Working Papers
2010
March 1, 2010
Credit Conditions and Recoveries from Recessions Associated with Financial Crises
Description: Recoveries from recessions associated with a financial crisis tend to be sluggish. In this paper, we present evidence that stressed credit conditions are an important factor constraining the pace of recovery. In particular, using industry-level data, we find that industries relying more on external finance grow more slowly than other industries during recoveries from recessions associated with financial crises. Additional tests, based on establishment size, on alternative definitions of financial crises, and on corporate-government interest rate spreads, support the findings. Moreover, for subsets of industries where financial frictions are more severe, we find much stronger differential growth effects.
March 1, 2010
Fiscal Adjustment in Sudan Size, Speed, and Composition
Description: The paper aims to identify the optimal size, speed and composition of the medium-term fiscal adjustment in the context of Sudan's limited oil reserves. The permanently sustainable non-oil primary balance approach suggests the need for significant fiscal adjustment over the medium term, requiring a widening of the tax base. Cross-country comparisons highlight VAT and personal income tax (as well as tax administration) as key areas for reform. The paper also suggests the need for complementary expenditure-side measures in the areas of petroleum pricing and anchoring fiscal policy in non-oil indicators.
March 1, 2010
Fiscal Objective in the Post IMF Program World: The Case of Albania
Description: The paper discusses the challenges facing Albania's fiscal policy following the graduation from the IMF programs. It argues that Albania's public debt remains too high and needs to be reduced. Strengthening the fiscal framework, including by introducing a numerical fiscal rule, could help achieve this objective. The paper discusses two alternative rules, with the objective of achieving a gradual decline in the public debt ratio. One rule would limit nominal expenditure growth, with a correction mechanism to guard against revenue slippages and other shocks. An alternative rule would limit the growth in nominal public debt.
March 1, 2010
Economic Transition and Health Care Reform: The Experience of Europe and Central Asia
Description: This paper exploits the staggered adoption of major concurrent health reforms in countries in Europe and Central Asia after 1990 to estimate their impact on public health expenditure, utilization, and avoidable deaths. While the health systems all derived from the same paradigm under central planning, they have since introduced changes to policies regarding cost-sharing, provider payment, financing, and the rationalization of hospital infrastructure. Social health insurance is predicted to increase this share, although the leads of both social health insurance and primary care fee-for-service suggest endogeneity may be an issue with the outpatient share regressions. Provider payment reforms produce the largest impact on spending, with fee-for-service increasing spending and patient-based payment reducing it. The impact on avoidable deaths is generally negligible, but there is some evidence of improvements due to fee-for-service. Considering the corresponding relative reduction in inpatient admissions and the incentives fee-for-service provides to deliver additional services, perhaps there is an overprovision of services in the primary care setting and an underutilization of more specialized hospital services.
March 1, 2010
A Public Financial Management Framework for Resources-Producing Countries
Description: This working paper overviews the challenges posed by resource revenues management and the policy prescriptions to meet them, and focuses on the Public Financial Management (PFM) framework and reforms that resource-producing countries should adopt. The paper outlines a PFM framework and reform path that take into account the institutional diversity of resource-producing countries. In the short term, the proposed reforms highlights the tools that could be implemented even where the PFM system is rather basic, while over the medium and long term they aim at converging with best international PFM practices.
March 1, 2010
Public Expenditures on Social Programs and Household Consumption in China
Description: This paper shows that increasing government social expenditures can make a substantive contribution to increasing household consumption in China. The paper first undertakes an empirical study of the relationship between the savings rate and social expenditures for a panel of OECD countries and provides illustrative estimates of their implications for China. It then applies a generational accounting framework to Chinese household income survey data. This analysis suggests that a sustained 1 percent of GDP increase in public expenditures, distributed equally across education, health, and pensions, would result in a permanent increase the household consumption ratio of 1¼ percentage points of GDP.
March 1, 2010
Cross-country Consumption Risk Sharing, a Long-run Perspective
Description: This paper estimates an empirical nonstationary panel regression model that tests long-run consumption risk sharing across a sample of OECD and emerging market (EM) countries. This is in contrast to the existing literature on consumption risk sharing, which is mainly about risks at business cycle frequency. Since our methodology focuses on identifying cointegrating relationships while allowing for arbitrary short-run dynamics, we can obtain a consistent estimate of long-run risk sharing while disregarding any short-run nuisance factors. Our results show that long-run risk sharing in OECD countries increased more than that in EM countries during the past two decades.
March 1, 2010
The Influence of “Big Brothers: ” How Important are Regional Factors for Uruguay?
Description: This paper examines the role played by regional factors in Uruguay, identifies the sources and transmission mechanisms of shocks stemming from the region, and assesses how vulnerable Uruguay is to a potential crisis in the region. Using a VAR model with block exogeneity restrictions, it finds that shocks from Argentina-which account for about 20 percent of Uruguayan output fluctuations-have large and rapid effects. This is mainly due to the existence of idiosyncratic real and financial linkages between Uruguay and Argentina, which also explain the very high correlation between their business cycles. The analysis of previous crises in the region suggests that despite the importance of these strong linkages, and despite the fact the two deepest crises in recent Uruguayan history followed crises in Argentina, Uruguay is now clearly less vulnerable to financial contagion from the region.
March 1, 2010
Caribbean Bananas: The Macroeconomic Impact of Trade Preference Erosion
Description: This paper examines the macroeconomic effects of the erosion of trade preferences, with a focus on the export of Caribbean bananas to Europe. Estimates are made of the magnitude of implicit assistance provided over a period of three decades to eastern Caribbean countries through banana trade preferences. The value of such assistance rose until the early 1990s, and has declined precipitously since then. Using vector autoregressive analysis, the paper finds that changes in the level of implicit assistance have had a considerable macroeconomic impact, especially on Caribbean real GDP growth.
March 1, 2010
FX Swaps: Implications for Financial and Economic Stability
Description: The proliferation of foreign exchange (FX) swaps as a source of funding and as a hedging tool has focused attention on the role of the FX swap market in the recent crisis. The turbulence in international money markets spilled over into the FX swap market in the second-half of 2007 and into 2008, giving rise to concerns over the ability of banks to roll over their funding requirements and manage their liquidity risk. The turmoil also raised questions about banks' ability to continue their supply of credit to the local economy, as well as the external financing gap it could create. In this paper, we examine the channels through which FX swap transactions could affect a country's financial and economic stability, and highlight the strategies central banks can employ to mitigate market pressures. While not offering any judgment on the instrument itself, we show that the use of FX swaps for funding and hedging purposes is not infallible, especially during periods of market stress.