Working Papers
2006
October 1, 2006
A Small Foreign Exchange Market with a Long-Term Peg: Barbados
Description: This paper is a first analysis of daily transactions in the foreign exchange market of Barbados, a small open economy that has had an unchanged peg to the U.S. dollar for over 30 years. As a result of the credibility of the peg, we expect that capital flows will respond to differentials between U.S. and comparable Barbadian interest rates and that this will result in uncovered interest parity, when allowance is made for market frictions and large discrete events. The results are consistent with this hypothesis about the motivation for foreign exchange transactions.
October 1, 2006
New Evidence on Fiscal Adjustment and Growth in Transition Economies
Description: This paper analyzes the relationship between fiscal adjustment and real GDP growth in a panel of 26 transition economies during 1992-2001. Unlike most previous studies using cross-country regressions, the paper finds a positive and statistically significant relationship between fiscal adjustment and growth that is robust to different model specifications and estimation methods. The paper also presents country experiences to delve deeper into the mechanisms that may underlie this statistical relationship.
October 1, 2006
Integration of the Securities Market Infrastructure in the European Union: Policy and Regulatory Issues
Description: This paper examines the impact of ongoing cross-border integration of securities market infrastructure in the European Union. In particular, it analyzes the regulatory framework that has evolved to deal with the risks associated with cross-border clearing and settlement and concludes that, due to institutionalized deficiencies, the current cross-border regulatory framework may not be adequate or effective in addressing and preventing a real cross-border crisis. The paper proposes a two-tier regulatory framework for securities infrastructure in Europe entailing the creation of a centralized "federal" European regulatory framework for regional systems, in addition to the current national regulatory framework for domestic systems.
October 1, 2006
Revenue Authorities: Issues and Problems in Evaluating their Success
Description: Revenue authorities (RAs) have been adopted by some countries as an alternative delivery model for improved revenue administration. They are sometimes seen as a possible solution to problems such as low rates of tax compliance, ineffective tax administration staff, and corruption. The paper discusses RAs as a governance model, from the perspective of revenue administration and the almost universal desire to improve performance and compliance with the law. It compiles and analyses features of the model, examines reasons why revenue authorities were established, and explores the extent to which countries have evaluated the success of the model. It also assesses countries' own perceptions about how this model may have contributed to tax administration reform. Further, the paper discusses data collection difficulties in carrying out an assessment using econometric analysis, and the problem of attributing changes in performance to a particular governance model. The paper concludes that while there are subjective perceptions among countries with revenue authorities that their model has led to improved revenue administration and has spurred modernization, there is no objective analysis that countries with RAs have performed better in this regard than countries without RAs.
October 1, 2006
FEER for the CFA Franc
Description: We apply the fundamentals equilibrium exchange rate (FEER) approach and the Johansen cointegration methodology to investigate the behavior of the real effective exchange rates of the two monetary unions of the CFA franc zone (CEMAC and WAEMU) vis-à-vis their long-run equilibrium paths. For both CEMAC and WAEMU, our results indicate that: (i) the fundamentals account for most of the fluctuation of the real effective exchange rates, with increases in the terms of trade, government consumption, and productivity improvements causing the exchange rate to appreciate, and increases in investment and openness leading to a depreciation; (ii) at end-2005 both the CEMAC and WAEMU real effective exchange rates were broadly in line with their long-run equilibrium values; and (iii) following a shock, reversion to equilibrium is twice as fast in WAEMU than in CEMAC.
October 1, 2006
Public Debt and Productivity: The Difficult Quest for Growth in Jamaica
Description: The paper analyzes Jamaica's experience of low growth despite consistently high investment. Cross-country analysis provides evidence of a significant and negative relationship between total public debt and productivity growth. Looking at the specific channels through which high debt affects productivity growth and the allocation of resources in Jamaica, the study finds that high public debt has been associated with macroeconomic uncertainty and an output structure that relied excessively on a few maturing sectors with limited scope for productivity growth. Furthermore, public investment has been crowded out by debt service, further adversely affecting productivity growth.
October 1, 2006
Gender Budgeting
Description: Women are disadvantaged relative to men, according to key economic, social, and political measures of equality, but in many areas, such as education, differences are narrowing. The concept of externalities underlies the arguments for including gender considerations in budget programs and policies. Other arguments have a weaker economic basis but may be more socially or politically compelling. The experience to date with "gender budgeting," which entails looking at gender issues comprehensively within the budget, has been mixed. To become more useful, gender budgeting should be integrated into budget processes in a way that generates tangible improvements in policy outcomes. The International Monetary Fund should encourage fiscal authorities to take into account the external benefits of reducing gender inequalities and to remove from fiscal legislation any arbitrary discrimination against women.
October 1, 2006
The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications
Description: We present a model of the optimal level of international reserves for a small open economy that is vulnerable to sudden stops in capital flows. Reserves allow the country to smooth domestic absorption in response to sudden stops, but yield a lower return than the interest rate on the country's long-term debt. We derive a formula for the optimal level of reserves, and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. However, the recent buildup of reserves in Asia seems in excess of what would be implied by an insurance motive against sudden stops.
October 1, 2006
Measures of Central Bank Autonomy: Empirical Evidence for OECD, Developing, and Emerging Market Economies
Description: This paper presents an update of the Grilli-Masciandaro-Tabellini (GMT) index of central bank (CB) autonomy, based on CB legislation as of end-2003. The index is applied to a set of OECD and developing countries, and emerging market economies. For a smaller set of countries, the paper presents a reconstruction of the GMT index based on Cukierman (1992) and assesses changes in CB autonomy between 1992 and 2003. The results point to a significant increase in CB autonomy, in particular for developing countries. In most cases, this improvement has involved a three-stage process: an initial stage in which the political foundations for CB autonomy are laid; a second stage in which operational autonomy develops; and a final stage in which CBs gain further political autonomy in terms of policy formulation and the appointment of senior management.
October 1, 2006
The Measurement of Central Bank Autonomy: Survey of Models, Indicators, and Empirical Evidence
Description: This paper presents a survey of the literature on the measurement of central bank autonomy. We distinguish inputs that constitute the building blocks in the literature, and the literature that builds on them. Issues including sensitivity analysis, robustness, and endogeneity are discussed. The review shows that empirical evidence regarding the beneficial effects of central bank autonomy is substantial, although some technical issues still remain for further research. In particular, central bank autonomy raises the issue of subjecting the monetary authorities to democratic control; this calls for additional research on the linkages between central bank autonomy and accountability and transparency. Additional empirical analysis on the relationship between the financial strength of the central bank and its de facto autonomy, and between its autonomy and financial stability, would also be desirable.