Working Papers
2014
October 27, 2014
The Impact of the Global Financial Crisis on Banking Globalization
Description: Although cross-border bank lending has fallen sharply since the crisis, extending our bank ownership database from 1995-2009 up to 2013 shows only limited retrenchment in foreign bank presence. While banks from OECD countries reduced their foreign presence (but still represent 89% of foreign bank assets), those from emerging markets and developing countries expanded abroad and doubled their presence. Especially advanced countries hit by a systemic crisis reduced their presence abroad, with far flung and relatively small investments more likely to be sold. Poorer and slower growing countries host fewer banks today, while large investments less likely expanded. Conversely, faster host countries’ growth and closeness to potential investors meant more entry. Lending by foreign banks locally grew more than cross-border bank claims did for the same home-host country combination, and each was driven by different factors. Altogether, our evidence shows that global banking is not becoming more fragmented, but rather is going through some important structural transformations with a greater variety of players and a more regional focus.
October 24, 2014
Global Risks and Collective Action Failures: What Can the International Community Do?
Description: Abstract What do climate change, global financial crises, pandemics, and fragility and conflict have in common? They are all examples of global risks that can cross geographical and generational boundaries and whose mismanagement can reverse gains in development and jeopardize the well-being of generations. Managing risks such as these becomes a global public good, whose benefits also cross boundaries, providing a rationale for collective action facilitated by the international community. Yet, as many public goods, provision of global public goods suffer from collective action failures that undermine international coordination. This paper discusses the obstacles to addresing these global risks effectively, highlighting their implications for the current juncture. It claims that remaining gaps in information, resources, and capacity hamper accumulation and use of knowledge to triger appropriate action, but diverging national interests remain the key impediment to cooperation and effectiveness of global efforts, even when knowledge on the risks and their consequences are well understood. The paper argues that managing global risks requires a cohesive international community that enables its stakeholders to work collectively around common goals by facilitating sharing of knowledge, devoting resources to capacity building, and protecting the vulnerable. When some countries fail to cooperate, the international community can still forge cooperation, including by realigning incentives and demonstrating benefit from incremental steps toward full cooperation.
October 23, 2014
Financial Frictions and Sources of Business Cycle
Description: This paper estimates a New Keynesian DSGE model with an explicit financial intermediary sector. Having measures of financial stress, such as the spread between lending and borrowing, enables the model to capture the impact of the financial crisis in a more direct and efficient way. The model fits US post-war macroeconomic data well, and shows that financial shocks play a greater role in explaining the volatility of macroeconomic variables than marginal efficiency of investment (MEI) shocks.
October 23, 2014
Designing a Fiscal Framework for a Prospective Commodity Producer: Options for Lebanon
Description: Lebanon is expected to have gas resources in its Mediterranean basin, and these could turn the country into a natural gas producer over the next decade. Lebanon’s economy and institutions will thus need to adapt to the challenges and opportunities that such change will bring. In this paper, we address how Lebanon’s fiscal framework will need to be reformulated to take into account potential resource revenue. Designing a fiscal regime appropriately is an absolute prerequisite to make sure the government can receive a fair share of the resources while investors face appropriate incentives to invest and develop the sector. This step should be followed by setting macro-fiscal anchors and supporting institutions. The prospective framework should initially be focused on ensuring fiscal sustainability and intergenerational equity, given the estimated relatively short horizon of Lebanon’s gas resources. Strong institutional arrangements also need to underpin the prospective framework, to ensure that the pace of resource wealth’s use is set in line with Lebanon’s capacity constraints.
October 23, 2014
Public Employment and Compensation Reform During Times of Fiscal Consolidation
Description: This paper compiles and compares recent and past measures introduced to contain the public wage bill in a number of emerging and advanced economies to assess their effectiveness in bringing down expenditure in a sustained way. In the aftermath of the Great Recession a number of countries have approved measures on the wage bill as part of fiscal consolidation efforts. These recent episodes are compared to past cases implemented in advanced economies over the period 1979–2009. Findings suggest that public wage bill consolidation episodes pre and post 2009 are similar in many respects. Moreover, typically countries that were able to achieve more sustained reductions in the wage bill have implemented to larger extent structural measures, and/or these measures were accompanied with substantial social dialogue and consensus.
October 22, 2014
Are Non-Euro Area EU Countries Importing Low Inflation from the Euro Area?
