Working Papers
2006
June 1, 2006
International Policy Coordination and Simple Monetary Policy Rules
Description: This paper studies the optimal design of monetary policy in an optimizing two-country sticky price model. We suppose that the production sequence of final consumption goods stretches across both countries and is associated with vertical trade. Prices of final consumption goods are sticky in the consumer's currency. Pursuing an inward-looking policy, as suggested in recent work, is not optimal in this set-up. We also ask which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy. The results hinge critically on the degree of price flexibility and the relative importance of cost-push and productivity shocks. In many cases, a strict targeting of price indices like producer or consumer price indices is dominated by rules that allow for some fluctuations in prices such as nominal income or monetary targeting.
June 1, 2006
How Do Central Banks Writeon Financial Stability?
Description: To showcase their increasing focus on financial stability, many central banks and other institutions have started publishing regular reports on financial stability. The paper presents a survey of the available financial stability reports, and proposes a framework for assessing such documents. It illustrates how the framework can be implemented, and uses the findings to identify prevalent practices, recent trends, and areas for improvement.
June 1, 2006
Moving to Territoriality? Implications for the United States and the Rest of the World
Description: This paper reviews the tax policy debate in the United States on the move of the corporation tax from its present worldwide basis to a territorial basis, and considers the implications for the United States and the rest of the world. It finds that there is no clear view on whether the move would significantly benefit the United States. Such a move, however, could have significant implications for the rest of the world in terms foreign direct investment (FDI) from the United States, the intensity of tax competition, and tax revenues.
June 1, 2006
U.S. Inflation Dynamics: What Drives Them Over Different Frequencies?
Description: This paper aims to improve the understanding of U.S. inflation dynamics by separating out structural from cyclical effects using frequency domain techniques. Most empirical studies of inflation dynamics do not distinguish between secular and cyclical movements, and we show that such a distinction is critical. In particular, we study traditional Phillips curve (TPC) and new Keynesian Phillips curve (NKPC) models of inflation, and conclude that the long-run secular decline in inflation cannot be explained in terms of changes in external trade and global factor markets. These variables tend to impact inflation primarily over the business cycle. We infer that the secular decline in inflation may well reflect improved monetary policy credibility and, thus, maintaining low inflation in the long run is closely linked to anchored inflation expectations.
June 1, 2006
An Empirical Investigation of the Exchange Rate Pass-Through to Inflation in Tanzania
Description: The paper examines the effect of exchange rate changes on consumer prices in Tanzania using structural vector autoregression (VAR) models. Using a data set covering the period 1990-2005, we find that the exchange rate pass-through to inflation declined in the late 1990s despite the depreciation of the currency. This could be partly attributed to the macroeconomic and structural reforms that were implemented during this period. The decline in the pass-through does not necessarily imply that exchange rate fluctuations are less significant in explaining macroeconomic fluctuations. The recent increase in the share of imports in the economy suggests that the pass-through could rise over the medium term. The findings imply that the authorities should remain vigilant in assessing the potential impact of foreign prices on the dynamics of inflation in Tanzania. In this regard, the authorities should seek to maintain low and stable inflation and continue the ongoing structural reforms designed to improve efficiency and increase competition.
June 1, 2006
What Transparency Can Do When Incentives Fail: An Analysis of Rent Capture
Description: This paper analyzes the pervasiveness and persistence of rent seeking, misgovernance, and public sector inefficiency in many developing and transition economies. We formalize evidence from country experiences and empirical studies into a stylized analytical framework that reflects realistic constraints faced in these countries. Our work departs from the standard economic literature by assuming that (i) the relationship between the government and its population is regulated through an implicit social consensus; (ii) traditional incentives (in the form of public expenditure controls, sanctions, or monetary incentives to perform) are, for various reasons, ineffective in many of these countries; and (iii) the persistence of high corruption reflects a very stable equilibrium, which in turn reflects the fact that several constraints are simultaneously binding. We argue that, when traditional incentives fail, transparency-information provision and disclosure, together with the means to use it-by relaxing different constraints, can contribute to improving public outcomes.
June 1, 2006
Aid Volatility and Dutch Disease: Is There a Role for Macroeconomic Policies?
Description: This paper studies how macroeconomic policies can help offset two unintended and undesirable features of foreign aid: its volatility and Dutch disease. We present evidence that aid volatility augments trade balance volatility and that foreign aid, with the important exception of years of adverse shocks, depresses exports. We also find that these effects can be mitigated through changes in net domestic assets of the central bank-a variable that reflects both monetary and fiscal policy. To characterize the optimal policy, we develop a general equilibrium model in which the capital account is closed and aid influences productivity growth through positive (public expenditure) and negative (Dutch disease) externalities. In this setting, macroeconomic policies permanently affect real variables and can improve welfare if donors do not distribute foreign aid optimally over time.
June 1, 2006
Are More Competitive Banking Systems More Stable?
Description: This paper provides the first empirical analysis of the cross-country relationship between a direct measure of competitive conduct of financial institutions and banking system fragility. Using the Panzar and Rosse H-Statistic as a measure for competition in 38 countries during 1980-2003, we present evidence that more competitive banking systems are less prone to systemic crises and that time to crisis is longer in a competitive environment. Our results hold when concentration and the regulatory environment are controlled for and are robust to different methodologies, different sampling periods, and alternative samples.
June 1, 2006
How Much Is Enough? Monte Carlo Simulations of an Oil Stabilization Fund for Nigeria
Description: In oil-dependent countries, a major issue is how to stabilize fiscal spending when government revenue fluctuates along with the international price of oil. A stabilization fund would allow the government to pull through an oil price trough and absorb windfall revenue when prices are high. This paper focuses on two key issues. First, the paper proposes to base government spending on moving averages of past oil prices that are shown to behave nearly as a random walk. Second, it uses Monte Carlo simulations of a fiscal policy model to look at the probability that a given level of assets in the stabilization fund is exhausted over a certain number of years. The simulations show that with a fiscal policy based on moving averages over three to five years, a stabilization fund of about 75 percent of 2004 oil revenue would be adequate, which, in Nigeria, would equate to US$16-18 billion.
June 1, 2006
Some Principles for Development of Statistics for a Gulf Cooperation Council Currency Union
Description: Looking ahead to the creation of a Gulf Cooperation Council (GCC) Currency Union in 2010, the paper covers some implications for the statistical programs of the GCC countries. Despite uncertainty over the structure of the proposed union, the paper envisions several types of mutually reinforcing statistics-convergence criteria, statistics on the core policy variables and instruments, additional macroeconomic data, specialized statistics related to the economic and institutional conditions within the union, and public information. Major changes to national statistical programs are needed that should begin soon.