Working Papers
2002
November 1, 2002
Oil Revenue Assignments: Country Experiences and Issues
Description: Based on country experiences, the paper assesses policy options to assign oil revenues to subnational governments (SNGs). The literature recommends that oil revenues be centralized. Given political economy considerations, this paper suggests that a possible alternative is to assign stable oil-tax bases to oil-producing SNGs, supplementing these with predictable transfers from the center. Although commonly used, oil revenue-sharing arrangements are the least preferable solution, as they complicate macroeconomic management and do not provide stable financing. Revenue sharing also does not diffuse separatist tendencies, since oil-producing SNGs would still be better off by keeping their oil revenues in full.
November 1, 2002
International Stock Returns and Market Integration: A Regional Perspective
Description: We investigate the relative importance of country and industry effects in international stock returns, with the innovation that we decompose country effects into region and within-region country effects. We divide the global stock market into the Americas, Asia, and Europe and find that most of the variation explained by country effects is actually due to region effects. Over time, these region effects have fallen. Within regions, however, only in Europe has segmentation declined, while it has increased elsewhere. Europe is also the only region where industry effects are now robustly more important than country effects.
November 1, 2002
The Significance of Federal Taxes as Automatic Stabilizers
Description: In this paper, a simple methodology to assess the effectiveness of automatic stabilizers is proposed and empirically tested using French data for the period 1970-2000. The paper concludes that fiscal stabilizers have dampened output variability by approximately 35 45 percent depending on the measure of potential output used. In addition, the results indicate that fiscal stabilizers mainly operated through the reduction of private investment fluctuations from 1970 to 1985, and through the reduction of private consumption variability thereafter. Due to the counterfactual nature of the analysis performed, the simplicity of the theoretical model, and simultaneity issues that might introduce biases, the results can at most be interpreted as approximations of the phenomenon that is analyzed.
November 1, 2002
Modern Hyper- and High Inflations
Description: Since 1947, hyperinflations (by Cagan’s definition) in market economies have been rare. Much more common have been longer inflationary processes with inflation rates above 100 percent per annum. Based on a sample of 133 countries, and using the 100 percent threshold as the basis for a definition of very high inflation episodes, this paper examines the main characteristics of such inflations. Among other things, we find that (i) close to 20 percent of countries have experienced inflation above 100 percent per annum; (ii) higher inflation tends to be more unstable; (iii) in high-inflation countries, the relationship between the fiscal balance and seigniorage is strong both in the short and longrun’s; (iv) inflation inertia decreases as average inflation rises; (v) high-inflation is associated with poor macroeconomic performance; and (vi) stabilizations from high inflation that rely on the exchange rate as the nominal anchor are expansionary.
November 1, 2002
Modeling the Macroeconomic Impact of HIV/AIDS
Description: The paper addresses the impact of HIV/AIDS on per capita output and income, with particular emphasis on the role of labor mobility between the formal and informal sectors, and the impact of the epidemic on investment decisions. The study finds that HIV/AIDS affects both the supply of labor and the demand for labor in the formal sector. Only if there is a significant rise in the capital-labor ratio, will there be an increase in formal sector employment. However, this is associated with a decline in the rate of return to capital. To the extent that companies respond to this by reducing investment, conventional models underestimate the adverse impact on employment, per capita output, and income. The analysis of the impact of HIV/AIDS on output is complemented by an assessment of the impact on income.
November 1, 2002
Tunisia’s Experience with Real Exchange Rate Targeting and the Transition to a Flexible Exchange Rate Regime
Description: Over the past decade or so, Tunisia has experienced a strong economic performance while pursuing a constant real exchange rate rule (CRERR). The limitations of this rule are now beginning to emerge in the context of a more open economy, regional integration, a more market-based monetary policy, and the desire to relax capital controls. This paper explores how Tunisia avoided the pitfalls of real exchange rate targeting as predicted by the theoretical models. By estimating the equilibrium real exchange rate based on fundamental variables and assessing different measures of competitiveness, the paper finds no evidence of a misalignment in the current level of the exchange rate.
November 1, 2002
Institutions Rule: The Primacy of Institutions over Integration and Geography in Economic Development
Description: We estimate the respective contributions of institutions, geography, and trade in determining cross-country income levels using recently developed instruments for institutions and trade. Our results indicate that the quality of institutions "trumps" everything else. Controlling for institutions, geography have at best weak direct effects on incomes, although it has a strong indirect effect through institutions. Similarly, controlling for institutions, trade has a negative, albeit, insignificant direct effect on income, although trade too has a positive effect on institutional quality. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.
November 1, 2002
Dollarization, Monetary Policy, and the Pass-Through
Description: This paper explores how real dollarization (dollar indexing of wages), financial dollarization (dollar denomination of financial contracts), and monetary policy interact in a general equilibrium, new open-economy macroeconomics model with real shocks. Real dollarization is avoided as long as the home monetary authorities conduct monetary policy optimally (maximize local welfare). Suboptimal monetary policies are more likely to induce real dollarization when the correlation between domestic and external shocks is high, since in this case the (presumably optimal) foreign monetary policy guarantees a better level of protection against macroeconomic uncertainty. While real dollarization contributes to financial dollarization, important asymmetries between the two were found.
November 1, 2002
Consolidation and Market Structure in Emerging Market Banking Systems
Description: This paper examines the evolution of market structure in emerging market banking systems during the 1990s. While significant bank consolidation has been taking place in these countries, reflected in a sharp decline in the number of banks, this process has not systematically been associated with increased concentration as measured by standard indices. Moreover, econometric estimates based on the Panzar-Rosse (1987) methodology suggest that, overall, markets have not become less competitive in a sample of eight European and Latin American countries. Lowering barriers to entry, by doing such things as allowing increased participation of foreign banks, appears to have prevented a decline in competitive pressures associated with consolidation.
November 1, 2002
How Does Conditional Aid (Not) Work?
Description: Does policy conditionality worsen domestic welfare, as governments are forced to attempt unpopular reforms resulting in damaging protests, or does conditionality help implement reforms that otherwise would have been impossible? This paper analyzes these questions. Using a game-theoretic framework, it argues that the impact of conditional aid on welfare is nonmonotonic. Sufficiently conditioned aid can enhance the signaling power of reform announcements, thereby deterring protest and enabling reform. In contrast, inadequately conditioned aid may induce a "weak" government to mistakenly attempt reform, resulting in protest and a worsening of domestic welfare relative to the status quo.