Working Papers
January 1, 0001
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1991
May 1, 1991
Protection and the Own-Funds Window in Tanzania: An Analytical Framework and Estimates of the Effects of Trade Liberalization
Description: This paper presents a simple partial equilibrium framework for considering the economic implications of administered protection in Tanzania, against the background of the country’s parallel exchange market and the establishment of the own-funds and open general license (OGL) facilities for authorizing imports. It also presents estimates of the range of possible adjustment in the real exchange rate and trade flows following from a unification of the highly-fragmented import licensing system, coupled with sufficient liberalization of the OGL facility to eliminate own-funded imports and the incentive to export smuggling.
May 1, 1991
Uncovered Interest Parity
Description: This note provides an overview of the uncovered interest parity assumption. It traces the history of the interest parity concept, summarizes evidence on the empirical validity of uncovered interest parity, and discusses the implications for macroeconomic analysis. The uncovered interest parity assumption has been an important building block in multiperiod and continuous time models of open economies, and although its validity is strongly challenged by the empirical evidence, its retention in macroeconomic models is supported on pragmatic grounds, at least for the time being, by the lack of much empirical support for existing models of the exchange risk premium.
May 1, 1991
Yugoslav Inflation and Money
Description: Yugoslav inflation unfolded as a classic wage-price-exchange rate spiral through the 1970s and 1980s and exploded into hyperinflation in the last quarter of 1989. This paper examines the process of monetary accommodation of inflation, the behavior of demand for money, and the interaction between the two in Yugoslavia. The asset-liability structure of the Central Bank, together with the policy stance on exchange and interest rates, led to a significant feedback from inflation to money supply. Real money balances are found to have been cointegrated with other economic variables despite their explosive and seasonal nature, and hence in long-run equilibrium relationship as economic theory would suggest.
Notes: Also published in Staff Papers, Vol. 38, No. 4, December 1991.
May 1, 1991
Efficient Arbitrage Under Financial Indexation: The Case of Chile
Description: Legal restrictions governing financial transactions in Chile have produced a system in which most financial assets are either 30-day non-indexed assets or 90-day indexed assets. This paper analyzes data on the rates of return of these assets to determine the extent to which efficient arbitrage takes place under conditions of partial financial indexation. The data cannot reject the joint hypothesis that participants in financial markets formulate their expectations rationally and that these markets operate efficiently. The data also shows that the indexed/non-indexed interest spread is an accurate predictor of future changes in inflation. The significant implications of these findings for the conduct of monetary policy are also discussed in some detail.
Notes: Also published in Staff Papers, Vol. 39, No. 1, March 1992.
May 1, 1991
The Demand for Money During High Inflation Episodes: Some Latin American Evidenceon the Cagan Model
Description: This paper examines the demand for money under conditions of very high inflation in Argentina, Bolivia, Brazil, Chile and Peru during the 1970s and 1980s. We test whether the monetary and inflationary experiences of these countries can be adequately characterized by the Cagan (1956) model, using an econometric procedure which is not reliant on any particular assumption concerning expectations formation except that forecasting errors are stationary. We also examine the importance of foreign asset substitution in domestic portfolios.
May 1, 1991
Commodity and Manufactures Prices in the Long Run
Description: The low level of primary commodity prices since 1985 is examined in the context of the behavior of those prices relative to prices of manufactured goods since 1854. The Prebisch-Singer hypothesis of a secular decline in relative commodity prices is sustained, but the recent decline is shown to be well outside the realm of historical experience. Commodity and manufactures prices are found to be cointegrated, conditional on the negative trend and a number of unexplained short-term swings. The earlier finding of a Gibson paradox is explained in terms of the difference between short- and long-run relationships.
May 1, 1991
Sri Lanka: Price Changes and the Poor
Description: This paper examines the short-run impact of Sri Lanka’s recent structural adjustment program on the poorest segments of society. While the ultimate goal of all macroeconomic adjustment programs is to overcome structural rigidities and put the economy on a sustainable growth path, some of the measures implemented, such as the liberalization of food and energy prices, cuts in subsidies and other budgetary spending, and exchange rate changes, may cause significant increases in relative prices faced by the poor. On the other hand, there are offsetting income effects even in the short run, such as adjustments in wages and output prices and retargeting of subsidies.
May 1, 1991
The Demand for Money in Developing Countries: Assessing the Role of Financial innovation
Description: Traditional specifications of money demand have been commonly plagued by persistent overprediction, implausible parameter estimates, and highly autocorrelated errors. This paper argues that some of those problems stem from the failure to account for the impact of financial innovation. We estimate money demand for ten developing countries employing various proxies for the innovation process and provide an assessment of the relative importance of this variable. We find that financial innovation plays an important role in determining money demand and its fluctuations, and that the importance of this role increases with the rate of inflation.
May 1, 1991
Commodity Booms and Government Expenditure Responses
Description: This paper develops a model incorporating asymmetric government expenditure behavior in response to a windfall revenue gain occasioned by a transitory commodity boom. The model is used to illustrate the transitional dynamics of a stylized economy during the boom period and the nature of the macroeconomic disequilibria which emerge in the post-boom period. Country case studies of Sri Lanka, Malaysia, and Kenya support the model’s predictions and the protracted nature of adjustment following the waning of the boom.
Notes: Includes country experiences for Kenya, Malaysia and Sri Lank.