Working Papers
1999
December 1, 1999
Assessing External Sustainability in India
Description: This paper examines the solvency and sustainability of India’s external imbalances and analyzes the optimality of its capital flows. We use three approaches: an intertemporal model of the current account that allows for capital controls; a composite model of macroeconomic indicators that yields probabilities of future balance of payments crises; and scenarios that examine the path of the current account consistent with the stabilization of India’s external liability-to-GDP ratio. The results indicate that India’s intertemporal budget constraint is satisfied and that the path of its current account imbalances is sustainable, with some support for the optimality (given capital controls) of its external borrowing.
December 1, 1999
Global Equilibrium Exchange Rates: Euro, Dollar, “Ins,” “Outs,” and Other Major Currencies in a Panel Cointegration Framework
Description: This paper presents a methodology for calculating bilateral equilibrium exchange rates for a panel of currencies in a way that guarantees global consistency. The methodology has three parts: a theoretical model that encompasses the balance of payments and the Balassa-Samuelson approaches to real exchange rate determination; an unobserved components decomposition in a cointegration framework that identifies a time-varying equilibrium real exchange rate; and an algebraic transformation that extracts bilateral equilibrium nominal rates. The results uncover that, by the start of Stage III of the European Economic and Monetary Union (EMU), the euro was significantly undervalued against the dollar and the pound, but overvalued against the yen. The paper also shows that the four major EMU currencies locked their parities with the euro at a rate close to equilibrium.
December 1, 1999
Risk, Resources, and Education—Public Versus Private Financing of Higher Education
Description: This paper develops a public education scheme that takes uncertainty aspects of private educational investments explicitly into account. In the author’s framework, the social merits of public education schemes are related to the lack of markets in which students can insure against educational risks. A case is made for tuition fees that depend on the expected returns of investments in education. The consideration of uncertainty provides a neglected link between educational choice, resource endowment, and productivity growth, which may serve to redefine the public role of education financing.
December 1, 1999
Global Liquidity and Asset Prices: Measurement, Implications, and Spillovers
Description: Much recent commentary suggests that global liquidity has influenced financial conditions in the major international markets to an important degree, and that excess liquidity in one financial center can influence financial conditions elsewhere. Little formal research has addressed these issues, however. In this paper, we use three indexes of liquidity (money growth) in the Group of Seven industrial countries to explore the international dimension of the relationship between liquidity and asset returns. Evidence suggests that an increase in G-7 liquidity is consistent with a decline in G-7 real interest rates and an increase in G-7 real stock returns. There is also evidence of liquidity spillovers across countries.
December 1, 1999
The Disappearing Openness-Inflation Relationship: A Cross-Country Analysis of Inflation Rates
Description: The robust negative correlation between openness and inflation found in cross-country data for the 1970s and 1980s has disappeared in the 1990s. There is now a strong negative correlation of inflation with per capita GDP, as higher-income countries have achieved significant disinflation not emulated by lower-income countries. Since 1973, the most consistent finding is that floating exchange rate regimes are associated with inflation rates at least 10 percent a year higher than pegged exchange rate regimes, after allowing for other factors. There is also a consistent positive correlation between land area and inflation.
December 1, 1999
The 1994 Mexican Economic Crisis: The Role of Government Expenditure and Relative Prices
Description: This paper discusses the role of a country’s fiscal stance in weakening the financial underpinnings of an open economy with a quasi-fixed nominal exchange rate, even where the overall fiscal deficit remains unchanged, or even narrows. The paper cites the role of expanding government operations in reducing the relative price of traded goods. A marked increase in government expenditure and taxation is associated with increased production costs, excess demand for nontraded goods, and a deterioration in the financial health of the traded goods sector. The paper demonstrates that, in contrast to the current economic situation in Mexico, the period leading to the 1994 crisis closely parallels these stylized facts.
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1999
November 1, 1999
Suriname: A Case Study of High Inflation
Description: Suriname recently went through a period of destabilizationthat that bordered on hyperinflation. The country’s experience provides a good illustration to study the genesis and dynamics of high inflation and includes some unusual phenomena, such as a monetary overhang, an eight-tiered exchange rate, and inflationary gold purchases by the central bank. High inflation also had a significant impact on the real economy. This paper compares the experience of Suriname with other countries discussed in the recent stabilization literature. It finds strong evidence of intertemporal demand effects, which occurred as the public reacted to the temporary bout of high inflation.