Working Papers
2006
April 1, 2006
Core Inflation Measures and Statistical Issues in Choosing Among Them
Description: This paper provides an overview of statistical measurement issues relating to alternative measures of core inflation, and the criteria for choosing among them. The approaches to measurement considered include exclusion-based methods, imputation methods, limited influence estimators, reweighting, and economic modeling. Criteria for judging which approach to use include credibility, control, deviations from a smoothed reference series, volatility, predictive ability, causality and cointegration tests, and correlation with money supply. Country practice can differ in how the approaches are implemented and how their appropriateness is assessed. There is little consistency in the results of country studies to readily suggest guidelines on accepted methods.
April 1, 2006
The Tax System in India: Could Reform Spur Growth?
Description: This paper assesses the effects of India's tax system on growth, through the level and productivity of private investment. Comparison of India's indicators of effective tax rates and tax revenue productivity with other countries shows that the Indian tax system is characterized by: (1) a high dependence on indirect taxes, (2) low average effective tax rates and tax productivity, and (3) high marginal effective tax rates and large tax-induced distortions on investment and financing decisions. The paper finds that the most recently proposed package of reforms would improve tax productivity and lower the marginal tax burden and tax-induced distortions. But firms that rely on internal sources of funds or face problems borrowing would continue to face high marginal tax rates.
March 1, 2006
What is Fuzzy About Clustering in West Africa?
Description: Applying techniques of clustering analysis to a set of variables suggested by the convergence criteria and the theory of optimal currency areas, this paper looks for country homogeneities to assess membership in the existing and proposed monetary unions of the broader west African region. Our analysis reveals considerable dissimilarities in the economic characteristics of the countries in west and central Africa. In particular, the West African Monetary Zone (WAMZ) countries do not form a cluster with the West Africa Economic and Monetary Union (WAEMU) countries; and, within the WAMZ, there is a significant lack of homogeneity. Furthermore, when west and central African countries are considered together, we find significant heterogeneities within the CFA franc zone, and some interesting similarities between the Economic and Monetary Community of Central Africa (CEMAC) and WAMZ countries. Overall, our findings raise some questions about the geographical boundaries of several existing and proposed monetary unions.
March 1, 2006
Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies
Description: This paper shows that the dominant view that the high variability of real exchange rates is due to movements in exchange rate-adjusted prices of tradable goods does not hold for Mexican data for periods with a managed exchange rate. The relative price of nontradables accounts for up to 70 percent of real exchange rate variability during these periods. The paper also proposes a model in which this fact, and the sudden stops that accompanied the collapse of Mexico's managed exchange rates, could result from a Fisherian debt-deflation mechanism operating via nontradables prices in economies with dollarized liabilities.
March 1, 2006
Sovereign Borrowing Cost and the IMF’s Data Standards Initiatives
Description: The effects of the IMF's data standards initiatives on sovereign borrowing costs in private capital markets are investigated for 26 emerging market and developing countries. Stable and significant panel econometric estimates indicate that subscription to the Special Data Dissemination Standard (SDDS) reduces launch spreads by an average of 20 percent while participation in the General Data Dissemination System (GDDS) reduces spreads for those countries with access to capital markets by an average of 8 percent. These estimates correspond to discounts of some 50 and 20 basis points, respectively. Evidence of similar discounts is also found when launch yields are analyzed.
March 1, 2006
Energy, the Exchange Rate, and the Economy: Macroeconomic Benefits of Canada’s Oil Sands Production
Description: This paper describes potential benefits from Canada's expanding oil sands production, higher energy exports, and further improvements in the terms of trade. Contrary to the previous Canadian exchange rate literature, this paper finds that both energy and nonenergy commodity prices have an influence on the Canadian dollar, and some upward pressure on the exchange rate would therefore be expected. Model results suggest, however, that the impact on other tradable goods exports is limited.
March 1, 2006
The Utilization-Adjusted Output Gap: Is the Russian Economy Overheating?
Description: This paper estimates the output gap in Russia using a utilization-adjusted production function approach, which we argue is preferable to traditional output gap methods. The approach amounts to (1) using available surveys to estimate the "natural rates" of capacity and labor utilization above which inflation begins to accelerate; (2) estimating a production function with utilization-adjusted capital and labor inputs; and (3) defining potential output as the level of output obtained when both capital and labor are at their estimated natural rates. The results suggest that the output gap in Russia was negative between 1999 and 2003, but may have recently become positive, thus contributing to inflationary pressures.
March 1, 2006
Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach
Description: This paper proposes a probabilistic approach to public debt sustainability analysis (DSA) using "fan charts." These depict the magnitude of risks-upside and downside-surrounding public debt projections as a result of uncertain economic conditions and policies. We propose a simulation algorithm for the path of public debt under realistic shock configurations, combining pure economic disturbances (to growth, interest rates, and exchange rates), the endogenous policy response to these, and the possible shocks arising from fiscal policy itself. The paper emphasizes the role of fiscal behavior, as well as the structure of disturbances facing the economy and due to fiscal policy, in shaping the risk profile of public debt. Fan charts for debt are derived from the "marriage" between the pattern of shocks on the one hand and the endogenous response of fiscal policy on the other. Applications to Argentina, Brazil, Mexico, South Africa, and Turkey are used to illustrate the approach and its limitations.
March 1, 2006
Toward a Lender of First Resort
Description: If interest rates (country spreads) rise, debt can rapidly be subject to a snowball effect, which becomes self-fulfilling with regard to the fundamentals themselves. This is a market imperfection, because we cannot be confident that the unaided market will choose the "good" over the "bad" equilibrium. We propose a policy intervention to deal with this structural weakness in the mechanisms of international capital flows. This is based on a simple taxonomy that breaks down the origin of crises into three components: confidence (spreads and currency crisis), fundamentals (real growth rate), and economic policy (primary deficit). Theory then suggests a set of circumstances in which a lender of first resort would be desirable. The policy would seek to short-circuit confidence crises, partly by using IMF support to improve ex ante incentives. Theory also illuminates the potential role of collective action clauses in reducing the risk of self-fulfilling debt crises.
March 1, 2006
Sovereign Insurance and Program Design: What is Optimal for the Sovereign?
Description: The design of the optimal sovereign insurance contract is analyzed when: the sovereign chooses the contract; effort is not contractible; shocks are of uncertain magnitude; the sovereign can save; and the sovereign can default. Under these conditions: i) an ex ante premium leads to higher coverage; ii) the premium increases with the sovereign's incentive to take risks; iii) a deductible is chosen to limit moral hazard; iv) the deductible-to-support ratio is decreasing with the size of the realized shock; and v) the change in the choice of savings when insurance is available is ambiguous, as there is a trade-off between inducing higher effort and increasing the likelihood of default.