Description: The synchronized disinflation across Europe since end-2011 raises the question of whether non-euro area EU countries are affected by the undershooting of the euro area inflation target. To shed light on this issue, we estimate an open-economy, New Keynsian Phillips curve, in which we control for imported inflation. Regression results suggest that falling food and energy prices have been the main disinflationary driver. But low core inflation in the euro area has also had a clear and significant impact. Countries with more rigid exchange-rate regimes and higher share of foreign value added in domestic demand have been more affected. The scope for monetary response to low inflation in non-euro area EU countries depends on concerns about financial stability and unanchoring of inflationary expectations, as well as on exchange rate regime and capital flows dynamics.
October 22, 2014
Unraveling the Monetary Policy Transmission Mechanism in Sri Lanka
Description: In this paper we examine the channels through which innovations to policy variables— policy rates or monetary aggregates—affect such macroeconomic variables as output and inflation in Sri Lanka. The effectiveness of monetary policy instruments is judged through the prism of conventional policy channels (money/interest rate, bank lending, exchange rate and asset price channels) in VAR models. The timing and magnitude of these effects are assessed using impulse response functions, and through the pass-through coefficients from policy to money market and lending rates. Our results show that (i) the interest rate channel (money view) has the strongest Granger effect (helps predict) on output with a 0.6 percent decrease in output after the second quarter and a cumulative 0.5 percent decline within a three-year period in response to innovations in the policy rate; (ii) the contribution from the bank lending channel is statistically significant (adding 0.2 percentage point to the baseline effect of policy rates) in affecting both output and prices but with a lag of about five quarters for output and longer for prices; and (iii) the exchange rate and asset price channels are ineffective and do not have Granger effects on either output or prices.
October 22, 2014
Unconventional Monetary Policy and Long-Term Interest Rates
Description: This paper examines the transmission mechanism through which unconventional monetary policy affects long-term interest rates. I construct a real-time measure summarizing market projections of the magnitude and duration of the Federal Reserve's Large Scale Asset Purchases (LSAP) program, and analyze the determination of term premiums and expectations of future short-term interest rates in a sample spanning more than two decades. Empirical findings suggest that the LSAP has effectively lowered the long-term Treasury bond yields, through both "signaling" and "portfolio balance" channels. On the other hand, the Fed's "forward guidance" also leads to gradual extension of market projections for the duration of the LSAP program, thereby enhancing the LSAP's effect to keep term premiums low. Estimation results also reveal a diminished effectiveness of the LSAP during QE III. Finally, model simulations underscore the importance of policy transparency in minimizing unnecessary market turbulence and ensuring a timely and smooth exit of the unconventional monetary policy stimulus.
October 17, 2014
Regulating Capital Flows at Both Ends: Does it Work?
Description: This paper examines whether cross-border capital flows can be regulated by imposing capital account restrictions (CARs) in both source and recipient countries, as was originally advocated by John Maynard Keynes and Harry Dexter White. To this end, we use data on bilateral cross-border bank flows from 31 source to 76 recipient (advanced and emerging market) countries over 1995–2012, and combine this information with a new and comprehensive dataset on various outflow and inflow related capital controls and prudential measures in these countries. Our findings suggest that CARs at either end can significantly influence the volume of cross-border bank flows, with restrictions at both ends associated with a larger reduction in flows. We also find evidence of cross-border spillovers whereby inflow restrictions imposed by countries are associated with larger flows to other countries. These findings suggest a useful scope for policy coordination between source and recipient countries, as well as among recipient countries, to better manage potentially disruptive flows.
October 17, 2014
Determinants of Financial Market Spillovers: The Role of Portfolio Diversification, Trade, Home Bias, and Concentration
Description: This paper defines financial market spillovers as the comovement between two countries’ financial markets and analyzes financial market spillovers over the period 2001-12 through four channels: bilateral portfolio investment, bilateral trade, home bias, and country concentration. The paper finds that, if a country has a large amount of bilateral portfolio exposure in another country, these two countries’ comovement of bond yields are large. Also, countries’ geographical preferences impact financial spillovers; if a country has a stronger home bias, the country could have less spillovers from foreign financial markets. A policy implication from this result is that, if countries become less home-biased and have a greater amount of portfolio investment assets, they should strengthen prudential regulations to mitigate against rising risks of financial spillovers (or risk greater volatility owing to comovement with foreign markets).