Working Papers
2009
August 1, 2009
Euro Area Monetary Policy in Uncharted Waters
Description: We analyze the European Central Bank's (ECB's) response to the global financial crisis. Our results suggest that even during the crisis, the core part of ECB's monetary policy transmission-from policy rates to market rates-has continued to operate, but at a decreased efficiency. We also find some evidence that the ECB's non-standard measures, namely the lengthening of the maturity of monetary policy operations and the provision of funds at the fixed rate, reduced money market term spreads, facilitating the pass-through from policy to market rates. Furthermore, the results imply that the substantial increase in the ECB's balance sheet may have contributed to a reduction in government bond term spreads.
August 1, 2009
Setting Up a Sovereign Wealth Fund: Some Policy and Operational Considerations
Description: This paper offers a policy and operational "roadmap" to policymakers considering setting up an SWF. It should also be of interest to policymakers in countries where SWFs are already in place, to review their existing policies and operations. Finally, it offers an opportunity to identify areas where research in macroeconomics and finance should give further answers as to the adequacy of existing practice related to the setting up and management of SWFs, an area where practical considerations often lead theoretical research. For instance, policymakers should optimally consider both their sovereign assets and liabilities together with their macroeconomic objectives, when setting up an SWF.
August 1, 2009
Fiscal Vulnerability and Sustainability in Oil-Producing Sub-Saharan African Countries
Description: Over many years rises and fall of world oil prices have been repeatedly reflected in the boom-bust cycles in oil-exporting countries the world over. The recent spectacular rise and equally spectacular fall in prices provides an opportunity to inquire whether anything is different this time. In this paper we limit the analysis to the experience, outlook, and longterm fiscal policy considerations for eight of the world's oil-producing countries in sub- Saharan Africa. Because we are interested in gauging their fiscal vulnerability and sustainability from the angle of managing exhaustible oil wealth, we focus on the non-oil primary balance as the relevant indicator of how initial conditions and resource endowments can influence long-term considerations in several different models of fiscal rules.
August 1, 2009
Does Good Financial Performance Mean Good Financial Intermediation in China?
Description: Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy's financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001-07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.
August 1, 2009
An Assessment of External Price Competitiveness for Mozambique
Description: This paper conducts an assessment of external price competitiveness for Mozambique. A variety of indicators suggest that Mozambique has recently lost external price competitiveness with respect to its major trading partners. Consistent with these indicators, an exchange rate assessment indicates that the metical is overvalued by 26 to 41 percent in real effective terms. If sustained, an overvaluation of this magnitude has the potential to retard economic growth and jeopardize external stability, calling for an adjustment of monetary policy to gradually restore external price competitiveness.
July 1, 2009
Macroeconomic Fluctuations in the Caribbean: The Role of Climatic and External Shocks
Description: This paper develops country-specific VAR models with block exogeneity restrictions to analyze how exogenous factors affect business cycles in the Eastern Caribbean. It finds that external shocks play a key role, explaining more than half of macroeconomic fluctuations in the region. Domestic business cycles are especially vulnerable to changes in climatic conditions, with a natural disaster leading to an immediate and significant fall in output-but the effects do not appear to be persistent. Oil price and external demand shocks also contribute significantly to domestic macroeconomic fluctuations. An increase in oil prices (external demand) is contractionary (expansionary), and the effects dissipate up to three years after the shock.
July 1, 2009
Fiscal Cycles in the Caribbean
Description: The sharp increase in debt in the Caribbean since the mid-1990s has focused attention on the conduct of fiscal policy in the region. This paper aims to diagnose how fiscal policy has behaved during this period by looking at three main cycles of the economy: the business, election, and natural disaster cycles. Our main findings suggest that fiscal policy has been mostly procyclical in the region, while disasters have been heavily "insured" by foreign transfers. The "when it rains, it pours" phenomena suggested by Kaminsky, Reinhart and Vegh (2004) seems to take place in the Caribbean.
July 1, 2009
Development of the Commercial Banking System in Afghanistan: Risks and Rewards
Description: Lending practices of commercial banks in Afghanistan were analyzed using CAMEL ratings. Statistically significant correlations were found: Banks with worse ratings (a) had more lending to domestic clients and (b) paid less tax. There was no statistically significant relationship between profits and total assets or between lending/assets versus profit/assets. Interviews of senior management of 8 banks accounting for about 90 percent of the commercial banking system corroborated evidence that poorly rated banks lend to domestic clients, whereas highly rated banks do not lend. Banks that lend extensively domestically engage in extra-judicial, non-traditional contract enforcement.
July 1, 2009
Macroeconomic Fundamentals, Price Discovery and Volatility Dynamics in Emerging Markets
Description: This study characterizes volatility dynamics in external emerging bond markets and examines how prices and volatility respond to news about macroeconomic fundamentals. As in mature bond markets, macroeconomic surprises in external emerging bond markets are found to affect both conditional returns and volatility, with the effects on volatility being more pronounced and longer lasting than those on prices. Yet the process of information absorption tends to be more drawn out than in mature bond markets. International and regional macroeconomic news is at least as important as local news for both asset valuations and volatility dynamics in external emerging bond markets.
July 1, 2009
Regional Financial Integration in the Caribbean: Evidence From Financial and Macroeconomic Data
Description: This paper assesses the extent of regional financial integration in the Caribbean Community (CARICOM) by analyzing equity prices in the region and rigidity of external financing constraints. The results are presented in a cross-regional perspective. The Caribbean stock markets are not as well integrated as one would expect from the extent of cross-listing and importance of regional banking groups: price differentials of cross-listed stocks reach an average of 5 percent. Auto-Regressive models suggest that these price differentials are only slowly arbitraged away, with half-lives exceeding 7 worked days, even when looking only at large arbitrage opportunities (using a Threshold Auto-Regressive model). A speculative methodology using macroeconomic data seems to confirm these findings. A strong mean reversion of the current account (respectively regional trade imbalances) is interpreted, following Obstfeld and Taylor (2004), as a lack of ways to finance current account deficits, i.e. a lack of global (respectively regional) financial integration. The region appears to be much less integrated than the EU15 or the ASEAN+3 groups, although it fares well compared to other LDCs.