Working Papers
Working Paper No. 09/6: Regional Financial Interlinkages and Financial Contagion Within Europe
Author/Editor: Arvai, Zsofia ; Driessen, Karl ; Otker-Robe, Inci
Summary: This paper focuses on financial interlinkages within Europe and potential contagion channeled through these interlinkages. It discusses the increased role of external financing as a source of funding for credit growth; analyzes potential channels of contagion through financial linkages; and assesses the magnitude of cross-border exposures between emerging and western European countries. Based on the stylized facts on these exposures, the paper provides simple indices of exposure to regional contagion that could help identify the likely pressure points and capture potential spillover effects and propagation channels of a regional shock originating from a given country.
Working Paper No. 09/9: Distress in European Banks: An Analysis Based on a New Dataset
Author/Editor: Poghosyan, Tigran; Cihák, Martin
Summary: The global financial crisis has highlighted the importance of early identification of weak banks: when problems are identified late, solutions are much more costly. Until recently, Europe has seen only a small number of outright bank failures, which made the estimation of early warning models for bank supervision very difficult. This paper presents a unique database of individual bank distress across the European Union from mid-1990s to 2008. Using this data set, we analyze the causes of banking distress in Europe. We identify a set of indicators and thresholds that can help to distinguish sound banks from those vulnerable to financial distress.
Author/Editor: Arvai, Zsofia ; Driessen, Karl ; Otker-Robe, Inci
Summary: This paper focuses on financial interlinkages within Europe and potential contagion channeled through these interlinkages. It discusses the increased role of external financing as a source of funding for credit growth; analyzes potential channels of contagion through financial linkages; and assesses the magnitude of cross-border exposures between emerging and western European countries. Based on the stylized facts on these exposures, the paper provides simple indices of exposure to regional contagion that could help identify the likely pressure points and capture potential spillover effects and propagation channels of a regional shock originating from a given country.
Working Paper No. 09/9: Distress in European Banks: An Analysis Based on a New Dataset
Author/Editor: Poghosyan, Tigran; Cihák, Martin
Summary: The global financial crisis has highlighted the importance of early identification of weak banks: when problems are identified late, solutions are much more costly. Until recently, Europe has seen only a small number of outright bank failures, which made the estimation of early warning models for bank supervision very difficult. This paper presents a unique database of individual bank distress across the European Union from mid-1990s to 2008. Using this data set, we analyze the causes of banking distress in Europe. We identify a set of indicators and thresholds that can help to distinguish sound banks from those vulnerable to financial distress.
Working Paper No. 09/7: Australia and New Zealand Exchange Rates: A Quantitative Assessment
Author/Editor: Edison, Hali J.; Vitek, Francis
Summary: The paper describes three empirical models commonly used to conduct exchange rate assessments and applies them to data for Australia and New Zealand. The baseline results using data and mediumterm projections available as of October 2008, suggest that the Australian and New Zealand dollars were broadly in line with fundamentals, but with a wide variation across models. A battery of sensitivity tests illustrate that altering the underlying assumptions can yield substantially different assessments. The results are particularly sensitive to the choice of assessment horizon, the set of economies included in the sample, medium-term forecasts, and the exchange rate reference period.
Working Paper No. 09/8: The Role for Counter-Cyclical Fiscal Policy in Singapore
Author/Editor: Eskesen, Leif Lybecker
Summary: Singapore's policymakers have often used fiscal policy as a counter-cyclical tool. Empirical results based on a structural autoregression framework suggest that fiscal policy can be used for demand management, although the impact may be somewhat short lived. The short-lived impact could reflect a number of factors, including the absence of credit-constrained economic agents, a high propensity to save among households, monetary focus on price stability, and leakages due to economic openness. Notwithstanding, fiscal policy should still play a key stabilizing role in the current downturn given the downside risks to growth and the vast fiscal space.
Working Paper No. 09/10: Benford's Law and Macroeconomic Data Quality
Author/Editor: Gonzalez-Garcia, Jesus; Pastor, Gonzalo C.
Summary: This paper examines the usefulness of testing the conformity of macroeconomic data with Benford's law as indicator of data quality. Most of the macroeconomic data series tested conform with Benford's law. However, questions emerge on the reliability of such tests as indicators of data quality once conformity with Benford's law is contrasted with the data quality ratings included in the data module of the Reports on the Observance of Standards and Codes (data ROSCs). Furthermore, the analysis shows that rejection of Benford's law may be unrelated to the quality of statistics, and instead may result from marked structural shifts in the data series. Hence, nonconformity with Benford's law should not be interpreted as a reliable indication of poor quality in macroeconomic data.
