Working Papers
1991
February 1, 1991
International Vat Harmonization: Economic Effects
Description: This paper highlights key macroeconomic issues related to VAT harmonization. A model is developed which emphasizes the effects of changes in the time profile of various taxes on international behavior. Dynamic simulations reveal that the macroeconomic and welfare implications of VAT harmonization, including conflicts of interest, depend critically on the tax system and the degree of substitution governing temporal and intertemporal allocations. We also demonstrate that the effects of revenue-neutral tax conversions between income and consumption tax systems undertaken by a single country depend critically on international differences in behavior.
Notes: Also published in Staff Papers, Vol. 38, No. 4, December 1991.
February 1, 1991
Estimating the Base of the Value-Added Tax (VAT) in Developing Countries: The Problem of Exemptions
Description: Developing countries with VATs typically exempt a large number of goods and services. Following a brief discussion of the rationale for exemptions, this paper presents a formula for the base of a VAT with exemptions. Two basic adjustments must be made to the base without exemptions: subtraction of the value of sales to consumers of exempt industries and addition of intermediate sales of taxable inputs to exempt industries. The paper concludes with a derivation of the elasticity of a VAT with exemptions with respect to aggregate consumption and a discussion of the implications of technological change for the VAT base.
February 1, 1991
On the Information Content of Ldc Secondary Loan Market Prices
Description: This note examines the impact of measurable and unmeasurable (not correlated with observed aggregates) information on secondary market LDC loan prices. The Institutional Investor country risk ratings are used to construct a proxy for the non-quantifiable information that moves debt market values. Regression results indicate that market participants use both macroeconomic aggregates and unmeasurable information to price LDC loans. This implies that price changes unrelated to observables need not raise concerns regarding price reliability, and, in fact, such price movements may well be conveying important information not quantified elsewhere.
February 1, 1991
The Italian Lira in the Narrow Erm Band: The Challenge of Credibility
Description: Under free capital mobility, a high-inflation country pursuing a nonaccommodating exchange rate policy will have higher real interest rates than its lower-inflation trading partners as long as that policy is not credible. If the policy gains credibility prior to inflation convergence, the sign of the real interest rate differential may be reversed. Developments in interest rate differentials and capital and reserve flows suggest that Italy’s nonaccommodating exchange rate policy has become significantly more credible in 1989-90. As improved credibility further limits their monetary autonomy, the Italian authorities will have to rely more on fiscal and incomes policies to promote disinflation.
February 1, 1991
A General Equilibrium Model with Informal Financial Markets
Description: The paper presents a general equilibrium framework for short-run macroeconomic analysis in a developing country context where controls on interest rates and foreign exchange restrictions lead to the emergence of informal financial markets. The complexity of the model precludes an analytical treatment. A simulation approach, based on parameters derived from estimates in the existing literature, is used to assess the properties of the model, which differ in important ways from those of standard open-economy models.
February 1, 1991
From Centrally-Planned to Market Economies: The Road from CPE to PCPE
Description: This paper deals with the early stages of transformation of centrally-planned economies (CPEs) into market economies during which expectations play a key role. It focuses on the transitional phase during which the economy is not any more a CPE but has not yet become a market economy. During this phase the economy is referred to as a “previously centrally-planned economy” (PCPE). A simple model is developed to analyze the consequences of expected price liberalization. The CPEs undergoing transformation lack depth and breadth of financial markets. The analysis illustrates the benefits from an early development of such markets. It demonstrates the cost of a fine-tuning strategy and the benefits from a quick implementation of price reform. The paper also examines means to reduce “liquidity overhang,” and shows that they involve taxation of one form or another. The consequences of privatization are analyzed and the benefits from an early development of an effective tax system highlighted.
Notes: Also published in Staff Papers, Vol. 38, No. 2, June 1991.
February 1, 1991
What Have We Learned About Estimating the Demand for Money? a Multicountry Evaluation of Some New Approaches
Description: This paper provides estimates of the demand for both narrow and broad monetary aggregates for the five largest industrial countries using two recent approaches: buffer stock and error correction models. The performances of these models are compared with several versions of the conventional partial adjustment model. Tests are performed in order to evaluate the parameter stability, post-sample predictive ability, encompassing properties, and economic implications of the models. The results are encouraging with respect to the newer models, as they significantly outperform the traditional approach. It is found that the error correction model is especially promising as a general approach.
February 1, 1991
An Empirical Exploration of Exchange Rate Target-Zones
Description: In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System are used to explore the importance of nonlinearities in the relationship between the exchange rates and fundamentals. Many implications of existing “target-zone” exchange rate models are tested; little support is found for existing nonlinear models of limited exchange rate flexibility.
February 1, 1991
Poverty Alleviation and Social Safety Net Schemes for Economies in Transition
Description: Inspired by the current Polish economic restructuring program, this paper attempts to develop a general income support scheme that could serve as a model to alleviate poverty in developed economies in the transitional phase. The proposed scheme has the advantage that no part of the poor population is omitted from eligibility for support sufficient to remove them from poverty. The concept of the simplified model is protection against poverty through income maintenance that is conditional upon fulfillment of forward-looking requirements such as workfare, training or job search. Further, the scheme considers methods whereby limited national resources can be managed by official policies that combine into a coherent, cost-effective package, an optimal mix of income guarantee levels and incentive effects.
February 1, 1991
On the Sequencing of Reforms in Eastern Europe
Description: This paper discusses issues related to the sequencing of the reforms that are necessary to transform the economies in Eastern Europe into market economies. It is first argued that the transition path of these economies will be smoother and less costly if a clear statement of the ultimate goals of the reforms is made at the outset. Interdependence between different aspects of the reforms implies that an appropriate strategy is to move on a broad front from the very beginning of the transformation process dealing simultaneously with macroeconomic stabilization, price reforms and convertibility, and privatization of state enterprises. It is also argued that a rapid reform process is preferable to a gradual one.