Working Papers
2005
November 1, 2005
Monitoring and Commitment in Bank Lending Behavior
Description: The paper proposes a theoretical argument on the nature of bank lending, based on the idea that, through commitment and monitoring, banks overcome basic informational asymmetries with borrowers. By bringing together loan commitment theories and credit rationing theories, the paper shows that, within a framework of asymmetric information between lenders and borrowers and under costly termination of lending arrangements, commitment may explain the accumulation of nonperforming loans by banks. Two additional results follow: (i) that banks favor borrowers with well-known production functions and long-term credit history; and (ii) that interest rate spreads may be large if significant market imperfections prevail.
November 1, 2005
Barriers to Capital Accumulation and the Incidence of Child Labor
Description: The World Bank documents an inverse relationship between GDP per capita and child labor participation rates. We construct a life-cycle model with human and physical capital in which parents make a time allocation choice for their child. The model considers two features that have shown potential in explaining differences in states of development across nations. These are a minimum consumption requirement, and barriers to physical capital accumulation. We find the introduction of capital barriers alone is not enough to replicate the aforementioned observation by the World Bank. However, we find the interplay of a minimum consumption requirement and barriers to capital may enhance our understanding of child labor and the poverty of nations. Additionally, we find support for policies aimed at reducing capital barriers as a means to reduce child labor.
November 1, 2005
How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa
Description: The paper analyzes and quantifies the importance of sovereign risk in determining corporate default premia (yield spreads). It also investigates the extent to which the practice by rating agencies and banks of not rating companies higher than their sovereign ("country or sovereign ceiling") is reflected in the yields of South African local-currency-denominated corporate bonds. The main findings are: (i) sovereign risk appears to be the single most important determinant of corporate default premia in South Africa; (ii) the sovereign ceiling (in local-currency terms) does not apply in the spreads of the industrial multinational companies in the sample; and (iii) consistent with rating agency policy, however, the sovereign ceiling appears to apply in the spreads of most financial companies in the sample.
November 1, 2005
Pricing Growth-Indexed Bonds
Description: Growth-indexed bonds have been suggested as a way of reducing the procyclicality of emerging-market countries' fiscal policies and the likelihood of costly debt crises. Investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle. In an effort to reduce such concerns, this article presents a simple way of pricing growth-indexed bonds. As a pleasant by-product, the analysis tracks the quantitative implications of an increase in the share of growth-indexed bonds in total debt, measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued.
November 1, 2005
The Impact on India of Trade Liberalization in the Textiles and Clothing Sector
Description: We analyze the impact of the elimination of textile and clothing (T&C) quotas in 2005 on India. Our simulations suggest that while Indian exports of T&C will continue to expand in the presence of the safeguards on China, they will be affected adversely once these safeguards are lifted. We argue that India could emerge much stronger and expand its trade in T&C at a much faster pace, if some of the key domestic structural weaknesses are overcome.
November 1, 2005
Capital Account Liberalization, Capital Flow Patterns, and Policy Responses in the EU's New Member States
Description: This paper discusses the experience of the EU's eight new member countries (EU8) between 1995 and 2003 when the bulk of capital account liberalization took place, focusing on interest-rate-sensitive portfolio flows and financial flows. It takes stock of the lessons from capital flow patterns to draw policy conclusions. There were two distinct groups in terms of the speed of capital account liberalization: rapid liberalizers and cautious liberalizers. The speed of disinflation and the level of public debt were major determinants of the size of interest-rate-sensitive portfolio inflows. Monetary and exchange rate policies were the main instruments used to react to large interest-sensitive inflows, whereas fiscal tightening was seldom used as a direct reaction to inflows.
November 1, 2005
Financial Globalization and Fiscal Perfomance in Emerging Markets
Description: In recent years financial globalization and benign global market conditions have helped emerging markets in their external financing and budgetary positions. This paper examines three related issues: (i) the importance of the impact of the benign financial environment on fiscal performance; (ii) the likely fiscal impact of a reversal in this environment; and (iii) the potential contribution of fiscal reforms to maintaining favorable market access. The results suggest that the benefits from the benign environment have been substantial and that the potential reversal of the favorable external conditions underlines the need for further fiscal reforms.
November 1, 2005
Does Performance Budgeting Work? An Analytical Review of the Empirical Literature
Description: This paper attempts to ascertain what light the empirical literature sheds on the efficacy of performance budgeting. Performance budgeting refers to procedures or mechanisms intended to strengthen links between the funds provided to public sector entities and their outcomes and/or outputs through the use of formal performance information in resource allocation decision making. The paper seeks to identify and examine the literature on "governmentwide" performance budgeting systems-that is, systems used by central budget decision makers (ministry of finance and political executive) to link the funding they provide to those agencies' performance. Performance budgeting principles are, however, applied not only on a government wide basis, but also in funding systems applied to specific categories of government services. This paper does not attempt to review the empirical literature on all such "sectoral" performance budgeting systems. Rather, it undertakes a case study of the literature on one specific sectoral system-output-based hospital funding systems.
November 1, 2005
The Domestic and Global Impact of Japan's Policies for Growth
Description: Japan is facing a sizable fiscal imbalance against a backdrop of weak trend growth and growing external imbalances in the world economy. This paper examines the possible impact of fiscal adjustment and productivity-enhancing structural reforms on the Japanese and world economies. Simulation results indicate that these could reduce substantially Japan's fiscal imbalance with only limited spillovers to the rest of the world. Specifically, faster productivity growth would help lower Japan's debt and limit the tendency of fiscal consolidation to increase the external surplus. In fact, very rapid productivity growth could potentially lead to a decline in Japan's external surplus and thereby have a positive effect on global imbalance. The modest extent of the spillovers to the rest of the world reflect the small size of the shocks and the diminished size of Japan in the world economy.
October 1, 2005
Estimating China's "Equilibrium" Real Exchange Rate
Description: The number of studies attempting to estimate the "equilibrium" real value of China's currency has proliferated in recent years as the country's presence in world markets has grown. These studies have sought to establish whether or not a significant part of China's competitive prowess can be attributed to the foreign exchange value of the renminbi. Unfortunately, no consensus has emerged because the studies yield a very wide range of estimates. The paper looks at a sample of these studies, with estimates of undervaluation ranging from zero to nearly 50 percent. It attributes the wide variation in these estimates to the influence of such factors as the different methodologies used, explanatory variables included, subjective judgments of the various researchers in deriving their results, and instability in underlying economic relationships, especially in a rapidly developing economy like China.