Working Paper No. 09/11: How Can Burundi Raise Its Growth Rate?The Impact of Civil Conflicts and State Intervention on Burundi's Growth Performance
Author/Editor: Basdevant, Olivier
Summary: Over the last thirty years Burundi's low economic growth has led to a significant decline in per capita GDP. The purpose of this paper is to shed light on supply-side constraints that prevented Burundi's economy from growing faster. Lack of investment, civil conflict, economic inefficiencies, state intervention in the economy, and regulatory restrictions explain a large part of the weak growth performance for the last thirty years.
* Working Paper No. 09/12: The International Diversification Puzzle when Goods Prices are Sticky: It's Really about Exchange-Rate Hedging, not Equity Portfolios
Author/Editor: Engel, Charles; Matsumoto, Akito
Summary: This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some nominal goods prices are sticky. Trade in these assets achieves the same allocations as trade in a complete set of nominal state-contingent claims in our linearized model. When there is a high degree of price stickiness, we show that not much equity diversification is required to replicate the complete-markets equilibrium when agents are able to hedge foreign exchange risk sufficiently. Moreover, temporarily sticky nominal goods prices can have large effects on equity portfolios even when dividend processes are very persistent.
Working Paper No. 09/13: Why Do Central Banks Go Weak?
Author/Editor: Ize, Alain; Oulidi, Nada
Summary: Determinants of central banks' profitability are studied using a statistical analysis of their balance sheets, country characteristics, and the macroeconomic and institutional environments in which they operate. Central banks at both tails of the distribution of profits generally operate in poorer countries with more troubled macroeconomic and institutional environments. For these central banks, profitability is strongly influenced by fiscal dominance and, to a lesser extent, by how actively central banks used their balance sheet for monetary policy purposes.
Author/Editor: Edison, Hali J.; Vitek, Francis
Summary: The paper describes three empirical models commonly used to conduct exchange rate assessments and applies them to data for Australia and New Zealand. The baseline results using data and mediumterm projections available as of October 2008, suggest that the Australian and New Zealand dollars were broadly in line with fundamentals, but with a wide variation across models. A battery of sensitivity tests illustrate that altering the underlying assumptions can yield substantially different assessments. The results are particularly sensitive to the choice of assessment horizon, the set of economies included in the sample, medium-term forecasts, and the exchange rate reference period.
Working Paper No. 09/8: The Role for Counter-Cyclical Fiscal Policy in Singapore
Author/Editor: Eskesen, Leif Lybecker
Summary: Singapore's policymakers have often used fiscal policy as a counter-cyclical tool. Empirical results based on a structural autoregression framework suggest that fiscal policy can be used for demand management, although the impact may be somewhat short lived. The short-lived impact could reflect a number of factors, including the absence of credit-constrained economic agents, a high propensity to save among households, monetary focus on price stability, and leakages due to economic openness. Notwithstanding, fiscal policy should still play a key stabilizing role in the current downturn given the downside risks to growth and the vast fiscal space.
Working Paper No. 09/10: Benford's Law and Macroeconomic Data Quality
Author/Editor: Gonzalez-Garcia, Jesus; Pastor, Gonzalo C.
Summary: This paper examines the usefulness of testing the conformity of macroeconomic data with Benford's law as indicator of data quality. Most of the macroeconomic data series tested conform with Benford's law. However, questions emerge on the reliability of such tests as indicators of data quality once conformity with Benford's law is contrasted with the data quality ratings included in the data module of the Reports on the Observance of Standards and Codes (data ROSCs). Furthermore, the analysis shows that rejection of Benford's law may be unrelated to the quality of statistics, and instead may result from marked structural shifts in the data series. Hence, nonconformity with Benford's law should not be interpreted as a reliable indication of poor quality in macroeconomic data.
Working Paper No. 09/11: How Can Burundi Raise Its Growth Rate?The Impact of Civil Conflicts and State Intervention on Burundi's Growth Performance
Author/Editor: Basdevant, Olivier
Summary: Over the last thirty years Burundi's low economic growth has led to a significant decline in per capita GDP. The purpose of this paper is to shed light on supply-side constraints that prevented Burundi's economy from growing faster. Lack of investment, civil conflict, economic inefficiencies, state intervention in the economy, and regulatory restrictions explain a large part of the weak growth performance for the last thirty years.
* Working Paper No. 09/12: The International Diversification Puzzle when Goods Prices are Sticky: It's Really about Exchange-Rate Hedging, not Equity Portfolios
Author/Editor: Engel, Charles; Matsumoto, Akito
Summary: This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some nominal goods prices are sticky. Trade in these assets achieves the same allocations as trade in a complete set of nominal state-contingent claims in our linearized model. When there is a high degree of price stickiness, we show that not much equity diversification is required to replicate the complete-markets equilibrium when agents are able to hedge foreign exchange risk sufficiently. Moreover, temporarily sticky nominal goods prices can have large effects on equity portfolios even when dividend processes are very persistent.
