Working Papers
2009
February 1, 2009
In Search of WTO Trade Effects: Preferential Trade Agreements Promote Trade Strongly, But Unevenly
Description: The literature measuring the impact of Preferential Trade Agreements (PTA) and WTO membership on trade flows has produced remarkably diverse results. Rose's (2004) seminal paper reports a range of specifications that show no WTO effects, but Subramanian and Wei (2007) contend that he does not fully control for multilateral resistance (which could bias WTO estimates). Subramanian and Wei (2007) address multilateral resistance comprehensively to report strong WTO trade effects for industrialized countries but do not account for unobserved bilateral heterogeneity (which could inflate WTO estimates). We unify these two approaches by accounting for both multilateral resistance and unobserved bilateral heterogeneity, while also allowing for individual trade effects of PTAs. WTO effects vanish and remain insignificant throughout once multilateral resistance, unobserved bilateral heterogeneity, and individual PTA effects are introduced. The result is robust to the use of alternative definitions and coding conventions for WTO membership that have been employed by Rose (2004), Tomz et al. (2007), or by Subramanian and Wei's (2007).
February 1, 2009
Current Account Determinants for Oil-Exporting Countries
Description: The paper aims at characterizing the main determinants of the medium-term current account balance for oil-exporting countries using dynamic panel estimation techniques. Previous studies included a very limited number of oil-exporting countries in their samples, raising concerns about the applicability of the estimated coefficients for oil countries. Furthermore, current approaches are not specifically tailored to oil-producing countries because they fail to capture the effects of oil wealth and the degree of maturity in oil production. This paper explores the underlying determinants of the current account balance for a large sample of oilexporting countries, and extends the specifications commonly used in the literature to include an oil wealth variable, as well as a proxy for the degree of maturity in oil production. The paper therefore contributes to the existing literature both in terms of the sample studied as well as the variables considered. The results reveal that factors that matter in determining the equilibrium current account balance of oil-exporting counties are the fiscal balance, the oil balance, oil wealth, age dependency, and the degree of maturity in oil production.
February 1, 2009
Why isn't South Africa Growing Faster? a Comparative Approach
Description: The purpose of this paper is to examine factors that have constrained South Africa's growth since the end of apartheid by comparing its GDP components and its saving and investment performance with those of 10 faster-growing countries. The study finds that sluggish investment has undermined growth since 1996 and that the underinvestment is in part explained by limited saving. Thus, over the last decade, interactions between investment, saving, and production may have perpetuated slow growth in South Africa.
January 1, 2009
“Monetary and Fiscal Rules in an Emerging Small Open Economy”
Description: We develop a optimal rules-based interpretation of the 'three pillars macroeconomic policy framework': a combination of a freely floating exchange rate, an explicit target for inflation, and a mechanism than ensures a stable government debt-GDP ratio around a specified long run. We show how such monetary-fiscal rules need to be adjusted to accommodate specific features of emerging market economies. The model takes the form of two-blocs, a DSGE emerging small open economy interacting with the rest of the world and features, in particular, financial frictions It is calibrated using Chile and US data. Alongside the optimal Ramsey policy benchmark, we model the three pillars as simple monetary and fiscal rules including and both domestic and CPI inflation targeting interest rate rules alongside a 'Structural Surplus Fiscal Rule' as followed recently in Chile. A comparison with a fixed exchange rate regime is made. We find that domestic inflation targeting is superior to partially or implicitly (through a CPI inflation target) or fully attempting to stabilizing the exchange rate. Financial frictions require fiscal policy to play a bigger role and lead to an increase in the costs associated with simple rules as opposed to the fully optimal policy.
January 1, 2009
Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the Dutch Disease?
Description: This paper argues that, in improving the efficient allocation of resources, financial sector development could dampen the appreciation effect of capital inflows. Using dynamic panel data techniques, the paper finds that the exchange rate appreciation effect of FDI inflows is indeed attenuated when financial and capital markets are larger and more active. The main implication of these results is that one of the main dangers associated with large capital inflows in emerging markets-the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate-can be mitigated partly by developing a deep financial sector.
January 1, 2009
An Index Number Formula Problem: The Aggregation of Broadly Comparable items
Description: Index number theory informs us that if data on matched prices and quantities are available, a superlative index number formula is best to aggregate heterogeneous items, and a unit value index to aggregate homogeneous ones. The formulas can give very different results. Neglected is the practical case of broadly comparable items. This paper provides a formal analysis as to why such formulas differ and proposes a solution to this index number problem.
January 1, 2009
On Impatience and Policy Effectiveness
Description: An increasing body of evidence suggests that the behavior of the economy has changed in many fundamental ways over the last decades. In particular, greater financial deregulation, larger wealth accumulation, and better policies might have helped lower uncertainty about future income and lengthen private sectors' planning horizon. In an overlapping-generations model, in which individuals discount the future more rapidly than implied by the market rate of interest, we find indeed evidence of a falling degree of impatience, providing empirical support for this hypothesis. The degree of persistence of "windfall" shocks to disposable income also appears to have varied over time. Shifts of this kind are shown to have a key impact on the average marginal propensity to consume and on the size of policy multipliers.
January 1, 2009
The Determinants of Commercial Bank Profitability in Sub-Saharan Africa
Description: Bank profits are high in Sub-Saharan Africa (SSA) compared to other regions. This paper uses a sample of 389 banks in 41 SSA countries to study the determinants of bank profitability. We find that apart from credit risk, higher returns on assets are associated with larger bank size, activity diversification, and private ownership. Bank returns are affected by macroeconomic variables, suggesting that macroeconomic policies that promote low inflation and stable output growth does boost credit expansion. The results also indicate moderate persistence in profitability. Causation in the Granger sense from returns on assets to capital occurs with a considerable lag, implying that high returns are not immediately retained in the form of equity increases. Thus, the paper gives some support to a policy of imposing higher capital requirements in the region in order to strengthen financial stability.
January 1, 2009
How Can Burundi Raise its Growth Rate? the Impact of Civil Conflicts and State Interventionon Burundi'S Growth Performance
Description: Over the last thirty years Burundi's low economic growth has led to a significant decline in per capita GDP. The purpose of this paper is to shed light on supply-side constraints that prevented Burundi's economy from growing faster. Lack of investment, civil conflict, economic inefficiencies, state intervention in the economy, and regulatory restrictions explain a large part of the weak growth performance for the last thirty years.
January 1, 2009
Regional Financial Interlinkages and Financial Contagion within Europe
Description: This paper focuses on financial interlinkages within Europe and potential contagion channeled through these interlinkages. It discusses the increased role of external financing as a source of funding for credit growth; analyzes potential channels of contagion through financial linkages; and assesses the magnitude of cross-border exposures between emerging and western European countries. Based on the stylized facts on these exposures, the paper provides simple indices of exposure to regional contagion that could help identify the likely pressure points and capture potential spillover effects and propagation channels of a regional shock originating from a given country.