Working Papers
2001
December 1, 2001
Import-Reducing Effect of Trade Barriers: A Cross-Country Investigation
Description: A comprehensive empirical investigation is carried out to ascertain the import-reducing effect of trade protection barriers. We first present a statistical summary of the status of global trade protection. Then, based on a monopolistic competition trade model and 1994 cross-country data on trade barriers, trade flows, and production, we estimate the import-reducing effect of trade barriers including both tariffs and non-tariff barriers (NTBs). We use the disaggregated cross-country, cross-industry data on manufactured goods and, unlike previous studies, our sample covers a broad range of countries-more than 70 in total-including countries from the most developed ones like those in the Group of Seven to the least developed one, Bangladesh. We specify an empirical model that captures the stylized facts well and helps generate sensible estimates. Our econometric framework is designed to control for the simultaneous determination of trade flows, trade barriers, and production. We find that both tariff and NTBs are quite significant in restricting imports.
December 1, 2001
An Investigation of Output Variance Before and During Inflation Targeting
Description: Since Taylor estimated a trade-off between inflation and output variance, it has been widely accepted that efforts to keep the inflation rate “too low and stable” will likely result in relatively larger output fluctuations. Following the generalized reduction in inflation variance in the 1990s, that concern was rekindled. This study estimates whether conditional output variance has changed in a sample of 12 countries. With the possible exception of Canada, there is no evidence of an increase in output variance. Either output variance has not changed (i.e., in Korea and Singapore) or has fallen (i.e., in Australia and New Zealand).
December 1, 2001
Convertibility Risk: The Precautionary Demand for Foreign Currency in a Crisis
Description: This paper presents theoretical work linking money demand to the perceptions of households about the risk that domestic currency may become inconvertible or that it may be devalued. An empirical investigation of the size of this effect is carried out using both cross section data and then monthly data for Korea to estimate an augmented demand for money equation. It is found that the fear of inconvertibility arising from the 1997 Korean currency crisis may have caused broad money demand to fall by 4-5 percentage points, equivalent to the loss of reserves of $6-72 billion (or about 30 percent of reserves as measured at end-November 1997).
December 1, 2001
Uncovered Interest Parity in Crisis: The Interest Rate Defense in the 1990s
Description: This paper tests for uncovered interest parity (UIP) using daily data for 23 developing and developed countries through the crisis-strewn 1990s. We find that UIP works better on average in the 1990s than in previous eras in the sense that the slope coefficient from a regression of exchange rate changes on interest differentials yields a positive coefficient (which is sometimes insignificantly different from unity). UIP works systematically worse for fixed and flexible exchange rate countries than for crisis countries, but we find no significant differences between rich and poor countries.
December 1, 2001
Corporate Restructuring in Japan: An Event-Study Analysis
Description: The implementation of the Commercial Rehabilitation Law (CRL) on April 1, 2000 was considered a key event in setting up the official infrastructure supporting corporate restructuring in Japan. This study evaluates the stock price impact of restructuring announcements before and after the CRL implementation using event-study analysis. Following the CRL implementation, the results suggest an improvement in market credibility of restructuring announcements based on improvements in disclosure, mergers, and to a lesser extent, labor force reductions. In contrast, credibility of restructuring announcements aimed at reducing excess capital deteriorated.
December 1, 2001
Regional Disparities and Transfer Policies in Russia: Theory and Evidence
Description: In this paper we examine economic disparities across regions in Russia and offer a theoretical treatment of various transfer rules between different regions. We analyze the principle of partial equalization, which implies that the more depressed regions should be subsidized by the more advantaged regions, but, the burden on more prosperous regions should not be excessive. Although, contrary to the partial equalization principle, the gaps between the richer and poorer regions have widened since the transition, there are some signs that this trend could be reversed.
December 1, 2001
Sources of Inflation in Developing Countries
Description: This paper develops stylized facts about the inflation process in developing countries, focusing particularly on the relationship between the exchange rate regime and the sources of inflation. Using annual data from 1964 to 1998 for 53 developing countries, we find that money growth and exchange rate changes-factors typically related to fiscal influences-are far more important in countries with floating exchange rate regimes than in those with fixed exchange rates. Instead, inertial factors dominate the inflation process in developing countries with fixed exchange rate regimes.
December 1, 2001
Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach
Description: This paper studies the effect of instrumental and institutional stabilization of exchange rate volatility on the integration of goods markets. Rather than using data on volume of trade, this paper employs a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities around the world during 1990-2000. We find that the impact of an institutional stabilization-currency board or dollarization-promotes market integration far beyond an instrumental stabilization. Among them, long-term currency unions are more effective than more recent currency boards. All have room to improve relative to a U.S. benchmark.
December 1, 2001
Fiscal Expenditure Policy and Non-Oil Economic Growth: Evidence from GCC Countries
Description: Through the use of a multivariate cointegration and error-correction model, this study investigates the short- and long-run relationship over the past two decades between fiscal expenditure policy and non?oil real GDP growth in member countries of the Gulf Cooperation Council (GCC). Despite the important role of the government, the empirical results do not strongly support that increases in fiscal expenditures tend to slow or accelerate non?oil real growth in these countries. However, the breakdown into current and capital expenditures is useful for assessing the effects of each spending category on short- and long-run non?oil real GDP growth.
December 1, 2001
Risk Diversification in the Credit Portfolio : An Overview of Country Practices
Description: This paper reviews the rules in place in selected countries to limit risk concentrations in the credit portfolio. The paper focuses on a number of issues suggested by international organizations for countries and bank supervisors to consider in imposing standards for risk diversification in the credit portfolio. The issues reviewed for each country are the large exposure limits, the definition of credit exposure (including application on a consolidated basis), and the definition of a group of related borrowers. The paper concludes that most of the countries reviewed set limits on large exposures for banks and define a related group of borrowers in line with recommended international standards. The major differences identified among countries include how to determine the credit exposure, the application of the exposure limits on a consolidated basis, and whether to impose limits on exposure to a specific sector.