Working Papers
2007
April 1, 2007
Diagnosing Dutch Disease: Does Russia Have the Symptoms?
Description: In this paper, we assess whether recent economic developments in Russia are symptomatic of Dutch Disease. We first provide a brief review of the literature on Dutch Disease and the natural resource curse. We then discuss the symptoms of Dutch Disease, which include (1) real exchange rate appreciation; (2) slower manufacturing growth; (3) faster service sector growth; and (4) higher overall wages. We test these predictions for Russia while carefully controlling for other factors that could have led to similar symptoms. We conclude that, while Russia has all of the symptoms, the diagnosis of Dutch Disease remains to be confirmed.
April 1, 2007
Health Aid and Infant Mortality
Description: This paper examines the relationship between health aid and infant mortality, using data from 118 countries between 1973 and 2004. Health aid has a statistically significant effect on infant mortality: doubling per capita health aid is associated with a 2 percent reduction in the infant mortality rate. For the average country, this implies that increasing per capita health aid by US$1.60 per year is associated with 1.5 fewer infant deaths per thousand births. The estimated effect is small, relative to the targets envisioned by the Millennium Development Goals.
April 1, 2007
Central Bank Autonomy: Lessons from Global Trends
Description: We calculate indexes of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indexes for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of central bank autonomy that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies.
April 1, 2007
Concept of Offshore Financial Centers: In Search of an Operational Definition
Description: This paper proposes a new definition of Offshore Financial Centers (OFCs) and develops a statistical method to differentiate between OFCs and non-OFCs using data from the Coordinated Portfolio Investment Survey (CPIS), the International Investment Position (IIP), and the balance of payments. The suggested methodology identifies more than 80 percent of the OFCs in the study sample that also appear in the a priori list used by the IMF to conduct its OFC assessment program. The methodology distinguishes OFCs based strictly on their macroeconomic features and avoids subjective presumptions on their activities or regulatory frameworks. The study also identifies three new countries meeting OFC criteria.
April 1, 2007
Balance of Payments Crises Under Inflation Targeting
Description: This paper analyzes a small open economy model under inflation targeting. It shows why such a monetary regime is vulnerable to speculative attacks that take place over a short period rather than instantaneously. The speed at which the regime collapses, and the extent of reserve losses, are increasing in the central bank's explicit or implicit commitment to intervene in the foreign exchange market. Attacks are therefore ranked, from most to least severe, as follows: Exchange rate targeting, CPI inflation targeting, domestic nontradables inflation targeting, and money targeting. Under inflation targeting the size of the attack is increasing in the tradables consumption share.
April 1, 2007
Sovereign Ceilings “Lite”? The Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies
Description: Although credit rating agencies have gradually moved away from a policy of never rating a private borrower above the sovereign (the "sovereign ceiling") it appears that sovereign ratings remain a significant determinant of the credit rating assigned to corporations. We examine this link using data for advanced and emerging economies over the past decade and conclude that the sovereign ratings have a significant and robust effect on private ratings even after controlling for country specific macroeconomic conditions and firm-level performance indicators. This suggests that public debt management affects the private sector through a channel that had not been previously recognized.
April 1, 2007
Audit Committees in Central Banks
Description: This paper reviews the tasks and design of audit committees, increasingly recommended as a way to strengthen financial accountability and good central bank governance. It outlines the motivations for the establishment of audit committees in commercial corporations and public sector entities, and explains how audit committees interact with other governance bodies within a central bank. The paper focuses on the functions of an audit committee, since the terminology of the governance structure is often country-specific. It summarizes operational issues to consider in designing an effective audit committee and discusses the implications for central bank legislation.
March 1, 2007
Do Economists’ and Financial Markets’ Perspectives on the New Members of the EU differ?
Description: In the past several years, the ten new Central and Eastern European members of the European Union have enjoyed rapid growth but frequently alongside growing external imbalances. Economists have pointed to rising vulnerabilities, but markets compressed sovereign bond yields. This paper examines the evidence from the perspective of economists' vulnerability analysis and markets' pricing of sovereign bonds. It finds that spread are lower than can be explained by "fundamentals" and speculates on the causes and permanence of this yield compression.
March 1, 2007
Is the Quantity of Government Debt a Constraint for Monetary Policy?
Description: This paper derives an interest rate rule for monetary policy in which the interest rate response of the central bank toward an increase in expected inflation falls as debts increase beyond a certain threshold level. A debt-constrained interest rate rule and the threshold level of debt are jointly estimated for Canada during the first decade of its inflation targeting regime of the 1990s. There are three main findings of this paper. First, a high government debt could constrain monetary policy if government spending-rather than taxes-is expected to adjust in future in line with debt service costs. The 'constraint' operates through an altered policy transmission mechanism through changes in the IS curve. Second, the effects of the debt-constraint on monetary policy are quite different during booms and recessions. Third, empirical estimates show that Canadian monetary policy might have been constrained by a high government debt-GDP ratio during the 1990s. Policy was less loose than what inflation indicators called for.
March 1, 2007
Introduction to Applied Stress Testing
Description: Stress testing is a useful and increasingly popular, yet sometimes misunderstood, method of analyzing the resilience of financial systems to adverse events. This paper aims to help demystify stress tests, and illustrate their strengths and weaknesses. Using an Excel-based exercise with institution-by-institution data, readers are walked through stress testing for credit risk, interest rate and exchange rate risks, liquidity risk and contagion risk, and are guided in the design of stress testing scenarios. The paper also describes the links between stress testing and other analytical tools, such as financial soundness indicators and supervisory early warning systems. Furthermore, it includes surveys of stress testing practices in central banks and the IMF.