Working Papers
2004
March 1, 2004
Assessing Early Warning Systems: How Have they Worked in Practice?
Description: Since 1999, the IMF's staff has been tracking several early-warning-system (EWS) models of currency crisis. The results have been mixed. One of the long-horizon models has performed well relative to pure guesswork and to available non-model-based forecasts, such as agency ratings and private analysts' currency crisis risk scores. The data do not speak clearly on the other long-horizon EWS model. The two short-horizon private sector models generally performed poorly.
March 1, 2004
Missing Link: Volatility and the Debt Intolerance Paradox
Description: A striking feature of sovereign lending is that many countries with moderate debt-to-income ratios systematically face higher spreads and more stringent borrowing constraints than others with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign reputation and countries' distinct credit histories. This paper provides theoretical and empirical evidence to show that differences in underlying macroeconomic volatility are key. While volatility increases the need for international borrowing to help smooth domestic consumption, the ability to borrow is constrained by the higher default risk that volatility engenders.
March 1, 2004
The Role of Stock Markets in Current Account Dynamics: a Time-Series Approach
Description: This paper develops a simple model to study the impact of stock markets on the current account. A closed-form solution for the current account is derived from the optimal portfolio and consumption/saving choices of a representative agent. Formally, the model can be seen as a stock market-augmented version of the "fundamental equation of the current account" popularized by Jeffrey Sachs. It appears to shed light on recent developments in the U.S. current account deficit. The model also shows how the current account may help predict future stock market performance and/or endowment streams.
March 1, 2004
Nonresident Deposits in India: In Search of Return?
Description: This paper analyzes trends in the accumulation of NRI (nonresident Indian) deposits and investigates the determinants of these inflows. It finds that monthly deposit flows have been quite stable since the 1991 crisis; nevertheless, there have been occasions when monthly flows turned negative in the short run, coinciding with adverse domestic or external events. Econometric analysis shows that the NRI deposits are influenced by standard risk and return variables. In particular, NRI deposits respond positively to changes in relative interest rates on NRI deposits and LIBOR; negatively to political and geopolitical uncertainties, such as the government resigning in mid-term, and tensions on India's borders; and negatively to adverse external events, such as the Asian crisis.
March 1, 2004
A Multivariate Filter for Measuring Potential Output and the NAIRU Application to the Czech Republic
Description: This paper presents a multivariate (MV) methodology for obtaining measures of excess demand that can facilitate discussion of monetary policy issues and improve policy decisions. Using data for the Czech Republic, a growing economy undergoing major structural change, it shows how the use of more information to condition the paths of potential output and the non accelerating inflation rate of unemployment (NAIRU) improves on univariate methods as the Hodrick-Prescott (HP) filter.
March 1, 2004
Debt Crises and the Development of International Capital Markets
Description: Crises on external sovereign debt are typically defined as defaults. Such a definition accurately captures debt-servicing difficulties in the 1980s, a period of numerous defaults on bank loans. However, defining defaults as debt crises is problematic for the 1990s, when sovereign bond markets emerged. In contrast to the 1980s, the 1990s are characterized by significant foreign debt-servicing difficulties but fewer sovereign defaults. In order to capture this evolution of debt markets, we define debt crises as events occurring when either a country defaults or its bond spreads are above a critical threshold. We find that our definition outperforms the default-based definition in capturing debt-servicing difficulties and, consequently, in fitting the post-1994 period. In particular, liquidity indicators are significant in explaining our definition of debt crises, while they do not play any role in explaining defaults after 1994.
March 1, 2004
And Schumpeter Said, "This is How Thou Shalt Grow": Further Quest for Economic Growth in Poor Countries
Description: The paper reviews the “stylized facts” on economic growth gathered by Easterly and Levine in their 2001 joint paper and illustrates some of the points made on the basis of data from the IMF’s World Economic Outlook on real growth and per capita GDP since 1970. The data show that the growth performance of many poor countries has been disappointing: most of the “developing” world, especially sub-Saharan Africa, has been getting poorer while the advanced economies have been getting richer. To reverse this trend requires finding ways to raise total factor productivity in poor countries; in turn, this implies letting entrepreneurs innovate—in the Schumpeterian sense—in order to bring about structural changes in the economy. The conclusion highlights several essential steps in creating a favorable environment for innovation and growth.
March 1, 2004
Autocorrelation-Corrected Standard Errors in Panel Probits: An Application to Currency Crisis Prediction
Description: Many estimates of early-warning-system (EWS) models of currency crisis have reported incorrect standard errors because of serial correlation in the context of panel probit regressions. This paper documents the magnitude of the problem, proposes and tests a solution, and applies it to previously published EWS estimates. We find that (1) the uncorrected probit estimates substantially underestimate the true standard errors, by up to a factor of four; (2) a heteroskedasicity- and autocorrelation-corrected (HAC) procedure produces accurate estimates; and (3) most variables from the original models remain significant, though substantially less so than had been previously thought.
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