Working Papers
2001
October 1, 2001
The Russian Financial Crisis and its Consequences for Central Asia
Description: This paper reviews the economic conditions in central Asia at the time of the Russian financial crisis of August 1998; the channels by which the crisis was transmitted to the central Asian region; and the policy responses. The paper concludes that, while real exchange rates of central Asian national currencies vis-à-vis the Russian ruble have returned to their pre-crisis levels following the nominal devaluations that ensued, other indicators of external competitiveness, such as unit labor cost indices, suggest the need for further surveillance in this area. Also, it is not yet clear if full exchange rate flexibility has been established in central Asia despite the protracted and costly exits from the nominal exchange rates in place at the time of the crisis. Finally, the debt-to-GDP ratios in central Asia, which grew rapidly between 1998 and 1999 in the context of large exchange rate adjustments, remain a challenge for the Tajik and Kyrgyz authorities, in particular.
October 1, 2001
Inflation Dynamics in Madagascar, 1971-2000
Description: The paper analyzes the dynamics of inflation in Madagascar in the period 1971-2000, applying cointegration analysis and error correction modeling. The empirical results, based on quarterly data, confirm that there exists a stable money demand relationship, as well as a purchasing power relationship in the long run. The former enters the short-run dynamics of inflation and money growth, while the latter affects the short-run dynamics of the exchange rate only. We also find that an appreciation has a direct negative impact on inflation and that inflation inertia is important. In addition, we conduct FIML estimation of the system and trace the impulse responses to various shocks.
October 1, 2001
Emerging Market Bond Spreads and Sovereign Credit Ratings: Reconciling Market Views with Economic Fundamentals
Description: This paper uses a panel data estimation of a simple univariate model of sovereign spreads on ratings to analyze statistically significant deviations from the estimated relationship. We find evidence of an asymmetric adjustment of spreads and ratings when such deviations are significant. In addition, the paper illustrates how significant disagreements between market and rating agencies' views can be used as a signal that further technical and sovereign analysis is warranted. For instance, we find that spreads were "excessively low" for most emerging markets before the Asian crisis. More recently, spreads were "excessively high" for a number of emerging markets.
October 1, 2001
Trade in the Mashreq: An Empirical Examination
Description: This paper provides a framework for understanding trade patterns in the Mashreq. An augmented gravity model is used to compare actual with expected levels of trade. Trade barriers, political uncertainty, and over-appreciation of domestic currencies seem to explain low levels of international trade. At the intra-regional level, specific trade barriers between Israel and other Mashreq countries reduce further levels of trade. Quite surprisingly, removing Israel from the sample leads to higher actual intra-regional trade than predicted. The analysis suggests that trade liberalization, correction of currency misalignments, reduction of political uncertainty, and improved trade relations with Israel would boost trade in the region.
October 1, 2001
Economic and Environmental Benefits of Eliminating Log Export Bans—The Case of Costa Rica
Description: An increasing number of tropical timber producing nations have enacted bans on export of logs. Proponents argue that a log export ban is a second-best policy tool for addressing environmental externalities; it also creates more jobs and improves scale efficiencies domestically. Theoretical arguments suggest that log export bans are largely incapable of achieving their objectives. However, little quantitative evidence exists. The authors maintain that eliminating log export bans in Costa Rica could generate economic gains as high as $14 million annually in addition to the environmental benefits.
October 1, 2001
Trade Integration and Political Turbulence: Environmental Policy Consequences
Description: This paper seeks to contribute to the unresolved issue of the effect of economic integration on environmental policy. In particular, we discuss the joint impact of trade openness and political uncertainty. Our theory predicts that the effect of trade integreation on the environment is conditional on the degree of political uncertainty. Trade integration raises the stringency of environmental policies, but the effect is reduced when the degree of political uncertainty is great. Political uncertainty has a positive effect on environmental policy as it reduces lobbying efforts. Applying our model to a unique data set of primarily developing countries, the empirical findings support the theory and are robust under alterntive specifications.
October 1, 2001
Implementation of Monetary Policy and the Central Bank's Balance Sheet
Description: This paper discusses how the choice of central banks' operating targets influences the use of their monetary policy instruments and how the latter affect the central bank's balance sheet. This is of particular interest, since the monetary conditionality in IMF-supported programs has traditionally been linked to central bank balance sheet items. Quantity targeting tends to be practiced today mostly in countries in which money markets are not yet well-developed or a monetary aggregate is used as the intermediate target. Most other central banks prefer to target a short-term interest rate, which results in day-to-day changes in balance sheet items becoming endogenous.
September 17, 2001
Subsidy Reforms and Poverty Alleviation
Description: This paper presents a general framework for characterizing the optimal pattern of subsidies for poverty alleviation under budgetary constraints and suggests possible reforms for the existing pattern of subsidies. The government may subsidize or tax goods in order to meet its objectives. The paper introduces the concept of a consumer equilibrium and shows that there are cases of equilibria in which reforms can generate not only fiscal savings but also Pareto improve the welfare of both poor and wealthy consumers.
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