Working Papers
2011
May 1, 2011
From West to East: Estimating External Spillovers to Australia and New Zealand
Description: This paper examines the size and source of external spillovers to Australia and New Zealand based on a structural vector autoregression (VAR) approach. It finds that during the last decade shocks from emerging Asia have become more important than those from the United States in affecting Australia’s business cycle. A 1 percent shock to emerging Asia’s growth is found to shift Australian growth by about 1/3 percent. Furthermore, there is evidence that commodity prices dominate the transmission of shocks from emerging Asia to Australia. The influence of emerging Asia on New Zealand is found to come indirectly through Australia, with Australian shocks transmitting almost "one-on-one" to New Zealand, largely through financial factors.
May 1, 2011
Search Frictions and the Labor Wedge
Description: This paper shows that labor market search frictions do not explain fluctuations in the labor wedge per se. However, the introduction of extensive and intensive margin clarifies that measuring the MRS in terms of total hours artificially introduces procyclicality in the MRS. When the MRS is correctly measured in terms of hours per worker, the labor wedge obtained is less variable than the one of the competitive model. Finally, we show that it is possible to measure a strongly procyclical labor wedge when the actual data generating process is a search model that allows for movements in both margins.
May 1, 2011
Impact of the Global Crisison Banking Sector Soundness in Asian Low-Income Countries
Description: The paper takes stock of the impact of the global financial crisis that began in late 2007 on banking sectors of Asian low-income countries, by exploring bank-level data provided by Bankscope. The paper examines three key channels of possible crisis spillovers: exposures to (i) valuation changes of mark-to-market financial assets, (ii) a drop in crossborder funding, and (iii) rises in NPLs prompted by international real economic linkages. The paper finds that despite relatively low financial integration, the impact of the crisis on LIC banks, particularly the largest ones, were not insignificant. Impacts were most palpable through a loan-to-crossborder funding nexus.
May 1, 2011
Causes of Asset Shortages in Emerging Markets
Description: We first illustrate that emerging markets (EMs) face a shortage of financial assets, with financial assets not growing as rapidly as domestic savings. We then estimate the asset shortage in EMs for 1995-2008. We develop a model that explains how asset shortage develop, and then econometrically estimate the causes of asset shortages. We conclude with policy implications.
May 1, 2011
On Brazil’s Term Structure: Stylized Facts and Analysis of Macroeconomic Interactions
Description: This paper characterizes the term structure of Treasury bond yields for Brazil, and estimates a Nelson-Siegel Model to reproduce its stylized facts for the period 2004-2010. For this purpose, this paper uses a software developed by Fund staff. In addition, the paper estimates two versions of the Nelson-Siegel Model that incorporates macroeconomic variables with the aim of assessing the dynamic interactions between the yield curve and the macroeconomy.
May 1, 2011
Words vs. Deeds: What Really Matters?
Description: This paper revisits the link between the nominal exchange rate regime and inflation, based on a sample of 145 emerging market and developing countries (EMDCs) over the period 1980-2010. We contend that, just as a de jure peg that is not backed by a de facto peg will have little value, de facto pegs that lack the corresponding de jure will likewise reap few of the low inflation benefits associated with pegging the exchange rate. To test our hypothesis, we exploit a novel dataset of both de jure and de facto exchange rate regime classifications. We find that pegged exchange rates are associated with significantly lower inflation in EMDCs than flexible exchange rates, and that this effect is much stronger for de facto pegs that are matched by de jure pegs than for those that are not. When it comes to anchoring expectations and delivering low inflation, therefore, both deeds and words matter.
May 1, 2011
Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-Financial Linkages Framework
Description: This paper attempts to identify the indicators that can demonstrate the vulnerabilities in systemically important financial institutions. The paper finds that (i) indicators on leverage, liquidity, and business scope can help identify the differences between the intervened and non-intervened financial institutions during the subprime crisis; (ii) the expected default frequencies react positively to shocks to leverage, inflation, global financial stress, and global excess liquidity, and negatively to return on assets and equity prices; and (iii) leverage has been the most robust factor with a long-run causal effect on the expected default frequencies.
May 1, 2011
New Shocks and Asset Price Volatility in General Equilibrium
Description: We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.
May 1, 2011
Identifying Fiscal Policy Transmission in Stochastic Debt Forecasts
Description: A stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks.
May 1, 2011
Oil Spill(over)s: Linkages in Petroleum Product Pricing Policies in West African Countries
Description: This paper addresses a number of issues regarding petroleum product pricing in Western Africaemphasizing international spillovers. We use panel unit root rests and long-run modeling based on vector error correction models to assess links and convergence in petroleum product prices across countries. Our results indicate that in general over the long-run there is convergence in prices across the countries. The estimation results for gasoline and diesel prices suggest the presence of long-run links between retail prices among the different country groupings with long-run multipliers ranging from 11 to -6.66. The speed of Adjustment to equilibrium varies significantly according to the countrygroupings considered. In contrast, the econometric results for kerosene prices not only indicate a weaker link between prices across countries, but also a much slower adjustment to equilibrium. Inlight of these important spillovers, the need to better coordinate pricing s and tax policies towards petroleum products at the regional level becomes apparent.