Selected Reference and Reading Materials compiled by Dan Villanueva


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Record ID

276     [ Page 41 of 68, No. 1 ]

Date

2013-01

Author

Armand Fouejieu and Scott Roger

Affiliation

l’Université d’Orléans and International Monetary Fund

Title

Inflation Targeting and Country Risk: an Empirical Investigation

Summary /
Abstract

The sovereign debt crisis in Europe has highlighted the role of country risk premia as a link between countries’ fiscal and external balances, financial conditions and monetary policy. The purpose of this paper is to estimate how adoption of inflation targeting (IT) affects spreads. It is hypothesized that country risk premia for IT countries (especially among emerging market economies) may be lower than for other countries owing to greater policy predictability and more stable long-term inflation. The findings suggest that IT reduces the risk premium, both through adoption of the IT regime, and through the observed track record in stabilizing inflation.

Keywords

Inflation targeting, risk premium, external debt

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp1321.pdf



Record ID

275     [ Page 41 of 68, No. 2 ]

Date

2012-12

Author

Pelin Ilbas, Øistein Røisland, and Tommy Sveen

Affiliation

National Bank of Belgium, Norges Bank, BI Norwegian Business School

Title

Robustifying optimal monetary policy using simple rules as cross-checks

Summary /
Abstract

There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that by placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy.

Keywords

Model uncertainty, optimal control, simple rules

URL

http://www.norges-bank.no/pages/92245/Norges_Bank_Working_Paper_2012_22.pdf



Record ID

274     [ Page 41 of 68, No. 3 ]

Date

2012-12

Author

Abdul Abiad, John Bluedorn, Jaime Guajardo, and Petia Topalova

Affiliation

Research Department, IMF

Title

The Rising Resilience of Emerging Market and Developing Economies

Summary /
Abstract

Economic performance in many emerging market and developing economies (EMDEs) improved substantially over the past twenty years. The past decade was particularly good—for the first time EMDEs spent more time in expansion and had smaller downturns than advanced economies. In this paper we document the history of EMDEs’ resilience over the past sixty years, and investigate what factors have been associated with it. We find that their improved performance in recent years is accounted for by both good policies and a lower incidence of external and domestic shocks—better policies account for about three-fifths of their improved resilience, while less frequent shocks account for the remainder.

Keywords

Emerging markets, low-income countries, developing countries, growth, development, expansion, recovery

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12300.pdf

Remarks

The Philippines is included in this study.



Record ID

273     [ Page 41 of 68, No. 4 ]

Date

2012-08

Author

Independent Evaluation Office

Affiliation

IMF

Title

International Reserves: IMF Concerns and Country Perspectives

Summary /
Abstract

This evaluation focuses on two aspects of the IMF’s concerns and advice related to international reserves. First, it examines the origin, rationale, and robustness of the IMF’s concerns about the effects of excessive reserve accumulation on the stability of the international monetary system. Second, it assesses the conceptual underpinnings and quality of the advice on reserve adequacy in the context of bilateral surveillance. In 2009, IMF Management and some senior staff began to emphasize the potential for large reserve accumulation to threaten the stability of the international monetary system. The evaluation argues that the focus on reserve accumulation as a risk for the international monetary system was not helpful in that it stressed the symptom of problems rather than the underlying causes, and it did not appear to be different from the longer-standing concerns about risks from global imbalances. Many country officials also felt that the IMF should have placed greater emphasis on other developments relating to the evolution and stability of the international monetary system—in particular the causes and consequences of fluctuations of global liquidity and international capital flows—that they considered to be of more pressing concern than reserves. The evaluation found a broadly held view that Management’s emphasis on excessive reserve accumulation was a response to frustration among some member countries with the IMF’s inability to achieve exchange rate adjustments in Asian countries with persistently large current account surpluses. In parallel with the aforementioned concerns about excessive reserve accumulation, IMF staff developed a new indicator to assess reserve adequacy in emerging-market economies. The new indicator defined upper and lower bounds for precautionary reserves. A number of country officials became worried that its use would engender pressures on countries to reduce their reserves at a time of heightened uncertainty in the global economy. With respect to reserve adequacy assessments in the context of bilateral surveillance, the evaluation centered on a sample of 43 economies that had accumulated the bulk of global reserves during the 2000–11 period. The country sample reflects the evaluation’s focus on the possible implications of excess reserves. The evaluation concludes that the IMF’s assessments and discussions of international reserves were often pro forma, emphasizing a few traditional indicators and insufficiently incorporating country-specific circumstances. It also identifies cases where the Fund’s analysis and advice could have been improved, notably by embedding the assessment of reserve adequacy in a broader analysis of countries’ internal and external stability.

