Working Papers
2002
December 1, 2002
Tax Revenue Forecasts in IMF-Supported Programs
Description: Year-ahead forecasts of tax revenues incorporated into IMF programs for low-income countries, from 1993 to 1999, are compared with the corresponding outturns. The accuracy of these forecasts was low, with a mean absolute percentage error of 16 percent. Forecasts of tax revenues as a percentage of GDP were biased upwards, but there was no significant bias in forecasts of nominal tax revenues. Upward bias in the tax revenue forecasts was associated with subsequent interruptions to the program, and the length of time between the commencement of the program and the beginning of the year for which the forecast was made.
December 1, 2002
Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions
Description: Many inflation stabilizations succeed only temporarily. Using a sample of 51 episodes of stabilization from inflation levels above 40 percent, we show that most of the failures are explained by bad luck, unfavorable initial conditions, and inadequate political institutions. The evolution of trading partners' demand and U.S. interest rates captures the effect of bad luck. Past inflation affects the outcome in two different ways: a long history of high inflation makes failure more likely, while a high level of inflation prior to stabilization increases the chances of success. Countries with short-lived political institutions, a weak executive authority, and proportional electoral rules also tend to fail. After controlling for all these factors, we find that exchange-rate-based stabilizations are more likely to succeed. These findings are robust across measures of failure (two dichotomous and one continuous), sample selection criteria, and estimation techniques, including Heckman's correction for the endogeneity of the anchor.
December 1, 2002
Monetary Policy Credibility and the Unemployment-Inflation Tradeoff: Some Evidence From 17 Industrial Countries
Description: Using data on long-term interest rates for 17 industrial countries, this paper develops some simple measures of monetary policy credibility and then tests if such measures improve the out-of-sample forecasts of conventional models of the inflation-unemployment process. The results provide some evidence in favor of the Lucas critique by showing that the short-run unemployment-inflation trade-off tends to improve in countries that are successful in providing low and stable inflation.
December 1, 2002
International Liquidity and the Role of the SDR in the International Monetary System
Description: This paper describes how the changed conditions in the international monetary system have undermined the role originally envisaged for the SDR. It argues that the concept of a global stock of international liquidity, which was fundamental to the creation of the SDR, is now no longer relevant. Nonetheless, there are good reasons to satisfy part of the growing demand for international reserves with SDR allocations: (i) there are efficiency gains, as SDRs can be created at zero resource cost, and thus obviate the need for countries to run current account surpluses or engage in expensive borrowing to obtain reserves, and (ii) there would be a reduction in systemic risk, as SDRs would substitute to some extent for borrowed reserves, which are less reliable and predictable source of reserves, especially in times of crisis.
December 1, 2002
Population Aging and Long-Term Fiscal Sustainability in Austria
Description: Austria faces significant population aging. This will increase public spending on pensions, health care, and long-term care, while tax and social security revenues will fall. This paper analyzes the fiscal burden facing Austria due to aging and the policy steps necessary to address it. The paper finds that Austria is not well prepared to meet the fiscal burden of aging and that fiscal sustainability is threatened, even under fairly optimistic assumptions about the effects of recent pension and labor market reforms. Consequently, to ensure long-term sustainability, pension reform must go further and other saving measures might also be necessary.
December 1, 2002
Implications of Migrationon Income and Welfare of Nationals
Description: As labor has become more mobile in today's world, it is important to understand the income and welfare of nationals regardless of their residence. This paper develops two key concepts, gross migration-corrected product (GMP) and welfare cost of migration, and calculates them using New Zealand data. Growth performance measured by New Zealanders' income has been clearly better than suggested by the GDP. The welfare cost associated with a marginal change in the tax rate appears quite high.
December 1, 2002
WTO Financial Services Commitments: Determinants and Impacton Financial Stability
Description: The paper investigates the factors that have influenced WTO members to take on their chosen level of liberalization commitments in the framework of liberalization of trade in financial services and the impact of such commitments on financial sector stability. The most important factors are economic growth, current account, trends in banking sector development, policy restrictiveness, and peer group effects. The econometric evidence suggests that more liberal commitments may be associated with greater vulnerability to currency and banking crises-most likely a short-term effect, which should be mitigated with time through increased market efficiency and better resource allocation.
December 1, 2002
A Balance Sheet Approach to Financial Crisis
Description: The paper lays out an analytical framework for understanding crises in emerging markets based on examination of stock variables in the aggregate balance sheet of a country and the balance sheets of its main sectors (assets and liabilities). It focuses on the risks created by maturity, currency, and capital structure mismatches. This framework draws attention to the vulnerabilities created by debts among residents, particularly those denominated in foreign currency, and it helps to explain how problems in one sector can spill over into other sectors, eventually triggering an external balance of payments crisis. The paper also discusses the potential of macroeconomic policies and official intervention to mitigate the cost of such a crisis.
Notes: See also: The Balance Sheet Approach and its Applications at the Fund, June 30, 2003
December 1, 2002
Modis: A Market-Oriented Deposit Insurance Scheme
Description: This paper argues that an optimal deposit insurance scheme would allow the level of insurance coverage to be determined by the market. Based on this principle, the paper proposes an insurance scheme that minimizes distortions and embodies fairness and credibility, two essential characteristics of a viable and effective deposit insurance scheme. Using a simple model for the determination of the optimal level of insurance coverage, it is shown that the optimal coverage is higher for developing compared to developed countries; a condition that is broadly satisfied by prevailing deposit insurance practices around the world.
December 1, 2002
The Use of Credit Ceilings in the Presence of Indirect Monetary Instruments: An Analytical Framework
Description: In this paper, we introduce credit ceilings in the standard model of the money multiplier and analyze their role in central bank's management of money supply in the presence of indirect monetary instruments. We show that under a regime of total credit ceilings, their optimal value equals the desired growth rate of the adjusted monetary base. Under a regime of partial credit ceilings, their optimal value depends on the desired growth rate of the adjusted monetary base, the degree of substitutability between the regulated and unregulated types of banks' earning assets, and the autonomous growth rate of the latter.