Working Papers
2009
September 1, 2009
Institutional Inertia
Description: We study the relative efficiency of outside-owned versus employee-owned firms and analyze implications for institutional change in a context of technological innovation. When decisions are made through majority voting, the vote on technology choice is used to influence the later vote on the sharing rule. We show how this dynamic voting generates a systematic technological bias that is contingent on firm ownership. We provide conditions under which the pivotal voter's political leverage leads the firm to an institutional trap whereby majority voting and inefficient technology choice reinforce each other, leading to institutional inertia.
August 1, 2009
Establishing Conversion Values for New Currency Unions: Method and Application to the planned Gulf Cooperation Council (GCC) Currency Union
Description: A key issue in creating a new currency union is setting the rates to convert national currencies into the new union currency. Planned unions in the Gulf region and Africa are seeking methods to set the conversion rates when their new currencies are created. We propose a forward-looking econometric methodology to determine conversion rates by calculating the degree of misalignment in the real exchange rate, and apply it to the GCC currency union. For each GCC currency, we identify the year at which the economy is the closest to its internal and external equilibrium, and then estimate the degree of misalignment in the bilateral real exchange rate vis-à-vis the U.S. dollar based on WEO forecasts until 2013. Application of the methodology to other regions is also considered.
August 1, 2009
Understanding the Growth of African Financial Markets
Description: This paper examines empirically the determinants of financial market development in Africa with an emphasis on banking systems and stock markets. The results show that income level, creditor rights protection, financial repression, and political risk are the main determinants of banking sector development in Africa, and that stock market liquidity, domestic savings, banking sector development, and political risk are the main determinants of stock market development. We also find that liberalizing the capital account promotes financial market development only in countries with high incomes, well- developed institutions, or both. The powerful impacts of political risk on both banking sector and stock market development suggest that resolution of political risk may be important to the development of African financial markets.
August 1, 2009
Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement
Description: Countries that trade more with each other exhibit higher business cycle correlation. This paper examines the mechanisms underlying this relationship using a large cross-country industry-level panel dataset of manufacturing production and trade. We show that sector pairs that experience more bilateral trade exhibit stronger comovement. Vertical linkages in production are an important explanation behind this effect: bilateral international trade increases comovement significantly more in cross-border industry pairs that use each other as intermediate inputs. Our estimates imply that these vertical production linkages account for some 30% of the total impact of bilateral trade on the business cycle correlation.
August 1, 2009
Credit Growth in Sub-Saharan Africa—Sources, Risks, and Policy Responses
Description: In this paper, we analyze credit growth in Sub-Saharan Africa over the past decade focusing on the post-2002 rapid credit growth in select countries. We develop regression models of the fundamental determinants of bank credit and use them to examine whether they can fully explain developments in rapid credit growth countries. We then argue that rapid credit expansion, whether a manifestation of a credit boom or driven by fundamentals, can give rise to prudential and macroeconomic risks. We detail these risks and discuss the choice of policies to mitigate them. We conclude by evaluating the likely impact of the ongoing global recession and financial crisis on credit growth in Sub-Saharan Africa.
August 1, 2009
Towards a Principal-Agent Based Typology of Risks in Public-Private Partnerships
Description: There is a strong economic rationale for close cooperation between the public and private sectors. This has resulted in a significant increase in the demand for the provision of public services through instruments combining public and private money such as public-private partnerships (PPPs or P3s). We describe these arrangements and explore how they can be analyzed using standard tools in economics (incentives and principal-agent theory). We discuss the implications of our approach in terms of identifying risks that are often overlooked before turining to the optimal risk-sharing between the public and private partners, in particular with respect to information asymmetries in risk perceptions. This allows us to propose a typology of the risks associated with PPPs, where both internal risks (the risks associated with the contract) and external risks (those associated with the project) are considered.
August 1, 2009
Tourism Specialization and Economic Development: Evidence from the UNESCO World Heritage List
Description: The present paper investigates whether tourism specialization is a viable strategy for development. We estimate standard growth equations augmented with a variable measuring tourism specialization using instrumental variables techniques for a large cross-section of countries for the period 1980-2002. We introduce an instrument for tourism based on the UNESCO World Heritage List. We find that there is a positive relationship between the extent of tourism specialization and economic growth. An increase of one standard deviation in the share of tourism in exports leads to about 0.5 percentage point in additional annual growth, everything else being constant. Our result holds against a large array of robustness checks.
August 1, 2009
Is China's Export-Oriented Growth Sustainable?
Description: This paper assesses the sustainability of China's export-oriented growth over the medium to longer term. It shows that maintaining the current export-oriented growth would require significant gains in market share through lower prices in a range of industries. This, in turn, could be achieved through a combination of increases in productivity, lower profits, and higher implicit or explicit subsidies to industry. However, the evidence suggest that it will prove difficult to accommodate such price reductions within existing profit margins or through productivity gains. Moving up the value-added chain, shifting the composition of exports, diversifying the export base, and increasing domestic value added of exports could give room to further export expansion. However, experiences from Asian economies that had similar export-oriented growth suggest there are limits to the global market share a country can occupy. Rebalancing growth toward private consumption would provide a large impetus to output growth and reduce the need for gaining further market share.
August 1, 2009
Panacea, Curse, or Nonevent? Unconventional Monetary Policy in the United Kingdom
Description: The Bank of England's current "quantitative easing" strategy has given rise to a controversial debate about the effects and risks of unconventional monetary policy. The present paper makes two contributions to this debate. First, it provides a systematic overview of unconventional policy options, drawing from existing theoretical and empirical studies. Against this backdrop, it then analyzes the BoE's specific policies, discussing their effectiveness so far and putting them into a cross-country context. Tentative evidence on the BoE's quantitative easing is moderately encouraging, although the strategy is neither guaranteed to succeed nor as perilous as some of its detractors claim.
August 1, 2009
Recent Advances in Credit Risk Modeling
Description: As is well known, most models of credit risk have failed to measure the credit risks in the context of the global financial crisis. In this context, financial industry representatives, regulators and academics worldwide have given new impetus to efforts to improve credit risk modeling for countries, corporations, financial institutions, and financial instruments. The paper summarizes some of the recent advances in this regard. It considers modifications of structural models, including of the classical Merton model, and efforts to reconcile the structural and the reduced-form models. It also discusses the reassessment of the default correlations using copulas, the pricing of credit index options, and the determination of the prices of distressed debt and estimation of recovery values.