Working Papers
2005
February 1, 2005
Exits from Heavily Managed Exchange Rate Regimes
Description: A widely held nostrum is that countries should exit heavily managed exchange rate regimes when the going is good, rather than when the exchange rate is under pressure to depreciate. Have countries followed this advice in practice? And, if so, how good has the going been? We find that in the past 25 years or so, almost all exits to more flexible regimes were followed by a depreciation of the exchange rate, and that exits were about evenly divided between disorderly and orderly cases. A logit econometric model, indicates that the general circumstances of orderly and disorderly exits have been broadly similar: an overvalued real exchange rate, falling reserves, a difficult fiscal position, and high world interest rates. Wellestablished pegs were less likely to end.
February 1, 2005
Hedging Foreign Exchange Risk in Chile: Markets and Instruments
Description: Policy makers have expressed interest in fostering the development of local foreign exchange derivatives markets with a view to reducing risks arising from currency mismatches between assets and liabilities in the corporate sector. This paper assesses foreign exchange exposure in the corporate sector in Chile, analyzes the current state of the foreign exchange derivatives market in Chile, and argues that liquid and developed foreign exchange derivatives markets can help promote financial stability.
February 1, 2005
Regional Trade Arrangements in Africa: Past Performance and the Way Forward
Description: Regional trade arrangements (RTAs) in Africa have been ineffective in promoting trade and foreign direct investment. Relatively high external trade barriers and low resource complementarity between member countries limit both intra- and extraregional trade. Small market size, poor transport facilities and high trading costs make it difficult for African countries to reap the potential benefits of RTAs. To increase regional trade and investment, African countries need to undertake more broad-based liberalization and streamline existing RTAs, supported by improvements in infrastructure and trade facilitation. Early action to strengthen the domestic revenue base would help address concerns over revenue losses from trade liberalization.
February 1, 2005
The Rise of U.S. Antidumping Activity in Historical Perspective
Description: Empirical studies of antidumping activity focus almost exclusively on the period since 1980. This paper puts recent U.S. antidumping experience in historical context by studying the determinants of annual case filings over the past half century. The conventional view that few antidumping cases existed prior to 1980 is not correct, although most did not result in the imposition of duties. The increased number of cases in recent decades largely reflects petitions that target multiple source countries; the number of imported products involved has actually fallen since the mid 1980s. The annual number of antidumping cases is influenced by the unemployment rate, the exchange rate, import penetration (closely related to the decline in average tariffs), and changes in the antidumping law and enforcement in the early 1980s.
February 1, 2005
Issues in Intergovernmental Fiscal Relations in China
Description: The paper reviews the changing nature of intergovernmental fiscal relations between the provinces and the central government in China over the past two decades and provides an assessment of the success of previous reforms in meeting their objectives. Key existing weaknesses in the current system that undermine these objectives are identified. Alternative instruments, procedures, rules, and incentives that could result in better outcomes are outlined by drawing upon relevant cross-country experiences.
February 1, 2005
Eurosclerosis or Financial Collapse: Why Did Swedish Incomes Fall Behind?
Description: Sweden represents an archetypal welfare state economy, with extensive government safety nets. Some scholars have attributed a decline in its per capita income ranking since 1970 to "eurosclerosis" or sluggish growth caused by distortionary policies. This paper argues rather, that the permanent loss in output following Sweden's banking crisis in the early 1990s explains the decline in its per capita GDP ratings. The paper finds no macroeconomic evidence that welfare state policies have deterred growth. The results warn that empirical growth analyses should distinguish between trend output growth and permanent output loss associated, for example, with financial crises.
February 1, 2005
Inequality, Poverty, and Growth: Cross-Country Evidence
Description: This paper examines the empirical relationship between inequality and growth, and analyzes the impacts of growth, inequality, and government spending on poverty reduction. A new panel dataset has been assembled on inequality and poverty that reduces measurement error and ensures comparability across countries and over time. The empirical results in this paper challenge the belief that income inequality has a negative effect on growth and confirm the validity of the Kuznets curve. Credit market imperfections in low- and medium-income countries are identified as the likely reason for the positive link between inequality and growth over the short-to-medium term. In the long term, inequality may have an adverse impact on growth.
February 1, 2005
Exchange Rates in the New EU Accession Countries: What Have We Learned from the Forerunners?
Description: Estimation and simulation of sustainable real exchange rates in some of the new EU accession countries point to potential difficulties in sustaining the ERM2 regime if entered too soon and with weak policies. According to the estimates, the Czech, Hungarian, and Polish currencies were overvalued in 2003. Simulations, conditional on large-model macroeconomic projections, suggest that under current policies those currencies would be unlikely to stay within the ERM2 stability corridor during 2004-10. In-sample simulations for Greece, Portugal, and Spain indicate both a much smaller misalignment of national currencies prior to ERM2, and a more stable path of real exchange rates over the medium term than can be expected for the new accession countries.
February 1, 2005
Monetary Policy and Corporate Behavior in India
Description: The paper examines the association and corporate behavior for a sample of manufacturing firms in India for the post-reform period 1992-2003. The findings suggest that a contractionary monetary policy lowers overall debt including bank debt, although the lagged response is positive, and listed firms increase their short-term bank borrowings, after monetary tightening. The responses of corporates to a monetary contraction in the post-1997 period has been more pronounced. A disaggregated analysis of responses of firms according to size and leverage largely validates these findings. Two policy implications emerge from the analysis. First, the interest rate transmission channel has strengthened since 1998, and, second, corporates in India, especially listed ones, seem to exhibit relationship lending.
February 1, 2005
Revenue Forecasting—How is it done? Results from a Survey of Low-Income Countries
Description: This paper takes stock of revenue forecasting practices in low-income countries, and provides a comprehensive and condensed account of the revenue forecasting process. Based on a new dataset on 34 low-income countries, it catalogues forecasting practices and procedures from inception until budget submission, focusing primarily on institutional aspects and processes. The paper also synthesizes three key characteristics of forecasting practices, formality, organizational simplicity, and transparency, and empirically explores their determinants. High levels of country corruption are associated with less formal and less transparent forecasts. Past IMF involvement in a country increases the formality of the process, but does not improve public access to information.