Working Papers
2011
January 1, 2011
Exploration of the Brazilian Term Structure in a Hidden Markov Framework
Description: We apply a hidden Markov model of the term structure to modeling the Brazilian swap rate curve. We examine the model's characteristics and its performance in describing the cross-sectional and time-series dynamics of the term structure. Two regimes are identified, a high level and a high volatility regime and a low level and low volatility regime. Both regimes are persistent and are explained by the level and the slope of the term structure. The model is estimated using a Bayesian MCM algorithm that produces consistent standard errors and a reliable method for testing the differences between the model parameters.
January 1, 2011
Government Debt Issuance in the Euro Area: The Impact of the Financial Crisis
Description: This paper documents and analyzes crisis-related changes in government debt issuance practices in the 16 euro zone countries and Denmark. Using a newly constructed database on primary market debt issuance during 2007-09, we find evidence of a shift away from pre-crisis standards of best funding practices competitive auctions of debt instruments with a fixed coupon, long maturity and local currency denomination (DLTF). Exploiting the cross-country panel data dimension of the data, we conclude that the crisis and related changes in the macroeconomic environment and investor sentiment can account for a significant proportion of the deviation. The negative effect of the crisis on DLTF debt issuance was especially pronounced in high deficit and high debt euro area countries, and has forced governments to assume additional risk.
January 1, 2011
Investment Objectives of Sovereign Wealth Funds: A Shifting Paradigm
Description: While SWF investment objectives to some extent reflect inherent characteristics, notable differences in strategic asset allocation (SAA) exist even amongst SWFs of similar types. Even so, this paper shows that the global crisis may have changed SWF’s asset allocations in ways that may not be ideal or justified in all cases and that a review of investment objectives may be warranted. It also argues for regular macro-risk assessments for the sovereign, the continued importance of SWFs as a stabilizer in international capital markets, as well as the active role they could play in international regulatory reform.
January 1, 2011
Determinants of Remittances: Evidence From tonga
Description: This paper analyzes the determinants of remittances to Tonga. The results indicate that macroeconomic conditions in remitting countries and exchange rate fluctuations influence remittances. In particular, remittances growth falls when the Tongan currency appreciates, but increases with higher real GDP growth and lower unemployment in remitting countries. The analysis also finds that the influence of these determinants varies with the recipients of remittances, with remittances to non-profit organizations being more sensitive to an appreciation of the Tongan currency and the interest rate differential between Tonga and remitting countries than remittances to households. However, the analysis does not find evidence of "Dutch Disease" in Tonga, as the real exchange rate does not appear to be affected by remittances.
January 1, 2011
How Does Political Instability Affect Economic Growth?
Description: The purpose of this paper is to empirically determine the effects of political instability on economic growth. Using the system-GMM estimator for linear dynamic panel data models on a sample covering up to 169 countries, and 5-year periods from 1960 to 2004, we find that higher degrees of political instability are associated with lower growth rates of GDP per capita. Regarding the channels of transmission, we find that political instability adversely affects growth by lowering the rates of productivity growth and, to a smaller degree, physical and human capital accumulation. Finally, economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect.
January 1, 2011
Sources of Corporate Profits in India: Business Dynamism or Advantages of Entrenchment?
Description: Some see India’s corporate sector as the fundamental driver of recent and future prosperity. Others see it as a source of excessive market power, personal enrichment, and influence over the State, with an ultimately distorting influence. To inform this debate, this paper analyses the correlates of profitability of firms listed on the Bombay Stock Exchange, covering a dynamic period-in terms of firm entry and growth-from the early 1990s to the late 2000s. Overall, the results do not provide support for the systematic exercise of market power via the product market. At least for this period, the story is more consistent with a competitive and dynamic business sector, despite the continued dominance of business houses and public sector firms in terms of sales and assets. Those with opposing views can, with justification, argue that our analysis does not cover influences, such as corporate governance and state-corporate relations, which may paint a less flattering picture of the corporate sector’s role. Those broader themes deserve further attention.
January 1, 2011
The Effects of Housing Prices and Monetary Policy in a Currency Union
Description: The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it. We find that labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996-2007 period.
January 1, 2011
Monetary Policy Transmission in an Emerging Market Setting
Description: Some emerging economies have a relatively ineffective monetary policy transmission owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchangerate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.
January 1, 2011
How Does Trade Evolve in the Aftermath of Financial Crises?
Description: We analyze trade dynamics following past episodes of financial crises. Using an augmented gravity model and 179 crisis episodes from 1970-2009, we find that there is a sharp decline in a country’s imports in the year following a crisis-19 percent, on average-and this decline is persistent, with imports recovering to their gravity-predicted levels only after 10 years. In contrast, exports of the crisis country are not adversely affected, and they remain close to the predicted level in both the short and medium-term.
January 1, 2011
A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices?
Description: This paper investigates the causes of extreme fluctuations in commodity prices from 1990 to 2010. Analyzing two very distinct commodities-crude oil and fine wine, we find that macroeconomic factors are the main determinants of commodity prices. Although supply constraints have the expected effect, aggregate demand growth is the key factor. The empirical results show that while advanced economies account for more than half of global consumption, emerging economies make up the bulk of the incremental change in demand, thereby having a greater weight in commodity price formation. The results also show that the shift in the composition of aggregate commodity demand is a recent phenomenon.