Working Papers
2005
August 1, 2005
A Global Perspectiveon External Positions
Description: This paper highlights the increased dispersion in net external positions in recent years, particularly among industrial countries. It provides a simple accounting framework that disentangles the factors driving the accumulation of external assets and liabilities (such as trade imbalances, investment income flows, and capital gains) for major external creditors and debtors. It also examines the factors driving the foreign asset portfolio of international investors, with a special focus on the weight of U.S. liabilities in the rest of the world's stock of external assets. Finally, it relates the empirical evidence to the current debate about the roles of portfolio balance effects and exchange rate adjustment in shaping the external adjustment process.
July 1, 2005
Preferential Trade Agreements in the Asia-Pacific Region
Description: Preferential trade agreements (PTAs) in the Asia-Pacific region have proliferated rapidly over the past five years and are creating a complex web of intersecting bilateral and regional trade agreements. This paper describes the proliferation of these PTAs, discusses their characteristics and implementation, and assesses their potential effects. Realizing the potential gains from Asia-Pacific PTAs requires a commitment to liberalize sensitive sectors, to maintain consistent provisions, and to enforce agreements. Other factors, including administrative complications, also could undermine any potential gains.
July 1, 2005
The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them?
Description: This paper draws attention to inconsistencies in estimating simple monetary policy rules and their implications for policy advice. We simulate a macroeconomic model with a backward reaction function similar to Taylor (1993). We estimate different versions of a policy rule, using these simulated data. Under certain circumstances, estimations document an illusionary presence of a lagged interest rate, or of forward-looking behavior. Our results are consistent with the fact that several authors found very different versions of monetary policy rules, all fitting the U.S. data well. We also survey the literature, providing a list of issues complicating practical use of Taylor rules.
July 1, 2005
Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia
Description: This paper estimates the effects of trade liberalization on plant productivity. In contrast to previous studies, we distinguish between productivity gains arising from lower tariffs on final goods relative to lower tariffs on intermediate inputs. Lower output tariffs can produce productivity gains by inducing tougher import competition whereas cheaper imported inputs can raise productivity via learning, variety, or quality effects. We use Indonesian manufacturing census data from 1991 to 2001, which includes plant-level information on imported inputs. The results show that the largest gains arise from reducing input tariffs. A 10 percentage point fall in output tariffs increases productivity by about 1 percent, whereas an equivalent fall in input tariffs leads to a 3 percent productivity gain for all firms and an 11 percent productivity gain for importing firms.
July 1, 2005
Money Demand and Inflation in Dollarized Economies: The Case of Russia
Description: Money demand in dollarized economies often appears to be highly unstable, making it difficult to forecast and control inflation. In this paper, we show that a stable money demand function for Russia can be found for "effective broad money," which includes an estimate of foreign cash holdings. Moreover, we find that an excess supply of effective broad money is inflationary, while other excess money measures are not, and that effective broad money growth has the strongest and most persistent effect on short-run inflation.
July 1, 2005
Pakistan's Macroeconomic Adjustment and Resumption of Growth, 1999-2004
Description: The main findings are as follows: (1) an increase in private national saving during 2001-03 was the key contributor to the turnaround in Pakistan's external current account during this period; (2) while Pakistan's growth was mainly export-led before 2003-04, it was largely led by domestic demand in 2004, especially consumer demand but also private and public investment; and (3) the structural reforms implemented in Pakistan during the past four years should make the observed strengthening in domestic savings and rise in domestic investment permanent, auguring well for accelerated growth within a sustainable external balance. The country's growth prospects would be further enhanced by a more externally driven growth process, and by an acceleration of structural reforms to further improve productivity and the investment climate.
July 1, 2005
U.S. Tax Reform: An Overview of the Current Debate and Policy Options
Description: In the context of the current tax policy debate in the United States, this paper reviews and discusses some of the main recurrent themes, as well as some of the most important tax reform proposals put forward over the past two decades. It finds that although there seems to be widespread agreement that the current tax system is too complex, unfair, and distortionary, little or no consensus exists on how best to improve it.
July 1, 2005
Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005
Description: This paper estimates bond-by-bond "haircuts"-realized investor losses-in recent debt restructurings in Russia, Ukraine, Pakistan, Ecuador, Argentina, and Uruguay. We consider both external and domestic retructurings. Haircuts are computed as the percentage difference between the present values of old and new instruments, discounted at the yield prevailing immediately after the exchange. We find average haircuts ranging from 13 percent (Uruguay external exchange) to 73 percent (2005 Argentina exchange). We also find within-exchange variations in haircuts, depending on the instrument tendered. With exceptions, domestic residents do not appear to have been treated systematically better (or worse) than foreign residents.
July 1, 2005
Liberalization, Prudential Supervision, and Capital Requirements: The Policy Trade-Offs
Description: While deregulated financial markets and strong competition are commonly viewed as prerequisites for successful economic development, recent empirical evidence suggests that financial liberalization, if not well phased, can lead to costly financial crises. This paper focuses on the roles of minimum capital requirements and prudential supervision in promoting financial stability during financial liberalization. The paper extends the Hellmann, Murdock, and Stiglitz model to analyze the effects of prudential supervision and demonstrates the trade-off between the quality of supervision and the level of minimum capital requirements. Where prudential supervision is poor, higher capital requirements are optimal.
July 1, 2005
Wage Flexibility in Turbulent Times: A Practitioner’s Guide, with an Application to Poland
Description: This paper reviews several methods to measure wage flexibility, and their suitability for evaluating the extent of such flexibility during times of structural change, when wage distributions and wage curves can be particularly volatile. The paper uses nonparametric estimation to capture possible nonlinearities in the wage curve and relaxes the assumption of a stable wage distribution over time by linking the shape of the wage change distribution to macroeconomic variables. The proposed methodology is applied to Polish micro data. The estimates confirm that wages are less elastic in a high-unemployment/low-wage environment. Based on a comparison of actual and counterfactual wage distributions, the effects of nominal wage rigidities on real wages, and thus, on the labor market and the real economy, were limited until 1998, but have been quite significant thereafter.