Working Papers
2004
October 1, 2004
The Cyclical and Long-Term Behavior of Government Expenditures in Developing Countries
Description: We examine the short- and long-term movements of government spending relative to output in 51 countries. We find that in the short term, the main components of government spending increase with output in about half of the sample countries, with some variation across spending categories and countries. Further, we find that there is a long-term relationship between government spending and output (in line with "Wagner's law") for the majority of countries for at least one spending aggregate. In the short term, we find that power dispersion and government size typically dampen the positive response of government spending to output. Output volatility and financial risk, on the other hand, contribute to the procylicality of government spending.
October 1, 2004
Financial Sector Development in the Middle East and North Africa
Description: Based on data collected on a wide range of financial sector indicators, new indices of financial development for countries in the Middle East and North Africa (MENA) are constructed, encompassing six themes: development of the monetary sector and monetary policy, banking sector development, nonbank financial development, regulation and supervision, financial openness, and institutional quality. The paper finds that the degree of financial development varies across the region. Some countries have relatively well-developed banking sectors and regulatory and supervisory regimes. However, across the region, more needs to be done to reinforce the institutional environment and promote nonbank financial sector development. Based on a subset of indicators, the MENA region is found to compare favorably with a few other regions, but it ranks far behind the industrialized countries and East Asia.
October 1, 2004
Why is Productivity Growth in the Euro Area so Sluggish?
Description: Slow productivity growth has plagued the euro area since the mid-1990s. That is particularly striking in view of the large productivity gains in the United States during the same period. This paper shows that the deceleration in labor productivity in the euro area was caused by structural changes in wage formation that have affected the relative price of labor, increased the labor intensity of growth and, thus, reduced the rate of capital deepening. Technological shocks seem to have played a minor role in explaining slower productivity growth in the euro area. In addition, a surge in capital deepening and, mainly, TFP growth in key service industries in the United States explain a large part of the productivity growth gap between the two regions in the second half of the 1990s.
October 1, 2004
Growth and Convergence in WAEMU Countries
Description: This paper investigates convergence and dynamic effects of human and physical capital on growth, in WAEMU countries. Using recently developed models for panel data and a growth accounting model, the study finds that growth is largely explained by changes in literacy rates and factor accumulation, but not by growth of total factor productivity (TFP). Nevertheless, the panel estimation identifies aid, government spending, credit to the private sector, and openness as positive determinants of TFP growth, and government deficits as a negative determinant. The study also finds that per capita income in lower-income WAEMU countries converge to per capita income in higher-income ones when economic policies are similar. These results suggest opportunities for policymakers to enhance growth and convergence.
October 1, 2004
Deriving Market Expectations for the Euro-Dollar Exchange Rate from Option Prices
Description: Option prices provide valuable information on market expectations. This paper attempts to extract market expectations, as conveyed by an implied risk-neutral probability distribution, from option prices for the dollar-euro exchange rate. Returns' volatilities are inferred from observed and interpolated option prices. To address robustness, two distributions, one from actual data and the other from interpolated data, were computed. The main conclusion of the paper is that traders have wide-ranging expectations, and large movements in either direction would not occur as a surprise. The main implication for monetary policy is that should markets become too volatile, then intervention may be required.
October 1, 2004
A Theory of Workers' Remittances with An Application to Morocco
Description: This paper provides a model on how altruism, "attachment" to the home country, and portfolio diversification may act as potential motives behind workers' remittances. It shows that the level of workers' remittances depends on how great are their degrees of altruism and "attachment" to their home country, and should also depend on interest rate differentials between the home country and the country of residence if portfolio diversification motives are significant in the decision to remit. The model is applied to Morocco using co-integration techniques. The paper then discusses the stability of remittances in Morocco and the policy implications in light of the empirical findings.
October 1, 2004
Work Absence in Europe
Description: Work absence is an important part of the individual decision on actual working hours. This paper focuses on sickness absence in Europe and develops a stylized model where absence is part of the labor-leisure decision made by workers and the production decision made by profit-maximizing firms, with insurance provisions and labor market institutions affecting the costs of absence. The results from a panel of 18 European countries indicate that absence is increased by generous insurance schemes where employers bear little responsibility for their costs. Shorter working hours reduce absence, but flexible working arrangements are preferable if labor supply erosion is a concern.
October 1, 2004
A New Taxonomy of Monetary Regimes
Description: This paper proposes a new taxonomy of monetary regimes defined by the choice and clarity of the nominal anchor. The regimes are as follows: (i) monetary nonautonomy, (ii) weak anchor, (iii) money anchor, (iv) exchange rate peg, (v) full-fledged inflation targeting, (vi) implicit price stability anchor, and (vii) inflation targeting lite. This taxonomy captures the commitment-discretion tradeoffs that lie at the heart of choosing a monetary regime. During the last 15 years the world has moved toward monetary regimes with less discretion. Empirical analysis suggests that country regime choices reflect the level of financial and economic development and recent inflation history.
October 1, 2004
Can Higher Reserves Help Reduce Exchange Rate Volatility?
Description: This paper studies the role of an increase in foreign exchange reserves in reducing currency volatility for emerging market countries. The study employs a panel of 28 countries over the period 1986-2002. Several control variables are introduced in the regressions to account for other factors affecting exchange rate volatility (monetary and external indicators as well as conventional macroeconomic fundamentals). The paper controls for the endogeneity induced by the role of the exchange rate regime, since the regime can affect both the level of reserves and exchange rate volatility. The results provide ample support for the proposition that holding adequate reserves reduces exchange rate volatility. The effect is strong and robust; moreover, it is nonlinear and appears to operate through a signaling effect.
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