Working Papers
2003
May 1, 2003
Retail Bank Interest Rate Pass-Through: Is Chile Atypical?
Description: This paper investigates empirically the pass-through of money market interest rates to retail banking interest rates in Chile, the United States, Canada, Australia, New Zealand, and five European countries. Overall, Chile's pass-through does not appear atypical. Based on a standard error-correction model, we find that, as in most countries considered, Chile's measured pass-through is incomplete. But Chile's pass-through is also faster than in many other countries considered and is comparable to that in the United States. While we find no significant evidence of asymmetry in Chile's pass-through across states of the interest rate or monetary policy cycle, we do find some evidence of parameter instability, around the time of the Asian and Russian crises. However, we do not find evidence that the switch to a more flexible exchange rate regime in 1999 and the "nominalization" of Chile's interest rate targets in 2001 have affected significantly the pass-through process.
May 1, 2003
Measuring the Impact of Distortions in Agricultural Trade in Partial and General Equilibrium
Description: This paper provides quantitative estimates of the impact of removing agricultural support (both tariffs and subsidies) in partial- and general-equilibrium frameworks. The results show that agricultural support in industrial countries is highly distortionary and tariffs have a larger distortionary impact than subsidies. Removal of agricultural support would likely raise the international prices of food, resulting in an increase in the cost of food for many net-food- importing countries, although the increase is generally small. The results also show that most of the benefits from removing agricultural support accrue to the countries that liberalize.
May 1, 2003
Stock Markets and the Real Exchange Rate: An Intertemporal Approach
Description: The paper presents an N-country model with stock markets, in which a closed-form solution for the real exchange rate is derived. Risky asset prices and allocation of risky assets among countries are determined endogenously. Such a framework allows an analysis of how fundamental parameters, such as the variance and covariance of the risky assets or demographic variables, affect the real exchange rate. The predictions of the model are contrasted with the Balassa-Samuelson effect. A new transmission channel of the real exchange rate for parameters such as income on net foreign assets, risk aversion, and risk-hedging opportunities is also explored.
May 1, 2003
Anticipating Credit Events Using Credit Default Swaps, with An Application to Sovereign Debt Crises
Description: In reduced-form pricing models, it is usual to assume a fixed recovery rate to obtain the probability of default from credit default swap prices. An alternative credit risk measure is proposed here: the maximum recovery rate compatible with observed prices. The analysis of the recent debt crisis in Argentina using this methodology shows that the correlation between the maximum recovery rate and implied default probabilities turns negative in advance of the credit event realization. This empirical finding suggests that the maximum recovery rate can be used for constructing early warning indicators of financial distress.
May 1, 2003
Overshooting and Dollarization in the Democratic Republic of the Congo
Description: The paper develops an interpretation of volatile exchange rate movements in a dollarized economy with very high rates of inflation. Differences between the rate of inflation and currency depreciation (over- or undershooting of the exchange rate) are seen as a proxy for changes in the relative demand for domestic and foreign currency. A simple model is calibrated for the Democratic Republic of the Congo in the 1990s and is used to derive estimates of the rate of dollarization.
May 1, 2003
Estimation of the Equilibrium Real Exchange Rate for Malawi
Description: This paper computes Malawi's equilibrium real exchange rate as a function of its fundamentals as derived from economic theory. It finds evidence in favor of the equilibrium approach to exchange rate determination, with several variables (particularly government consumption and real per capita growth) found to drive movements in the time-varying equilibrium real exchange rate. The results also indicate that following a shock there is a rapid reversion of the real exchange rate to its time-varying equilibrium, with a half-life of reversion of about 11 months.
May 1, 2003
Armenia: The Road to Sustained Rapid Growth-Cross-Country Evidence
Description: This study examines the growth determinants and the economic policy challenges that Armenia faces to sustain the rapid growth of the past two years. The paper also seeks to answer the following two questions: Why has Armenia performed relatively better than other transition economies? What are the roles of macroeconomic policies and the level of financial intermediation in explaining growth differences? The paper also draws upon past cross-country experiences by estimating panel regressions on the determinants of growth to make predictions for the Armenian economy.
May 1, 2003
Bayesian Vars: A Survey of the Recent Literature with An Application to the European Monetary System
Description: This paper reviews recent advances in the specification and estimation of Bayesian Vector Autoregressive models (BVARs). After describing the Bayesian principle of estimation, we first present the methodology originally developed by Litterman (1986) and Doan et al. (1984) and review alternative priors. We then discuss extensions of the basic model and address issues in forecasting and structural analysis. An application to the estimation of a system of time-varying reaction functions for four European central banks under the European Monetary System (EMS) illustrates how some of the results previously presented may be applied in practice.
May 1, 2003
Catalyzing Capital Flows: Do IMF-Supported Programs Work As Commitment Devices?
Description: An objective of IMF-supported programs is to help countries improve their access to international capital markets. In this paper, we examine the issue whether IMF-supported programs influence the ability of developing country issuers to tap international bond markets and whether they improve spreads paid on the bonds issued. We find that IMF-supported programs do not provide a uniformly favorable signaling effect-that is, the mere existence of a program supported by the IMF does not act as a strong "seal of good housekeeping." Instead, the evidence is most consistent with a positive effect of IMF-supported programs when they are viewed as likely to lead to policy reform and when undertaken before economic fundamentals have deteriorated significantly. The size of the IMF-supported program matters, but the credibility of a joint commitment by the country and the IMF appears to be critical.
May 1, 2003
Regional Convergence and the Role of Federal Transfers in Canada
Description: Differences in per capita output across Canadian provinces have narrowed less than disparities in per capita income in past decades. Using a panel regression framework, this paper studies the differential impact of federal transfer programs on output convergence. The evidence suggests that while the Employment Insurance (EI) system seems to have had a significant negative effect on output convergence?by discouraging migration within Canada?the Equalization transfers may have helped spur convergence. The EI system, despite reforms introduced in the 1990s, still appears to contain features that deter labor mobility.