Working Papers
1999
August 1, 1999
Inflation and Growth in Transition: Are the Asian Economies Different?
Description: This paper examines the progress made in four Asian transition economies—China, Lao P.D.R., Vietnam, and Mongolia—to market-based systems. Overall, these economies appear to have had a more favorable experience with inflation stabilization and output growth than that of transition economies elsewhere. While initial conditions played an important role in determining the strategy and speed of the transition, growth performance benefited from continued macroeconomic stability and reforms in a key sector (such as agriculture); this confirms the need for sustained and rapid structural reforms and highlights the constraints for sustainable growth posed by weak financial and enterprise sectors.
August 1, 1999
The Relative Merits and Implications of Inflation Targeting for South Africa
Description: This paper describes the main elements of inflation targeting, reviews its pros and cons, and examines the experiences thus far in countries using this framework. It discusses the implications and relative merits of such a framework for South Africa, and concludes that it would be feasible and desirable for South Africa to adopt explicit inflation targeting. Doing so could reduce uncertainties about the Reserve Bank’s objectives and enhance the transparency of monetary policy. However, further experience with the operational aspects of the repurchase system and a refinement of the inflation forecasting framework may be needed before inflation targeting is implemented.
August 1, 1999
The External Wealth of Nations: Measures of Foreign Assets and Liabilities for Industrial and Developing Countries
Description: Capital flows are closely monitored, but surprisingly little is known about the stocks of external assets and liabilities held by countries, especially in the developing world. This paper constructs estimates of foreign assets and liabilities and their equity and debt subcomponents for 66 industrial and developing countries for the period 1970-97. It explores the sensitivity of estimates of stock positions to the treatment of valuation effects not captured in balance of payments data. Finally, it characterizes the stylized facts of estimated stocks and asks whether there are trends in net foreign asset positions and differences in debt-equity ratios across countries.
Notes: Link to the data set and documentation for this Working Paper.
August 1, 1999
Bank Fragility and International Capital Mobility
Description: The paper examines the effects of increased financial integration on the economy and, specifically, the welfare of depositors and the business sector. A simple model of a small open economy with a fragile banking sector and imperfect capital mobility is developed. Increased international integration of the market for bank deposits makes runs on banks more likely and unambiguously hurts the domestic business sector. Depositors may gain or lose depending on the parameters. Even when depositors gain, the overall effect on the economy depends on the size of foreign assets held relative to the costs of bank crises.
August 1, 1999
Private Sector Consumption Behavior and Non-Keynesian Effects of Fiscal Policy
Description: This paper explores the hypothesis that the propensity to consume out of income is not constant but varies, perhaps in a nonlinear fashion, with fiscal variables. It examines whether there is any empirical evidence to support the hypothesis that households move from non-Ricardian to Ricardian behavior as government debt reaches high levels and as uncertainty about future taxes increases. The paper also examines the possibility of a relationship (along the lines of the Bertola-Drazen model) between the propensity to consume out of income and the government consumption-to-GDP ratio.
August 1, 1999
Foreign Exchange Queues, Informal Traders, and a Zero Premium in the Black Market: A Cape Verdean Puzzle
Description: During 1996–98, several indicators hinted at the apparent unsustainability of Cape Verde’s exchange rate peg. The country, faced with a considerable backlog of approved but unmet applications for foreign currencies, tolerated a parallel market. Street traders, however, demanded only negligible premiums (if any at all) for foreign exchange. By integrating the emigrants’ transfer decisions into a basic Mundell-Fleming-type model, the author conjectures that this puzzle can be explained with the increasing use of transfer channels outside the banking system, leading to unrecorded inflows of foreign exchange. Analysis of the relevant balance of payments data appears to support this result.
August 1, 1999
Deconstructing Job Creation
Description: This paper studies net employment growth across 21 OECD economies in 1980-97, focusing on experiences within the European Union. It finds that sectoral effects can only partially account for differences in job creation. By contrast, it shows that a policy package including low taxation and flexible employment protection legislation is associated with high job creation and can account for most of the observed differences. The Netherlands’ success is largely accounted for by the creation of part-time jobs for women aged 25-49 in the services sector, but in most EU countries the substitution of part-time jobs for full-time jobs is considerable.
August 1, 1999
Bailout and Conglomeration
Description: The paper suggests that when firms differ stochastically in their productivity, a bank may find it optimal not to bail out the failed nonconglomerate firms at all, but to bail out conglomerates fully. Expectation of such bailout policy may encourage risk-averse firms to join a conglomerate to minimize the risk of liquidation. Furthermore, in case of private information, bad firms follow good firms’ decision on conglomeration to hide their type. Finally, the paper discusses the impact of conglomeration on the debt-equity ratio and the expansion of existing conglomerates through mergers and acquisitions.
August 1, 1999
Analysis of the U.S. Business Cycle with a Vector-Markov-Switching Model
Description: This paper identifies turning points for the U.S. business cycle using different time series. The model, a multivariate Markov-Swiching model, assumes that each series is characterized by a mixture of two normal distributions (a high and low mean) with switching determined by a common Markov process. The procedure is applied to the series that make up the composite U.S. coincident indicator to obtain business cycle turning points. The business cycle chronology is closer to the NBER reference cycle than the turning points obtained from the individual series using a univariate model. The model is also used to forecast the series, with encouraging results.
August 1, 1999
Bank Bailouts: Moral Hazard vs. Value Effect
Description: This paper shows that a central bank, by announcing and committing ex-ante to a bailout policy that is contingent on the realization of certain states of nature (for example on the occurrence of an adverse macroeconomic shock), creates a risk-reducing “value effect” that more than outweighs the moral hazard component of such a policy.