Working Papers
2008
June 1, 2008
Medium-Term Budgetary Frameworks - Lessons for Austria from International Experience
Description: The Austrian government is about to introduce a new fiscal management framework. The first step is to introduce a medium-term budgetary framework, including an expenditure rule. The paper focuses on this first step. The purpose is to describe and evaluate the Austrian model in light of other countries' experiences with their frameworks. An attempt is made to identify features that have proven to be effective elsewhere and that can be applied to the Austrian case. The paper also identifies potential challenges and possible trade-offs when implementing the framework.
June 1, 2008
A U.S. Financial Conditions Index: Putting Credit Where Credit is Due
Description: This paper uses vector autoregressions and impulse-response functions to construct a U.S. financial conditions index (FCI). Credit availability—proxied by survey results on lending standards—is an important driver of the business cycle, accounting for over 20 percent of the typical contribution of financial factors to growth. A net tightening in lending standards of 20 percentage points reduces economic activity by ¾ percent after one year and 1¼ percent after two years. Much of the impact of monetary policy on the economy also works through its effects on credit supply, which is evidence supporting the existence of a credit channel of monetary policy. Shocks to corporate bond yields, equity prices, and real exchange rates also contribute to fluctuations in the FCI. This FCI is an accurate predictor of real GDP growth, anticipating turning points in activity with a lead time of six to nine months. 15B
June 1, 2008
A Review of Capital Budgeting Practices
Description: A key challenge in government budgeting is to define an appropriate balance between current and capital expenditures. Budgeting for government capital investment also remains not well-integrated into the formal budget preparation process in many countries. This paper aims to provide an overview of past and current budgeting practices for public investment. The study will also provide a comparison between the budget practices between low-income countries and developed countries and make a series of recommendations for how to ensure efficient integration of capital planning and budget management in low-income countries.
June 1, 2008
Life Expectancy and Income Convergence in the World: A Dynamic General Equilibrium Analysis
Description: There is world-wide convergence in life expectancy, despite little convergence in GDP per capita. If one values longer life much more than material happiness, the world living standards may this have already converged substantially. This paper introduces the concept of the dynastic general equilibrium value of life to measure welfare gains from the increase in life expectancy. A calibration study finds sizable welfare gains, but these gains hardly mitigate the large inequality among countries. A conventional GDP-based measure remains a good approximation for (non) convergence in world living standards, even when adjusted for changes in life expectancy.
June 1, 2008
Modeling Macro-Critical Energy Sectors in Low-Income Countries: A General Framework and an Application to Côte d’Ivoire
Description: This paper proposes a general framework for monitoring macro-critical energy sectors in low-income countries, defined as consisting of the three subsectors of crude oil and natural gas production, refinery, and electricity production. It aims to derive consistent information on physical and financial flows in the sector, including on interlinkages between the subsectors. It then applies this framework to Côte d'Ivoire. While being an important source of growth, the Ivoirien energy sector is found to have important shortcomings, in particular as regards transparency, efficiency and contribution to fiscal revenue. Among the key problems are partially intransparent production sharing arrangements for hydrocarbon production, price distortions for natural gas, administered prices for refined petroleum products, underfunding and lack of investment in the electricity sector, and inefficient government subsidies in the latter two subsectors.
June 1, 2008
Fiscal Policy and Economic Development
Description: This paper offers possible explanations for three generally observed facts about fiscal policy and development: (F1) The relative size of government increases as an economy develops, (F2) The rise in government and taxation are associated with rising or constant economic growth rates, and (F3) Today's developing countries have larger government sectors than did today's developed countries at similar stages of development. The explanations for these facts are based on the structural transformation from traditional (mostly agricultural) to modern (industrial and post-industrial) production, rising public infrastructure investment, and less representative governments in many of today's developing economies.
June 1, 2008
Bolivia: The Hydrocarbons Boom and the Risk of Dutch Disease
Description: The hydrocarbons sector has become one of the most dynamic economic activities in the Bolivian economy and the main driver of improved export performance and international reserve accumulation. The central role of the hydrocarbons sector in the economy is attributable to the high levels of investment made in the late 1990s, which permitted much higher production levels, particularly of natural gas. However those positive developments in the hydrocarbons sector have given rise to the possibility of a new case of "Dutch disease." While Bolivia's economy has already seen many benefits from its higher gas exports, especially in terms of lower external vulnerability and improved fiscal stance, the new resources could also limit the development of other economic sectors in terms of output and factor income. This paper explores the transmission channels of Dutch disease, as well as its main symptom, the appreciation of the real exchange rate
June 1, 2008
Trade Openness and Volatility
Description: This paper examines the mechanisms through which output volatility is related to trade openness using an industry-level panel dataset of manufacturing production and trade. The main results are threefold. First, sectors more open to international trade are more volatile. Second, trade is accompanied by increased specialization. Third, sectors that are more open are less correlated with the rest of the economy. The point estimates indicate that each of the three effects has an appreciable impact on aggregate volatility. Added together they imply that the relationship between trade openness and overall volatility is positive and economically significant.
June 1, 2008
Why are Saving Rates of Urban Households in China Rising?
Description: From 1995 to 2005, the average urban household saving rate in China rose by 7 percentage points, to ¼ of disposable income. We use household-level data to explain the postponing of consumption despite rapid income growth. Tracing cohorts over time indicates virtually no consumption smoothing over the life cycle. Saving rates have increased across all demographic groups, although the age-profile of savings has an unusual U-shaped pattern, with saving rates being the highest among the youngest and oldest households in recent years. These patterns are best explained by the rising private burden of expenditures on housing, education, and health care.
June 1, 2008
Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals
Description: We study herd behavior in a laboratory financial market with financial market professionals. We compare two treatments, one in which the price adjusts to the order flow so that herding should never occur, and one in which event uncertainty makes herding possible. In the first treatment, subjects herd seldom, in accordance with both the theory and previous experimental evidence on student subjects. A proportion of subjects, however, engage in contrarianism, something not accounted for by the theory. In the second treatment, the proportion of herding decisions increases, but not as much as theory suggests; moreover, contrarianism disappears altogether.