The evaluation recommends that:
(1) Policy initiatives should target distortions and their causes rather than symptoms such as excessive reserves. Discussion of reserve accumulation in the multilateral context should be imbedded in a comprehensive treatment of threats to global financial stability, one that is informed by developments in global liquidity and financial markets; (2) Policy initiatives that are meant to deal with systemic externalities must take into account the relative size of countries’ contributions to the externality; (3) Reserve adequacy indicators should be applied flexibly and reflect country-specific circumstances; and (4) The multiple tradeoffs involved in decisions on reserve accumulation and reserve adequacy at the country level need to be recognized, and advice on reserves should be integrated with advice in related policy areas. Advice should not be directed only to emerging markets but, when necessary, take into account the concerns in advanced economies that have arisen since the financial crisis.

Keywords

International reserves; reserve adequacy assessments

URL

http://www.ieo-imf.org/ieo/files/completedevaluations/IR_Main_Report.pdf



Record ID

272     [ Page 41 of 68, No. 5 ]

Date

2012-12

Author

Medina, Leandro

Affiliation

Middle East and Central Asia Department, IMF

Title

Spring Forward or Fall Back? The Post-Crisis Recovery of Firms

Summary /
Abstract

This paper studies corporate performance in the aftermath of the global crisis by examining 6,581 manufacturing firms in 48 developed and developing countries in 2010, identifying factors of resilience as well as vulnerability. Based on a cross-sectional analysis, the results show that pre-crisis leverage and short-term debt have had negative effects on the speed of the recovery, while asset tangibility has had positive effects. The negative effect of leverage is non-linear, being particularly strong in firms with high pre-crisis leverage. Furthermore, the effects are different for advanced and emerging market economies. The paper also shows that the macroeconomic framework critically matters for firm growth. In particular, in countries that have allowed the exchange rate to depreciate, firms have had a faster recovery in sectors highly dependent on trade.

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12292.pdf

Remarks

There are 17 Philippine firms included in this empirical study.



Record ID

271     [ Page 41 of 68, No. 6 ]

Date

2011-04

Author

Andrew G. Berg and Jonathan D. Ostry

Affiliation

Research Department, IMF

Title

Inequality and Unsustainable Growth: Two Sides of the Same Coin?

Summary /
Abstract

The relationship between income inequality and economic growth is complex. Some inequality is integral to the effective functioning of a market economy and the incentives needed for investment and growth. But inequality can also be destructive to growth, for example, by amplifying the risk of crisis or making it difficult for the poor to invest in education. The evidence has also been mixed: some find that average growth over long periods of time is higher with more initial equality; others find that an increase in equality today tends to lower growth in the near term. The empirical literature on growth and inequality, however, has missed a key feature of the growth process in developing countries: namely, its lack of persistence. Per capita incomes do not typically grow steadily for decades. Rather, periods of rapid growth are punctuated by collapses and sometimes stagnation—the hills, valleys, and plateaus of growth. Relating income distribution to long-run average growth may thus miss the point. The more relevant issue for many countries is: how is income distribution related to these sharp growth breaks?

This note focuses on the duration of growth spells—defined as the interval starting with a growth upbreak and ending with a downbreak—and on the links between duration and various policies and country characteristics, including income distribution. It turns out that many of even the poorest countries have succeeded in initiating growth at high rates for a few years. What is rarer—and what separates growth miracles from laggards—is the ability to sustain growth. The question then becomes: what determines the length of growth spells, and what is the role of income inequality in duration?

We find that longer growth spells are robustly associated with more equality in the income distribution. For example, closing, say, half the inequality gap between Latin America and emerging Asia would, according to our central estimates, more than double the expected duration of a growth spell. Inequality typically changes only slowly, but a number of countries in our sample have experienced improvements in income distribution of this magnitude in the course of a growth spell. Inequality still matters, moreover, even when other determinants of growth duration—external shocks, initial income, institutional quality, openness to trade, and macroeconomic stability—are taken into account.

