Working Papers
2008
October 1, 2008
Contingent Liabilities: Issues and Practice
Description: Contingent liabilities have gained prominence in the analysis of public finance. Indeed, history is full of episodes in which the financial position of the public sector is substantially altered-or its true nature uncovered-as a result of government bailouts of financial or nonfinancial entities, in both the private and the public sector. The paper discusses theoretical and practical issues raised by contingent liabilities, including the rationale for taking them on, how to safeguard against the fiscal risks associated with them, how to account and budget for them, and how to disclose them. Country experiences are used to illustrate ways these issues are addressed in practice and challenges faced. The paper also points to good practices related to the mitigation, management and disclosure of risks from contingent liabilities.
September 1, 2008
Determinants of Government Efficiency
Description: We compile the first large cross-country panel dataset of public sector performance and efficiency, encompassing 114 countries on all income levels from 1980 to 2006, with about 1,800 country-year observations for the education sector and about 900 observations for health. We regress these indicators on potential economic, institutional, demographic, and geographic determinants. Our most resounding conclusion is that higher government expenditure relative to GDP tends to be associated with lower efficiency in the respective sector. Moreover, we find that richer countries exhibit better public sector performance and efficiency, and that institutional and demographic factors also play a significant role.
September 1, 2008
Systemic Banking Crises: A New Database
Description: This paper presents a new database on the timing of systemic banking crises and policy responses to resolve them. The database covers the universe of systemic banking crises for the period 1970-2007, with detailed data on crisis containment and resolution policies for 42 crisis episodes, and also includes data on the timing of currency crises and sovereign debt crises. The database extends and builds on the Caprio, Klingebiel, Laeven, and Noguera (2005) banking crisis database, and is the most complete and detailed database on banking crises to date.
September 1, 2008
Macroeconomic Effects of EU Transfers in New Member States
Description: Large inflows from the European Union to the New Member States are likely to significantlyimpact macroeconomic outcomes. In this paper, we use the IMF's Global Integrated Monetaryand Fiscal model (GIMF) to analyze the impact of the transfers and show the conditionsunder which they would help speed up convergence. We find that the EU funds need to bedirected predominantly to investment rather than to income support and that to bestaccompany the EU fund inflows, the policy-mix would need to combine counter-cyclicalpolicy with a strong commitment to the existing monetary regime.
September 1, 2008
The Impact of Public Capital, Human Capital, and Knowledge on Aggregate Output
Description: This paper investigates the impact of public capital on private sector output by testing and estimating an aggregate production function for the U.S. economy over the postwar period augmented to include the stock of public capital as an additional factor input. We use patent applications to proxy for knowledge/technology stocks and adjust labor hours for changes in human capital or skill. Using Johansen's (1988 and 1991) multivariate cointegration analysis, we find a positive and significant long run effect of public capital, private capital, skilladjusted labor, and technology/ knowledge on private sector output. We find that public capital accounts for about half of the post-1973 productivity slowdown, but only plays a minor role in the partial recovery of labor productivity growth since the mid 1980s. The largest contribution to that (partial) recovery comes from the knowledge stock and human capital.
September 1, 2008
Public Financial Management and Fiscal Outcomes in Sub-Saharan African Heavily-Indebted Poor Countries
Description: This paper examines, in a formal econometric framework, the linkages between public financial management and fiscal outcomes in sub-Saharan African countries. Similar analyses have been done for Latin America, Europe, and the United States, but none in the context of low-income countries. Using public financial management indicators, as measured in two recent assessments related to the Heavily-Indebted Poor Countries Initiative, this study shows that improving public financial management leads to better fiscal outcomes, as measured by the overall fiscal balance and external debt levels, after controlling for other characteristics that might alter fiscal outcomes.
September 1, 2008
Trade Elasticities in the Middle East and Central Asia: What is the Role of Oil?
Description: The analysis in this paper suggests that import and export volume elasticities are markedly lower in oil-exporting Middle East and Central Asian countries than in non-oil countries in the region. A key implication of this finding is that a real appreciation of the exchange rate in oil-exporting countries would achieve little in terms of expenditure switching: an appreciation does not boost imports and non-oil exports constitute only a small share of GDP and total trade in these countries. Therefore, while a real appreciation lowers the current account surplus of oil-exporting countries through valuation effects, the contribution to lowering global imbalances may be more limited.
September 1, 2008
The Eastern Caribbean Central Bank: Challenges to an Effective Lender of Last Resort
Description: The paper analyzes the challenges for the Eastern Caribbean Central Bank (ECCB) to be an effective lender of last resort (LOLR) as part of a modern banking crisis resolution framework. The main results from the theoretical model of the ECCB's institutional arrangement are that the majority of currency union members may veto emergency lending in the case of a member-specific shock, as such lending may endanger the stability of the currency board (by lowering the central bank's international reserves, thus raising devaluation risk). However, in the presence of contagion across countries, all currency union members have a vested interest in liquidity supply from the central bank. A key policy recommendation is that currency union members need a stronger fiscal position to continue to access international financial markets and sustain the exchange rate peg.
September 1, 2008
New Keynesian Exchange Rate Pass-Through
Description: Using the theory of optimal local currency pricing, this paper constructs a structural equation to estimate the rate at which foreign producer prices pass through the local currency prices of imported goods in the U.S. This can be viewed as measuring exchange rate pass-through, in line with price stickiness in the New Keynesian Phillips curve literature. We estimate the structural equation using the generalized methods of moments for consistent estimates of exchange rate pass-through. We find that a model with a mix of local currency pricing and producer currency pricing fits the data best. The estimate of price stickiness in import prices is comparable to existing estimates of domestic price stickiness.
September 1, 2008
Stress Testing at the IMF
Description: For almost a decade, the IMF has been using stress tests to identify vulnerabilities across institutions that could undermine the stability of a country's financial system. This working paper focuses on the IMF's experience with stress testing in the Financial Sector Assessment Program (FSAP). It provides background on the nature of an FSAP and the role of macro stress testing within it. It also describes how the methodology of stress testing in FSAPs has been evolving and what are fairly common approaches now being used. Finally, it discusses the main strengths and challenges for future development of macro stress testing in FSAPs and provides an overview of stress testing practice in European FSAPs.