Working Papers
2009
October 1, 2009
Monetary Policy Analysis and Forecasting in the World Economy: A Panel Unobserved Components Approach
Description: This paper develops a panel unobserved components model of the monetary transmission mechanism in the world economy, disaggregated into its fifteen largest national economies. This structural macroeconometric model features extensive linkages between the real and financial sectors, both within and across economies. A variety of monetary policy analysis and forecasting applications of the estimated model are demonstrated, based on a novel Bayesian framework for conditioning on judgment.
October 1, 2009
Inflation Targeting at 20 - Achievements and Challenges
Description: This paper provides an overview of inflation targeting frameworks and macroeconomic performance under inflation targeting. Inflation targeting frameworks are generally quite similar across countries, and a broad consensus has developed in favor of "flexible" inflation targeting. The evidence shows that, although inflation target ranges are missed frequently in most countries, the inflation and growth performance under inflation targeting compares very favorably with performance under alternative frameworks. Inflation targeters also tentatively appear to be coping better with the commodity price and financial shocks in 2007-2009 than non-inflation targeters. Key issues going forward include adapting inflation targeting to emerging market and developing countries, and incorporating financial stability issues into the framework.
October 1, 2009
Hybrid Inflation Targeting Regimes
Description: This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank's policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exhange rate smoothing because of the perverse impact of exchange rate movements on activity.
October 1, 2009
The Liquidity and Liquidity Distribution Effects in Emerging Markets: The Case of Jordan
Description: This paper analyzes the determinants of daily changes in Jordan's interbank market overnight rate. It not only quantifies the classic liquidity effect, but also uncovers a liquidity distribution effect on both sides of the market, and shows that their magnitude is a decreasing and convex function of the level of excess reserves. It finds that the volatility of rate changes depends much more on the reserve surplus accumulated within a maintenance period than on the level of excess reserves. As Carpenter and Demiralp (2006), it uses the series of the central bank's daily forecast errors to identify the liquidity effect.
October 1, 2009
Analyzing Fiscal Space Using the MAMS Model - An Application to Burkina Faso
Description: This paper analyses economic implications and the transmission mechanisms of different options for creating and using fiscal space. For creating fiscal space, we consider prioritizing expenditures, raising revenue, and scaled-up aid. Fiscal space is used for increasing health and education spending, infrastructure spending, or both. The analysis takes place within the World Bank's MAMS model, which is a multisectoral real computable general equilibrium model that incorporates the Millennium Development Goals. The model has been calibrated for Burkina Faso, which serves as an illustrative country example. Some of the key results are that absorbing a more educated labor force requires fundamental structural change in the economy; increasing health and education spending can face sizeable capacity constraints; and infrastructure spending has a positive effect on growth as well as education and health outcomes.
October 1, 2009
Revisiting the Determinants of Productivity Growth - What’s new?
Description: This paper studies the main determinants of total factor productivity (TFP) growth using principal component analysis and a dynamic panel data model and, through a case study, explores key areas where accelerated reforms in the Maghreb countries would boost TFP gains. The results reveal that reforms targeted at attracting foreign direct investment and rationalizing government size, shifting resources from low-productivity sectors to higher ones, and encouraging women to enter the work force, could accelerate TFP gains. Equally important are reforms aimed at strengthening human capital, increasing the volume of trade, and improving the business environment.
October 1, 2009
Australian Bank and Corporate Sector Vulnerabilities: An International Perspective
Description: This paper focuses on how the exposure to the corporate sector may impact the health of the Australian banking system. It also compares Australian banks with their international peers. Finally, it investigates banks' exposure to credit risk using the new Basel II Pillar 3 disclosure data. The analysis shows that Australian banks have remained very sound by international standards, despite the global financial turmoil. While the international downturn points to several vulnerabilities, the risks from the corporate and household sectors appear to be manageable.
October 1, 2009
Euro Area Sovereign Risk During the Crisis
Description: While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability. From this perspective, to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns? In line with previous studies, the paper suggests that euro area sovereign risk premium differentials tend to comove over time and are mainly driven by a common time-varying factor, mimicking global risk repricing. Since October 2008, however, there is evidence that markets have become progressively more concerned about the potential fiscal implications of national financial sectors' frailty and future debt dynamics. The liquidity of sovereign bond markets still seems to play a significant (albeit fairly limited) role in explaining changes in euro area spreads.
October 1, 2009
External Balance in Low Income Countries
Description: This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run.
October 1, 2009
Do Trading Partners Still Matter for Nigeria's Growth? A Contribution to the Debateon Decoupling and Spillovers
Description: Should policymakers still be concerned about economic growth in trading partners? Have developing and emerging market countries decoupled from the US enough to grow despite significant recession in the US? Using VAR models, this paper addresses these questions for Nigeria in the context of the global crisis. The results seem to debunk the "decoupling theory" and suggest there are still significant spillovers from Nigeria's main trading partners, including the US, with trade and commodity price linkages being the dominant transmission channels. Given the sharp fall in both trade financing and commodity prices in aftermath of the crisis, these results provide some explanation to the realization of adverse second-round effects in Nigeria.