Working Papers
2007
July 1, 2007
Estimation of a Behavioral Equilibrium Exchange Rate Model for Ghana
Description: The paper estimates a behavioral equilibrium exchange rate model for Ghana. Regression results show that most of the REER's long-run behavior can be explained by real GDP growth, real interest rate differentials (both relative to trading-partner countries), and the real world prices of Ghana's main export commodities. On the basis of these fundamentals, the REER in late 2006 was found to be very close to its estimated equilibrium level. The results also suggest, that deviations from the equilibrium path are eliminated within two to three years.
June 1, 2007
Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism
Description: Financial globalization was off to a rocky start in emerging economies hit by Sudden Stops in the 1990s. The surge in foreign reserves since then is viewed as a New Merchantilism in which reserves are a war-chest for defense against Sudden Stops. We conduct a quantitative assessment of this argument using a framework in which precautionary savings affect foreign assets via business cycle volatility, financial globalization, and endogenous Sudden Stops. Our results show that financial globalization and Sudden Stop risk are plausible explanations of the surge in reserves but cyclical volatility, which has declined in the globalization period, is not.
June 1, 2007
Measuring the Effect of Foreign Aidon Growth and Poverty Reduction or the Pitfalls of Interaction Variables
Description: Regressions in a number of recent papers written by staff members of the World Bank and the IMF rely on an interaction variable (IAV) to establish the effects of foreign aid on economic growth or the reduction of poverty. The common assumption in these papers is that if the coefficient of this IAV is statistically significant, then both of its components have a significant effect on the dependent variable. That assumption is not justified in its generality, and this paper develops two techniques that show a high probability that in at least two of the three studies analyzed one of the components of the IAV may not have a significant effect.
June 1, 2007
Relative Price Stability, Creditor Rights, and Financial Deepening
Description: The paper provides a theoretical and cross-country empirical analysis of the determinants of financial deepening, and finds that higher credit-to-GDP ratios are associated with stronger creditor rights and lower inflation, and that the marginal effect of improvements in creditor rights protection is declining as the rate of inflation increases. The analysis suggests that in a high inflation environment, controlling inflation and reducing macroeconomic volatility should be given priority. Once these goals are achieved, the focus of attention should shift to creditor rights protection and credit information management.
June 1, 2007
International Financial Integration Through Equity Markets: Which Firms from Which Countries Go Global?
Description: This paper studies international financial integration analyzing firms from various countries raising capital, trading equity, and/or cross-listing in major world stock markets. Using a large sample of 39,517 firms from 111 countries covering the period 1989-2000, we find that, although international financial integration increases substantially over this period, only relatively few countries and firms actively participate in international markets. Firms more likely to internationalize are from larger and more open economies, with higher income, better macroeconomic policies, and worse institutional environments. These firms tend to be larger, grow faster, and have higher returns and more foreign sales. While changes occur with internationalization, these firm attributes are present before internationalization takes place. The results suggest that international financial integration will likely remain constrained by country and firm characteristics.
June 1, 2007
Re-Accessing International Capital Markets After Financial Crises: Some Empirical Evidence
Description: The paper analyzes the factors that contribute to the re-access of countries that emerge from a severe financial crisis to the international capital markets. It conjectures that these factors depend on a sovereign's commitment and ability to repay its foreign debt, signaled by sound macroeconomic policies, and the global liquidity environment. Using panel data for 49 countries over a 24-year period, the analysis uses a simple probit approach to show that, indeed, a sustainable debt profile and a sound external position, accompanied by a favorable global liquidity environment, are key factors in affecting the likelihood a sovereign reaccesses international capital markets.
June 1, 2007
An Oil and Gas Model
Description: This paper formulated a short-run model, with an explicit role for monetary policy, for analyzing world oil and gas markets. The model described carefully the parameters of these markets and their vulnerability to business cycles. Estimates showed that short-run demand for oil and gas was price- inelastic, relatively income-elastic, and was influenced by interest and exchange rates; short-run supply was price-inelastic. Short-run price inelasticity could be a source for high volatility in oil and gas prices, and could confer to producers a temporary market power. Being simultaneous and incorporating interest and exchange rates, the model could be useful in short-term forecasting of oil and gas outputs and prices under policy scenarios.
June 1, 2007
Modalities of Moving to Inflation Targeting in Armenia and Georgia
Description: This paper reviews the current monetary and exchange rate policy frameworks in Armenia and Georgia, and the challenges associated with the choice of a credible nominal anchor in the context of large nominal and real shocks. The paper makes a case for a gradual transition to full-fledged inflation targeting (FFIT) in both countries in the medium term. The implications of this option are examined from various angles. In particular, the monetary transmission mechanisms and compliance with major institutional prerequisites for successful FFIT adoption are analyzed. Based on this analysis, the paper identifies a series of short- and medium-term recommendations, drawing on the experience of emerging market countries that successfully moved to FFIT.
June 1, 2007
Asia Rising: A Sectoral Perspective
Description: This paper undertakes a cross-country analysis of productivity growth at both the aggregate and sectoral level. It finds that Asia's remarkable output growth over the past 40 years reflected both high investment, and rapid productivity increases. These factors were in turn supported by the region's relatively strong institutional and policy environment, which encouraged resource shifts from low- to high-productivity sectors. Looking ahead, sustaining rapid growth requires meeting a number of key challenges: (i) implementing reforms to boost productivity in the increasingly important, but currently lagging, service sectors; (ii) providing policy support for continuing the shift of resources from agriculture to industry and services; (iii) strengthening policy frameworks in late-developing countries.
June 1, 2007
The Role of Domestic Debt Markets in Economic Growth: An Empirical Investigation for Low-Income Countries and Emerging Markets
Description: We develop a new public domestic debt (DD) database covering 93 low-income countries and emerging markets over the 1975-2004 period to estimate the growth impact of DD. Moderate levels of non-inflationary DD, as a share of GDP and bank deposits, are found to exert a positive overall impact on economic growth. Granger-causality regressions suggest support for a variety of channels: improved monetary policy; broader financial market development; strengthened domestic institutions/accountability; and enhanced private savings and financial intermediation. There is some evidence that, above a ratio of 35% percent of bank deposits, DD begins to undermine growth, lending credence to traditional crowding out and bank efficiency concerns. Importantly, the growth contribution of DD is higher if it is marketable, bears positive real interest rates and is held outside the banking system. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.