Working Papers
2015
December 30, 2015
The Impact of Unconventional Monetary Policy Measures by the Systemic Four on Global Liquidity and Monetary Conditions
Description: The paper examines the impact of unconventional monetary policy measures (UMPMs) implemented since 2008 in the United States, the United Kingdom, Euro area and Japan— the Systemic Four—on global monetary and liquidity conditions. Overall, the results show positive significant relationships. However, there are differences in the impact of the UMPMs of individual S4 countries on these conditions in other countries. UMPMs of the Bank of Japan have positive association with global liquidity but negative association with securities issuance. The quantitative easing (QE) of the Bank of England has the opposite association. Results for the quantitative easing measures of the United States Federal Reserve System (U.S. Fed) and the ECB UMPMs are more mixed.
December 30, 2015
Government Spending Effects in Low-income Countries
Description: Despite the voluminous literature on fiscal policy, very few papers focus on low-income countries (LICs). This paper develops a new-Keynesian small open economy model to show, analytically and through simulations, that some of the prevalent features of LICs—different types of financing including aid, the marginal efficiency of public investment, and the degree of home bias—play a key role in determining the effects of fiscal policy and related multipliers in these countries. External financing like aid increases the resource envelope of the economy, mitigating the private sector crowding out effects of government spending and pushing up the output multiplier. The same external financing, however, tends to appreciate the real exchange rate and as a result, traded output can respond quite negatively, reducing the overall output multiplier. Although capital scarcity implies high returns to public capital in LICs, declines in public investment efficiency can substantially dampen the output multiplier. Since LICs often import substantial amounts of goods, public investment may not be as effective in stimulating domestic production in the short run.
December 29, 2015
Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability?
Description: How does monetary policy impact upon macroprudential regulation? This paper models monetary policy's transmission to bank risk taking, and its interaction with a regulator's optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator's entire trade-off. We show that the regulator allows interest rate changes to partly "pass through" to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.
December 29, 2015
Long-term Gain, Short-Term Pain: Assessing the Potential Impact of Structural Reforms in Chile
Description: In this paper, I study the potential economic impact of the 2015-18 structural reform agenda in Chile, using the IMF dynamic general equilibrium model (GIMF). I find that the agenda has the potential to significantly increase Chile’s long-run GDP, although it may have some negative effects in the short term. Ensuring a smooth transition to a higher productive potential depends on three key dimensions: the credibility of the reforms, their effectiveness in closing structural gaps, and their speed of implementation. Badly designed reforms that remove only a very small fraction of the existing structural gaps, at a slow speed, and with little credibility, can greatly reduce the positive impact of the reform agenda on GDP.
December 29, 2015
The Game of Anchors: Studying the Causes of Currency Crises in Belarus
Description: Belarus experienced a sequence of currency crises during 2009-2014. Our empirical results, based on a structural econometric model, suggest that the activist wage policy and extensive state program lending (SPL) conflicted with the tightly managed exchange rate regime and suppressed monetary policy transmission. This created conditions for the unusually frequent crises. At the current juncture, refocusing monetary policy from exchange rate to inflation would help to avoid disorderly external adjustments. The government should abandon wage targets and phase out SPL to remove the underlying source of the imbalances and ensure lasting stabilization.
December 29, 2015
Sharing a Ride on the Commodities Roller Coaster: Common Factors in Business Cycles of Emerging Economies
Description: Fluctuations in commodity prices are an important driver of business cycles in small emerging market economies (EMEs). We document how these fluctuations correlate strongly with the business cycle in EMEs. We then embed a commodity sector into a multi-country EMEs’ business cycle model where exogenous fluctuations in commodity prices follow a common dynamic factor structure and coexist with other driving forces. The estimated model assigns to commodity shocks 42 percent of the variance in income, of which a considerable part is linked to the common factor. A further amplification mechanism is a ”spillover” effect from commodity prices to risk premia.
December 28, 2015
Reforming the Legal and Institutional Framework for the Enforcement of Civil and Commercial Claims in Portugal
Description: This paper discusses the recent major reforms in the area of civil and commercial claims enforcement undertaken by the Portuguese authorities in the context of the IMF/EU-supported adjustment program. The economic literature has long recognized that slow claims enforcement affects economic growth, foreign direct investment, credit and labor markets, and firm size. The Portuguese authorities together with IMF/EU staff deployed a novel approach that has focused on incentives tackling weaknesses in the enforcement process with the aim of increasing the efficiency and effectiveness of claims enforcement and resolving court backlogs. The paper finds impressive quantifiable changes affecting, in particular, court backlog reduction, court processing speed, and private debt recovery. The economic literature suggests that this will impact positively on the payment culture and overall growth, even if such impact cannot be determined at this stage.
December 28, 2015
From Expenditure Consolidation to Expenditure Efficiency: Addressing Public Expenditure Pressures in Lithuania
Description: This paper reviews public expenditure in Lithuania to identify areas where deeper structural reforms may be warranted to improve spending efficiency and contain future spending pressures. The analysis benchmarks spending in Lithuania against other European countries focusing on spending levels, spending composition, and spending outcomes, and for both economic and functional spending classifications. While recent expenditure consolidation efforts have kept public spending among the lowest in Europe, a transition from broad-based measures to more structural measures will be required: to ensure that low spending levels remain sustainable, to address poor social outcomes such as high inequality and poor health and education outcomes, and to efficiently and equitably contain spending pressures arising from an ageing population.
December 28, 2015
Changes in the Global Investor Base and the Stability of Portfolio Flows to Emerging Markets
Description: An analysis of mutual-fund-level flow data into EM bond and equity markets confirms that different types of funds behave differently. Bond funds are more sensitive to global factors and engage more in return chasing than equity funds. Flows from retail, open-end, and offshore funds are more volatile. Global funds are more stable in their EM investments than “dedicated” EM funds. Differences in the stability of flows from ultimate investors play a key role in explaining these patterns. The changing mix of global investors over the past 15 year has probably made portfolio flows to EMs more sensitive to global financial conditions.
December 28, 2015
Housing Price and Household Debt Interactions in Sweden
Description: Sweden is experiencing double-digit housing price gains alongside rising household debt. A common interpretation is that mortgage lending boosted by expansionary monetary policy is driving up house prices. But theory suggests the value of housing collateral is also important for household’s capacity to borrow. This paper examines the interactions between housing prices and household debt using a three-equation model, finding that household borrowing impacts housing prices in the short-run, but the price of housing is the main driver of the secular trend in household debt over the long-run. Both housing prices and household debt are estimated to be moderately above their long-run equilibrium levels, but the adjustment toward equilibrium is not found to be rapid. Whereas low interest rates have contributed to the recent surge in housing prices, growth in incomes and financial assets play a larger role. Policy experiments suggest that a gradual phasing out of mortgage interest deductibility is likely to have a manageable effect on housing prices and household debt.