Working Papers
2002
October 1, 2002
Moral Hazard and International Crisis Lending: A Test
Description: We test for the existence of a moral hazard effect attributable to official crisis lending by analyzing the evolution of sovereign bond spreads in emerging markets before and after the Russian crisis. The nonbailout of Russia in August 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets. In the presence of moral hazard, such an event should raise not only the level of spreads, but also the sensitivity with which spreads reflect fundamentals as well as their cross-country dispersion. We find strong evidence for all three effects.
October 1, 2002
Economic Transition, Entrepreneurial Capacity, and Intergenerational Distribution
Description: A defining feature of transition economies is the expansion of the private sector. Motivated by the observation that new enterprises in transition economies seem to have a strong preference for recruiting young people, this paper studies intergenerational redistribution following from market reforms that stimulate private sector activity and firm creation. We implement a theoretical model and find that in some cases more than half of the current working age population may be made worse off by an increase in entrepreneurial capacity. This may help explain why market reforms have been voted down despite their long-run benefits.
October 1, 2002
A Comparative Analysis of Government Social Spending Indicators and Their Correlation with Social Outcomes in Sub-Saharan Africa
Description: This paper analyzes trends in social indicators in sub-Saharan Africa (SSA) and their correlation with the three most widely used scaled measures of government social spending: in per capita terms, as a percentage of GDP, and as a percentage of total government expenditure. On the basis of a regional data set matching health and education outcome indicators with government spending on those sectors, cross-country statistical analysis shows spending both per capita and as a percent of GDP to be of some relevance to social outcomes, but not the share of social spending in budgetary allocations. The policy implications concern not only governments in the region, but also the international donor community for its role in supporting social programs in SSA.
October 1, 2002
The ECB and Euro-Area Enlargement
Description: The likely enlargement of euro-area membership will radically change the environment under which monetary policy will be made in the euro area. Within less than a decade, the number of member countries in the euro area could more than double, with the vast majority of accession countries being relatively small in economic terms, compared with current members. Absent reforms, such a significant but asymmetric expansion could impede the effectiveness of the institutional policymaking process of the European Central Bank (ECB) and be seen by some as resulting in the overrepresentation of small member countries in the ECB Council. The paper illustrates these issues, describes the principles on which reforms of the ECB statute could build, and discusses four specific institutional reform scenarios. The analysis coincides with the ECB Council being scheduled to present suggestions for reform by late 2002.
October 1, 2002
Transparency and International Investor Behavior
Description: Does country "transparency" affect international portfolio investment? We examine this and related questions using a unique micro dataset on international portfolio holdings. We employ various indices of government and corporate transparency, focusing on the availability and quality of information. We find that emerging market equity funds hold fewer assets in less transparent countries. Herding among funds is somewhat less prevalent in more transparent countries. During the Asian and Russian crises, emerging market funds withdrew more strongly from less transparent countries after controlling for other risk factors. However, funds tend to react less strongly to news from more opaque markets.
October 1, 2002
The Missing Globalization Puzzle
Description: The failure of declining trade-related costs to be reflected in estimates of the standard gravity model of bilateral trade might be called the "missing globalization puzzle." This puzzle is most apparent in the estimated distance coefficients found in the literature, which show no evidence of declining in absolute value over time. In contrast, we find evidence of globalization, on both cross-section and panel data, reflected in a variety of measures of geography. Our estimation procedure is consistent with recent theoretical developments that emphasize the importance of relative costs for determining bilateral trade patterns. But the main reason our findings differ from previous studies is our nonlinear specification, which has a number of advantages over the standard log-linear specification.
October 1, 2002
Sovereign Credit Ratings Methodology: An Evaluation
Description: This paper describes and evaluates the sovereign credit ratings methodologies of Standard & Poor's, Moody's Investors Service, and Fitch Ratings. A simple definition of ratings failure-based on ratings stability-is proposed and tested, pointing to falling failure rates, consistent upside bias, and strong interagency correlation. Possible causes of ratings failure are separated into informational, analytical, revenue bias, and other incentive problems, each of which is discussed. The paper seeks to highlight methodological developments after the Asian crisis, particularly with regard to the estimation of contingent liabilities and the assessment of international reserves adequacy.
October 1, 2002
Exchange Rate Responses to Inflation in Bangladesh
Description: This paper investigates the exchange rate responses to inflation in Bangladesh during the period from 1972-73 to 1999. Both annual and monthly data are used in the investigation. The results suggest that past consumer price inflation generally led to currency devaluation, measured as a decline in the value of the currency in terms of the trade-weighted nominal effective exchange rate. The effect of inflation on devaluation, however, became weaker following the financial reforms undertaken in the early 1980s. The effect of devaluation on inflation was not significant, and this result remained robust throughout the sample period.
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