Working Papers
2011
December 1, 2011
Oil Prices, External Income, and Growth: Lessons From Jordan
Description: This paper extends the long-run growth model of Esfahani et al. (2009) to a labor exporting country that receives large inflows of external income?the sum of remittances, FDI and general government transfers?from major oil-exporting economies. The theoretical model predicts real oil prices to be one of the main long-run drivers of real output. Using quarterly data between 1979 and 2009 on core macroeconomic variables for Jordan and a number of key foreign variables, we identify two long-run relationships: an output equation as predicted by theory and an equation linking foreign and domestic inflation rates. It is shown that real output in the long run is shaped by: (i) oil prices through their impact on external income and in turn on capital accumulation, and (ii) technological transfers through foreign output. The empirical analysis of the paper confirms the hypothesis that a large share of Jordan's output volatility can be associated with fluctuations in net income received from abroad. External factors, however, cannot be relied upon to provide similar growth stimuli in the future, and therefore it will be important to diversify the sources of growth in order to achieve a high and sustained level of income.
December 1, 2011
Safeguarding Banks and Containing Property Booms: Cross-Country Evidenceon Macroprudential Policies and Lessons From Hong Kong SAR
Description: We assess the effectiveness of macroprudential policies against a number of different indicators of property sector activity and financial stability. At the cross-country level the use of LTV caps decelerates property price growth. Both LTV and DTI caps slow property lending growth. LTV caps also affect a broader range of financial stability indicators in economies with pegged exchange rates and currency boards. For Hong Kong SAR, LTV policy tends to be forward looking, with caps lowered to counter downward movements in mortgage rates, and higher growth in mortgage loan and volumes of transactions. The reduction in caps appears to respond to small and medium size flat price appreciation, and contributes to a decline in high-end volume growth after a year and total transactions volume growth after 1½?2 years. Price growth responds favorably after 2 years. The evidence suggests LTV tightening could affect property activity through the expectations channel rather than through the credit channel.
November 1, 2011
What Can Low-Income Countries Expect From Adopting Inflation Targeting?
Description: Inflation targeting (IT) is a relatively new monetary policy framework for low-income countries (LICs). The limited number of LICs with an IT framework and the short time that has elapsed since the adoption of this framework explains why there are no previous empirical studies on the performance of IT in LICs. This paper has made a first attempt at filling this gap. It finds that inflation targeting appears to be associated with lower inflation and inflation volatility. At the same time, there is no robust evidence of an adverse impact on output. This may explain the appeal of IT for many LICs, where building credibility of monetary policy is difficult and minimizing output costs of reducing inflation is imperative for social and political reasons.
November 1, 2011
The Eurozone Crisis: How Banks and Sovereigns Came to Be Joined At the Hip
Description: We use the rise and dispersion of sovereign spreads to tell the story of the emergence and escalation of financial tensions within the eurozone. This process evolved through three stages. Following the onset of the Subprime crisis in July 2007, spreads rose but mainly due to common global factors. The rescue of Bear Stearns in March 2008 marked the start of a distinctively European banking crisis. During this key phase, sovereign spreads tended to rise with the growing demand for support by weakening domestic financial sectors, especially in countries with lower growth prospects and higher debt burdens. As the constraint of continued fiscal commitments became clearer, and coinciding with the nationalization of Anglo Irish in January 2009, the separation between the sovereign and the financial sector disappeared.
November 1, 2011
The Problem that Wasn't: Coordination Failures in Sovereign Debt Restructurings
Description: Contrary to widespread expectation, debt renegotiations in the era of bond finance have generally been quick and involved little litigation. We present a model that rationalizes the initial fears and offers interpretations for why they did not materialize. When the exchange offer is sufficiently attractive vis-à-vis holding out, full participation can be an equilibrium. Legal innovations such as minimum participation thresholds and defensive exit consents helped coordinate creditors and avoid litigation. Unlike CACs, exit consents can be exploited to force high haircuts on creditors, but the ability of creditors to coordinate to block exit consents can limit overly aggressive use.
November 1, 2011
The Puzzle of Persistently Negative Interest Rate-Growth Differentials: Financial Repression or Income Catch-Up?
Description: The interest rate-growth differential (IRGD) shows a marked correlation with GDP per capita. It has been on average around 1 percentage point for large advanced economies during 1999-2008; but below -7 percentage points among non-advanced economies - exerting a powerful stabilizing influence on government debt ratios. We show that large negative IRGDs are largely due to real interest rates well below market equilibrium - possibly stemming from financial repression and captive and distorted markets, whereas the income catch-up process plays a relatively modest role. We find econometric support for this conjecture. Therefore, the IRGD in non-advanced economies is likely to rise with financial integration and market development, well before their GDP per capita converges to advanced-economy levels.
November 1, 2011
Determinants of Development Financing Flows From Brazil, Russia, India, and China to Low-Income Countries
Description: BRICs development financing flows have increased significantly and are expected to become more prominent in the post-crisis era. We investigate the potential implications on the country-allocation of loan commitments and the degree of concessionality using a panel vector autoregression model and single equation dynamic panel estimation.We find that BRICs lend more to LICs with weaker institutions. Land-locked, resource-scarce LICs receive significantly less financing than other resource-rich LICs. The degree of concessionality is negatively correlated with the amount of loans and positively correlated with better institutional indicators suggesting that the higher the risks, the higher the required returns that BRICs expect.
November 1, 2011
Unemployment in Latin America and the Caribbean
Description: JEL Cl This study constructs a new data set on unemployment rates in Latin America and the Caribbean and then explores the determinants of unemployment. We compare different countries, finding that unemployment is influenced by the size of the rural population and that the effects of government regulations are generally weak. We also examine large, persistent increases in unemployment over time, finding that they are caused by contractions in aggregate demand. These demand contractions result from either disinflationary monetary policy or the defense of an exchange - rate peg in the face of capital flight. Our evidence supports hysteresis theories in which short - run changes in unemployment influence the natural rate.
November 1, 2011
What Drives the Global Land Rush?
Description: This paper studies the determinants of foreign land acquisition for large-scale agriculture. To do so, gravity models are estimated using data on bilateral investment relationships, together with newly constructed indicators of agro-ecological suitability in areas with low population density as well as indicators of land rights security. Results confirm the central role of agro-ecological potential as a pull factor. In contrast to the literature on foreign investment in general, the quality of the business climate is insignificant whereas weak land governance and tenure security for current users make countries more attractive for investors. Implications for policy are discussed.
November 1, 2011
Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models
Description: A number of countries are reviewing their institutional arrangements for financial stability to support the development of a macroprudential policy function. In some cases, this involves a rethink of the appropriate institutional boundaries between central banks and financial regulatory agencies, or the setting up of dedicated policymaking committees. In others, efforts are underway to enhance cooperation within the existing institutional structure. Against this background, this paper provides basic guidance for the design of effective arrangements, in a manner that can provide a framework for country-specific advice. After reviewing briefly the main institutional elements of existing and emerging macroprudential policy frameworks across countries, the paper identifies stylized institutional models based on key features that distinguish institutional arrangements. It develops criteria to assess the effectiveness of models, examines the strengths and weaknesses of models against these criteria, and explores ways to improve existing setups. The paper finally distills lessons and sets out desired principles for effective macroprudential policy arrangements.