is expected to be the strongest it has been in over a decade, with robust or strengthening economic activity in almost all regions of the world. In 2001, although slowing, world growth is expected to remain at a high level. Some important risks are mentioned too in the outlook, including persistent imbalances in growth rates and current account positions among the major currency areas, currency misalignments, generous stock market valuations, and increases in oil prices.

The WEO presents a more detailed look at recent productivity improvements in the United States and in other countries in Chapter II, focusing on the linkages with "new economy" features, stock market developments, and the recovery of capital flows to emerging markets. The chapter highlights the growing importance of the information technology sector and its association with historically high price-earnings ratios in global stock markets, greater volatility of equity prices, and stronger international linkages of stock prices. Most signs of a new economy are in the United States, but new economy features will almost certainly spread to other industrial countries—albeit with uncertain speed and scope. Uncertainties of a new economy also present challenges to policymakers, notably the difficulties in identifying economic shocks and determining appropriate policy responses when the productivity growth rate is both uncertain and changing. Included in Chapter II is a review of recent developments in commodity prices, noting the negative terms of trade shocks faced by many nonfuel-commodity-exporting countries, and the particular difficulties these shocks have created for poverty-stricken countries in Africa.

Two other chapters of the WEO focus on the countries that have been moving from centrally planned to more marketbased economic systems over the past decade or so. Chapter III assesses the overall transition process to date and the key policy lessons, including the experiences of China and some other east Asian economies, while Chapter IV focuses on the prospective enlargement of the European Union (EU) to include countries of Central and Eastern Europe and the Baltics. Considering the transition process as a whole, the WEO observes that many countries have made substantial progress in achieving greater macroeconomic stability and introducing essential structural and institutional reforms. Nevertheless, significant differences are still apparent. Particularly striking is the much stronger output growth among some Asian economies—China, Cambodia, the Lao PDR, and Vietnam—compared with other transition economies in Eastern Europe and the former Soviet Union. The WEO concludes that the rapid growth in east Asia largely reflected more favorable initial conditions such as the relatively smaller role played by big, state-owned industrial enterprises and a large agricultural sector, which boosted output and provided a pool of surplus labor for new business. In other transition economies, large state enterprises needed rapid reform and agricultural sectors tended to be smaller.

In general, the transition process outside of east Asia has proved to be more difficult than expected, with output initially falling rapidly, poverty increasing, and vested interests often slowing the implementation of structural and institutional reforms. The overall better performance of the EU accession countries reflects not just their more favorable starting conditions, but also their stronger commitment to reforms—the latter probably supported by accession requirements.

A number of background studies were prepared by the IMF staff for the October 2000 WEO: Tamim Bayoumi and Benjamin Hunt, "New Economy or Not: What Should the Monetary Policymaker Believe?"; Beatrice Weder, "Institutional Reform in Transition Economies; How Far Have They Come?"; Erik Berglof and Gerard Roland, "From 'Regatta' to 'Big Bang'?: The Impact of the EU Accession Strategy on Reform in Central and Eastern Europe"; and Mark de Broeck and Torsten Sløk, "Interpreting Real Exchange Rate Movements in Transition Countries."

These papers are or soon will be available on the Research at the IMF website at http://www.imf.org/research. The October WEO can be found in full-text format at http://www.imf.org/external/pubs/ft/weo/2000/02/index.htm. The next issue of the WEO will be available on this website at the end of April 2001 and the published version will be available in May.

Editor’s Note

The research summaries in this issue provide an overview of research done at the IMF on exchange rate regimes and banking crises. Both topics are of considerable relevance to the member countries of the IMF, including developing and industrial countries. These summaries highlight a particular strength of IMF researchers: the ability to discern common threads and to draw broader lessons from careful analysis of the experiences of a diverse group of countries.

Mexico is featured in this issue's Country Study and serves as a prominent example of analytical work carried out on developing countries by staff in the IMF's area departments.

Two major conferences were held at the IMF during the last quarter of 2000—the First Annual Research Conference and a Conference on Fiscal Decentralization. Brief summaries of the proceedings of both events are included in this bulletin.

This issue also contains a description of the main themes of the October 2000 World Economic Outlook.

— Eswar Prasad

Journal Description and Subscription Request

The IMF Research Bulletin (ISSN: 1020-8313) is a quarterly publication in English and is available free of cost. Material from the bulletin may be reprinted with proper attribution. Editorial correspondence may be addressed to The Editor, IMF Research Bulletin, IMF, Room 10-548, Washington, DC 20431 U.S.A. or e-mailed to resbulletin@imf.org. Subscription requests should be addressed to Publication Services, Box X2001, IMF, Washington, DC 20431 U.S.A.; e-mail: publications@imf.org.