Working Papers
2008
April 1, 2008
Housing Finance and Mortgage-Backed Securities in Mexico
Description: This paper reviews the Mexican experience with the securitization of residential mortgages. It highlights the key legislative and institutional reforms leading to the development of primary and secondary mortgage markets and reports the main features and valuation practices of the RMBS markets. The paper identifies areas warranting close attention to improve the outlook for the Mexican RMBS market and draws some lessons from the recent U.S. subprime mortgage market problems.
April 1, 2008
The Capital Markets of Emerging Europe: Institutions, Instruments and Investors
Description: Emerging European countries have made large strides in developing their local capital markets since the early-1990s. However, the rate of development has been widely disparate across countries and market segments, underpinned by the varying degrees of progress made in key areas such as establishing pricing benchmarks, adopting, implementing and enforcing securities laws and regulations, encouraging the growth of an institutional investor base, and providing adequate trading infrastructure. This paper provides an overview of the trends in the region's local capital markets, and examines the main factors that have contributed to their growth and effectiveness to date. It also discusses selected policy responses necessary to further improve the breadth and depth of these markets.
April 1, 2008
Global Aging and Declining World Interest Rates: Macroeconomic Insurance Through Pension Reform in Cyprus
Description: How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.
April 1, 2008
Informality and Bank Credit: Evidence from Firm-Level Data
Description: The paper relies on a firm-level data on transition economies to examine the relationship between informality and bank credit. We find evidence that informality is robustly and significantly associated with lower access to and use of bank credit. We also find that higher tax compliance costs reduce firms' reliance on bank credit, while a stronger quality of the legal environment is associated with higher access to credit even for financially opaque informal firms. An interactive term between a country-wide measure of tax compliance costs and the level of informal activity is negative and significant, suggesting that the negative association between informality and bank credit is stronger in countries with weak tax administration.
April 1, 2008
Corporate Governance Reforms in the EU: Do They Matter and How?
Description: This paper proposes a new approach to quantifying the effects of corporate governance reforms, by focusing on the dynamics of the voting premiums, a measure of the private benefits of control in a corporation. The results indicate that the reforms have been successful in reducing the voting premiums EU-wide. Moreover, more intense and broad reform efforts (such as introducing national reforms beyond and above the EU-wide initiatives) bring higher and longer lasting benefits. Our findings also suggest that the market for corporate control in Europe has become more integrated, as illustrated by the lower dispersion in voting premiums across countries and over time.
April 1, 2008
Price Dynamics in the Eastern Caribbean
Description: The Eastern Caribbean Currency Union (ECCU) countries share a common currency, the EC dollar, which has been pegged to the U.S. dollar at the same rate for more than three decades. This paper examines the influence of the peg on ECCU price stability, and analyzes whether absolute Purchasing Power Parity (PPP) holds within the currency union. It shows that U.S. price stability has helped anchor price movement in the ECCU. As the same time, inflation in the ECCU is not entirely imported from the U.S., and has some domestic policy content. In addition, deviation from PPP within the ECCU can be attributed to persistent price dispersion of nontradables.
April 1, 2008
A New Fiscal Rule: Should Israel “Go Swiss?”
Description: We propose a fiscal rule that fulfills a specific debt reduction objective while maintaining significant fiscal flexibility-two overarching concerns in Israel. Not unlike the Swiss "debt brake," the rule incorporates an error-correction mechanism (ECM) through which departure from the debt objective affects binding medium-run expenditure ceilings. Two variants of our ECM rule are shown to be superior to a comparable deficit rule in terms of attaining the debt objective and allowing for fiscal stabilization while supporting medium-term expenditure planning. Given its relative sophistication, a proper implementation of the ECM rule requires supportive fiscal institutions, including independent input and assessment.
April 1, 2008
Striving to Be “Clearly Open” and “Crystal Clear”: Monetary Policy Communication of the CNB
Description: The Czech National Bank has a respectable track record in terms of its policy actions and the corresponding inflation outturns. Using a simple forward-looking policy rule, we find that its main communication tools-inflation targets, inflation forecasts, verbal assessments of the inflation risks contained in quarterly inflation reports, and the voting within the CNB Board-provided a clear message in about three out of every four observations in our 2001- 2005 sample.
March 1, 2008
Corporate Income Tax Competition in the Caribbean
Description: Motivated by the concern that corporate income tax (CIT) competition may have eroded the tax base, this paper calculates average effective tax rates to measure the impact of CIT competition, including the widespread use of tax holidays, on the tax base for 15 countries in the Caribbean. The results not only confirm erosion of the tax base, but also show that CIT holidays must be removed for recent tax policy initiatives (such as accelerated depreciation, loss carry forward provisions, and tax harmonization) to be effective. These findings suggest that the authorities should either avoid granting CIT holidays or rely more on other taxes (including consumption taxes such as the value-added tax) in order to broaden the tax base.
March 1, 2008
Credit Cyclicality in Chile: A Cross-Country Analysis
Description: This paper analyzes the determinants of credit cyclicality. It constructs a financial development index and studies whether it affects the amplitude of impulse responses to shocks to output, terms of trade, global liquidity, and global risk appetite. The paper uses both country-specific VARs for cross-country analyses and panel VARs to compare impulse responses between various country groupings. The study finds evidence that financial development-especially stronger creditor rights-can mitigate credit cyclicality, given that the response of credit to output or terms of trade shocks is stronger in countries with weaker financial systems.