Working Papers

April 29, 2015

Non-FDI Capital Inflows in Low-Income Developing Countries: Catching the Wave?

Description: Low-income countries (LIDCs) are typically characterized by intermittent and very modest access to private external funding sources. Motivated by recent developments in private flows to LIDCs this paper makes two contributions: First, it constructs a new comprehensive dataset on gross private capital flows with special focus on non-FDI flows in LIDCs. Concentrating on LIDCs and more specifically on gross non-FDI private flows is intentionally aimed at closing a gap in existing datasets where country coverage of developing economies is limited mainly to emerging markets (EMs). Second, using the new data, it identifies several shifting patterns of gross non-FDI private inflows to LIDCs. A surprising fact emerges: since the mid 2000's periods of surges in gross non-FDI private inflows in LIDCs are broadly comparable to those of EMs. Moreover, while gross non-FDI inflows to LIDCs are on average much lower than those to EMs, we show that the LIDC top quartile gross non-FDI inflow is comparable to the EM median inflow and converging to the EM top quartile inflow.

April 28, 2015

Understanding Residential Real Estate in China

Description: China’s residential real estate sector plays an important role in the economy and has been a key driver of growth. Since 2014 the sector has softened visibly, reflecting overbuilding across many cities. An orderly adjustment of the sector is welcome. The key questions are how severe the adjustment will be and how long it will last. This paper uses various datasets, an analytical framework to estimate demand and supply conditions, and develops a number of scenarios to determine the oversupply both at the national level and by city tiers. It highlights that the adjustment will be a multiyear process with adverse implications for investment and growth. Smaller cities, as well as those in the Northeast region, face more challenging demand-supply dynamics. The key will be to allow the adjustment to take place, while avoiding a too sharp of an economic slowdown.

Notes: Full text is also available in Chinese.

April 28, 2015

Do Resource Windfalls Improve the Standard of Living in Sub-Saharan African Countries?: Evidence from a Panel of Countries

Description: We examine the impact of resource windfall on the standard of living both in the short-run and long-run, using a sample of 130 countries, 1963-2007. Then, we systematically investigate the effect of resource windfall on welfare in three different groups of countries: We find that in the short-run resource windfall is welfare enhancing in the whole sample, especially via increases in income and decreases in inequality. However, in SSA countries, the size of welfare improvement is small and it is smaller and almost zero after one year in fragile Sub-Saharan African (SSA) countries. In the whole sample, a resource windfall shock leads to significant welfare growth even in the long-run, but we couldn’t find any significant long-run effect of resource windfall in SSA countries.

April 28, 2015

Hong Kong’s Growth Synchronization with China and the U.S.: A Trend and Cycle Analysis

Description: This paper investigates the synchronization of Hong Kong SAR’s economic growth with mainland China and the United States. This paper identifies trends of economic growth based on the permanent income hypothesis. Specifically, the paper confirms whether real consumption in Hong Kong SAR and mainland China satisfy the permanent income hypothesis, at least in a weak form. It then identifies the permanent and transitory components of income of each economy using a simple state-space model. It uses structural vector autoregression models to analyze how permanent and transitory shocks originating from mainland China and the United States affect the Hong Kong economy, and how such influences evolve over time. The paper’s main findings suggest that transitory shocks from the United States remain a major driving force behind Hong Kong SAR’s business cycle fluctuations. On the other hand, permanent shocks from mainland China have a larger impact on Hong Kong SAR’s trend growth.

April 28, 2015

Is Islamic Banking Good for Growth?

Description: The rapid growth of Islamic banking has attracted much attention lately in the economic literature. At the same time, a mature body of the literature has shown that financial development is broadly conducive to economic growth, which raises the question as to whether a similar conclusion holds for Islamic banking. Against this backdrop, this paper investigates the relationship between Islamic banking development and economic growth in a sample of low and middle income countries, using data over the period 1990-2010. The results show that, notwithstanding its relatively small size compared to the economy and the overall size of the financial system, Islamic banking is positively associated with economic growth even after controlling for various determinants, including the level of financial depth. The results are robust across across different specifications, sample composition and time periods.

April 22, 2015

Capital Control Measures: A New Dataset

Description: This paper presents a new dataset of capital control restrictions on both inflows and outflows of 10 categories of assets for 100 countries over the period 1995 to 2013. Building on the data in Schindler (2009) and other datasets based on the analysis of the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), this dataset includes additional asset categories, more countries, and a longer time period. The paper discusses in detail the construction of the dataset and characterizes the data with respect to the prevalence and correlation of controls across asset categories and between controls on inflows and controls on outflows, the aggregation of the separate categories into broader indicators, and the comparison of this dataset with other indicators of capital controls.

April 7, 2015

A Simple Multivariate Filter for Estimating Potential Output

Description: Estimates of potential output are an important ingredient of structured forecasting and policy analysis. Using information on consensus forecasts, this paper extends the multivariate filter developed by Benes and others (2010). Although the estimates in real time are more robust relative to those of naïve statistical filters, there is still significant uncertainty surrounding the estimates. The paper presents estimates for 16 countries and provides an example of how the filtered estimates at the end of the sample period can be improved with additional information.

April 3, 2015

Macroprudential Policy and Labor Market Dynamics in Emerging Economies

Description: Emerging economies have high shares of self-employed individuals running owner-only firms who, in contrast to many salaried firms, have little access to formal financing and therefore rely on informal financing (input credit) from other firms. We build a small open economy real business cycle model with labor and financial market frictions where formal credit markets, informal credit, and the structure of the labor market interact. The model successfully replicates the cyclical behavior of sectoral employment, formal credit, and the main macroeconomic aggregates in emerging economies. We show that a countercyclical macroprudential policy that reduces formal credit fluctuations has positive though quantitatively limited effects on consumption and output volatility, but generates larger unemployment fluctuations in response to productivity shocks; the same policy increases labor market and aggregate volatility in response to net worth shocks. The link between input credit and the labor market structure---key for capturing the cyclical dynamics of labor and credit markets in the data---plays a crucial role for these results.

April 3, 2015

Investment in Emerging Markets We Are Not in Kansas Anymore…Or Are We?

Description: We document that (i) although private investment growth in emerging markets has decelerated in recent years, it came down from cyclical highs and remains close to pre-crisis trends; and (ii) investment-to-output ratios generally remain close to or above historical averages. We show that investment is positively related to expect future profitability, cash flows and debt flows, and negatively associated with leverage. Critically, it is also positively related to (country-specific) commodity export prices and capital inflows. Lower commodity export prices and expected profitability, a moderation in capital inflows, and increased leverage account for the bulk of the recent investment deceleration.

April 2, 2015

Recent U.S. Labor Force Dynamics: Reversible or not?

Description: The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering. A key question is how much of the post-2007 decline is reversible, something which is central to the policy debate. The key finding of this paper is that while around ¼–? of the post-2007 decline is reversible, the LFPR will continue to decline given population aging. This paper’s measure of the “employment gap” also suggests that labor market slack remains and will only decline gradually, pointing to a still important role for stimulative macro-economic policies to help reach full employment. In addition, given the continued downward pressure on the LFPR, labor supply measures will be an essential component of the strategy to boost potential growth. Finally, stimulative macroeconomic and labor supply policies should also help reduce the scope for further hysteresis effects to develop (e.g., loss of skills, discouragement).