A key implication of these results is that it is difficult to separate analyses of growth and income distribution. The immediate role for policy, however, is less clear. Increased inequality may shorten growth duration, but poorly designed efforts to lower inequality could grossly distort incentives and thereby undermine growth, hurting even the poor. There nevertheless may be some "win-win" policies, such as better-targeted subsidies, improvements in economic opportunities for the poor, and active labor market policies that promote employment. When there are trade-offs between potential short-run effects of policies on growth and income distribution, the evidence presented in this note is not decisive. But the analysis below does perhaps tilt the balance towards the notion that attention to inequality can bring significant longer-run benefits for growth. Over longer horizons, reduced inequality and sustained growth may thus be two sides of the same coin.

Keywords

Income distribution; sustainable growth.

URL

http://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf

Remarks

The authors thank Olivier Blanchard and other IMF colleagues for useful discussions on this IMF Staff Discussion Note.



Record ID

270     [ Page 41 of 68, No. 7 ]

Date

2011-04

Author

Jonathan D. Ostry, Atish R. Ghosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Mahvash S. Qureshi, and Annamaria Kokenyne

Affiliation

Research Department, IMF

Title

Managing Capital Inflows: What Tools to Use?

Summary /
Abstract

Emerging market economies are facing increasing challenges in managing the current wave of capital inflows. In an earlier note (Ostry et al., 2010), we laid out a set of circumstances under which capital controls could usefully form part of the policy response to inflow surges. For countries whose currencies were on the strong side, where reserves were adequate, where overheating concerns precluded easier monetary policy, and where the fiscal balance was consistent with macroeconomic and public debt considerations, capital controls were a useful part of the policy toolkit to address inflow surges. Beyond macroeconomic considerations, capital controls could also help to address financial-stability concerns when prudential tools were insufficient or could not be made effective in a timely manner. We also stressed that the use of capital controls needs to take account of multilateral considerations, as well as their costs and the mixed evidence on their effectiveness in restraining aggregate flows.

This note elaborates on how the macro and financial-stability rationales for capital controls fit together; how prudential and capital control measures should be deployed against various risks that inflow surges may bring; and specifically, how capital controls should be designed to best meet the goals of efficiency and effectiveness. Four broad conclusions emerge. First, capital controls may be useful in addressing both macroeconomic and financial stability concerns in the face of inflow surges, but before imposing capital controls, countries need first to exhaust their macroeconomic-cum-exchange-rate policy options. The macro policy response needs to have primacy both because of its importance in helping to abate the inflow surge, and because it ensures that countries act in a multilaterally-consistent manner and do not impose controls merely to avoid necessary external and macro-policy adjustment. Second, while prudential regulations and capital controls can help reduce the buildup of vulnerabilities on domestic balance sheets, they both inevitably create distortions—reducing some “good” financial flows alongside “bad” ones—and may be circumvented. Thus, there is no unambiguous welfare ranking of policy instruments (though non-discriminatory prudential measures are always appropriate), and a pragmatic approach taking account of the economy’s most pertinent risks and distortions needs to be adopted. Third, measures need to be targeted to the risks at hand. When inflows are intermediated through the regulated financial system, prudential regulation will be the main instrument. When inflows bypass regulated markets and institutions, capital controls may be the best option if the perimeter of regulation cannot be widened sufficiently quickly or effectively. Fourth, the design of capital controls needs to be tailored to country circumstances. Where inflows raise macro concerns, controls will need to be broad, usually price-based, and temporary (though institutional arrangements to implement controls could be maintained). To address financial-stability concerns, controls could be targeted on the riskiest flows, might include administrative measures, and could be used even against more persistent inflows.

Keywords

Capital inflows, capital controls, prudential tools

URL

http://www.imf.org/external/pubs/ft/sdn/2011/sdn1106.pdf

Remarks

This research paper was approved by Olivier Blanchard.



Record ID

269     [ Page 41 of 68, No. 8 ]

Date

2012-11

Author

Jain-Chandra, Sonali ; Unsal, D. Filiz

Affiliation

Asia and Pacific Department, IMF

Title

The Effectiveness of Monetary Policy Transmission Under Capital Inflows: Evidence from Asia

Summary /
Abstract

The effectiveness of the monetary policy transmission mechanism in open economies could be impaired if interest rates are driven primarily by global factors, especially during periods of large capital inflows. The main objective of this paper is to assess whether this is true for emerging Asia’s economies. Using a dynamic factor model and a structural vector auto-regression model, we show that long-term interest rates in Asia are indeed predominantly driven by global factors. However, monetary policy transmission mechanism remains effective in the region, as it operates predominantly through short-term interest rates. Nevertheless, the monetary transmission mechanism, though effective, is somewhat weaker in Asia during the periods of surges in capital inflows.

Keywords

Monetary policy transmission, capital flows, dynamic factor model, structural VAR

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12265.pdf



Record ID

268     [ Page 41 of 68, No. 9 ]

Date

2012-06

Author

Giovanni Dell’Ariccia, Deniz Igan, Luc Laeven, and Hui Tong

Affiliation

Research Department, IMF

Title

Policies for Macrofinancial Stability: How to Deal with Credit Booms

Summary /
Abstract

Credit booms buttress investment and consumption and can contribute to long-term financial deepening. But they often end up in costly balance sheet dislocations, and, more often than acceptable, in devastating financial crises whose cost can exceed the benefits associated with the boom. These risks have long been recognized. But, until the global financial crisis in 2008, policy paid limited attention to the problem. The crisis—preceded by booms in many of the hardest-hit countries—has led to a more activist stance. Yet, there is little consensus about how and when policy should intervene. This note explores past credit booms with the objective of assessing the effectiveness of macroeconomic and macroprudential policies in reducing the risk of a crisis or, at least, limiting its consequences. It should be recognized at the onset that a more interventionist policy will inevitably imply some trade-offs. No policy tool is a panacea for the ills stemming from credit booms, and any form of intervention will entail costs and distortions, the relevance of which will depend on the characteristics and institutions of individual countries. With these caveats in mind, the analysis in this note brings the following insights. First, credit booms are often triggered by financial reform, capital inflow surges associated with capital account liberalizations, and periods of strong economic growth. They tend to be more frequent in fixed exchange rate regimes, when banking supervision is weak, and when macroeconomic policies are loose. Second, not all booms are bad. About a third of boom cases end up in financial crises. Others do not lead to busts but are followed by extended periods of below-trend economic growth. Yet many result in permanent financial deepening and benefit long-term economic growth. Third, it is difficult to tell “bad” from “good” booms in real time. But there are useful telltales. Bad booms tend to be larger and last longer (roughly half of the booms lasting longer than six years end up in a crisis). Fourth, monetary policy is in principle the natural lever to contain a credit boom. In practice, however, capital flows (and related concerns about exchange rate volatility) and currency substitution limit its effectiveness in small open economies. In addition, since booms can occur in low-inflation environments, a conflict may emerge with its primary objective. Fifth, given its time lags, fiscal policy is ill-equipped to timely stop a boom. But consolidation during the boom years can help create fiscal room to support the financial sector or stimulate the economy if and when a bust arrives. Finally, macroprudential tools have at times proven effective in containing booms, and more often in limiting the consequences of busts, thanks to the buffers they helped to build. Their more targeted nature limits their costs, although their associated distortions, should these tools be abused, can be severe. Moreover, circumvention has often been a major issue, underscoring the importance of careful design, coordination with other policies (including across borders), and close supervision to ensure the efficacy of these tools.

Keywords

Credit booms; financial stability; macroprudential regulation; macroeconomic policy

URL

http://www.imf.org/external/pubs/ft/sdn/2012/sdn1206.pdf



Record ID

267     [ Page 41 of 68, No. 10 ]

Date

2012-08

Author

Paolo Gelain, Kevin J. Lansing, and Caterina Mendicino

Affiliation

Norges Bank, FRB San Francisco, and Bank of Portugal

Title

House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macro-prudential Policy

Summary /
Abstract

Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan- to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation.

Keywords

Asset Pricing, Excess Volatility, Credit Cycles, Housing Bubbles, Monetary policy, Macroprudential policy.

URL

http://www.norges-bank.no/Upload/English/Publications/Working%20Papers/2012/wp_2012_08.pdf



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