Working Paper No. 09/13: Why Do Central Banks Go Weak?
Author/Editor: Ize, Alain; Oulidi, Nada
Summary: Determinants of central banks' profitability are studied using a statistical analysis of their balance sheets, country characteristics, and the macroeconomic and institutional environments in which they operate. Central banks at both tails of the distribution of profits generally operate in poorer countries with more troubled macroeconomic and institutional environments. For these central banks, profitability is strongly influenced by fiscal dominance and, to a lesser extent, by how actively central banks used their balance sheet for monetary policy purposes.
Working Paper No. 09/14: Bank Efficiency in Sub-Saharan African Middle Income Countries
Author/Editor: Chen, Chuling
Summary: We use bank level data to study the efficiency of banks in Sub-Saharan African middle-income countries and provide possible explanations for the difference in the efficiency levels of banks. We find that banks, on average, could save 20-30 percent of their total costs if they were operating efficiently, and that foreign banks are more efficient than public banks and domestic private banks. Among the factors that could affect the efficiency levels are macroeconomic stability, depth of financial development, the degree of market competition, strong legal rights and contract laws, and better governance, including political stability and government effectiveness. Our findings point to the importance of policies that aim to build stronger institutions, promote more competition, and improve governance.
Working Paper No. 09/15: The Determinants of Commercial Bank Profitability in Sub-Saharan Africa
Author/Editor: Flamini, Valentina; McDonald, Calvin A.; Schumacher, Liliana
Summary: Bank profits are high in Sub-Saharan Africa (SSA) compared to other regions. This paper uses a sample of 389 banks in 41 SSA countries to study the determinants of bank profitability. We find that apart from credit risk, higher returns on assets are associated with larger bank size, activity diversification, and private ownership. Bank returns are affected by macroeconomic variables, suggesting that macroeconomic policies that promote low inflation and stable output growth does boost credit expansion. The results also indicate moderate persistence in profitability. Causation in the Granger sense from returns on assets to capital occurs with a considerable lag, implying that high returns are not immediately retained in the form of equity increases. Thus, the paper gives some support to a policy of imposing higher capital requirements in the region in order to strengthen financial stability.
Author/Editor: Chen, Chuling
Summary: We use bank level data to study the efficiency of banks in Sub-Saharan African middle-income countries and provide possible explanations for the difference in the efficiency levels of banks. We find that banks, on average, could save 20-30 percent of their total costs if they were operating efficiently, and that foreign banks are more efficient than public banks and domestic private banks. Among the factors that could affect the efficiency levels are macroeconomic stability, depth of financial development, the degree of market competition, strong legal rights and contract laws, and better governance, including political stability and government effectiveness. Our findings point to the importance of policies that aim to build stronger institutions, promote more competition, and improve governance.
Working Paper No. 09/15: The Determinants of Commercial Bank Profitability in Sub-Saharan Africa
Author/Editor: Flamini, Valentina; McDonald, Calvin A.; Schumacher, Liliana
Summary: Bank profits are high in Sub-Saharan Africa (SSA) compared to other regions. This paper uses a sample of 389 banks in 41 SSA countries to study the determinants of bank profitability. We find that apart from credit risk, higher returns on assets are associated with larger bank size, activity diversification, and private ownership. Bank returns are affected by macroeconomic variables, suggesting that macroeconomic policies that promote low inflation and stable output growth does boost credit expansion. The results also indicate moderate persistence in profitability. Causation in the Granger sense from returns on assets to capital occurs with a considerable lag, implying that high returns are not immediately retained in the form of equity increases. Thus, the paper gives some support to a policy of imposing higher capital requirements in the region in order to strengthen financial stability.
Working Paper No. 09/18: On Impatience and Policy Effectiveness
Author/Editor: Bayoumi, Tamim; Sgherri, Silvia
Summary: An increasing body of evidence suggests that the behavior of the economy has changed in many fundamental ways over the last decades. In particular, greater financial deregulation, larger wealth accumulation, and better policies might have helped lower uncertainty about future income and lengthen private sectors' planning horizon. In an overlapping-generations model, in which individuals discount the future more rapidly than implied by the market rate of interest, we find indeed evidence of a falling degree of impatience, providing empirical support for this hypothesis. The degree of persistence of "windfall" shocks to disposable income also appears to have varied over time. Shifts of this kind are shown to have a key impact on the average marginal propensity to consume and on the size of policy multipliers.
Working Paper No. 09/17: Does Global Liquidity Matter for Monetary Policy in the Euro Area?
Author/Editor: Berger, Helge; Harjes, Thomas
Summary: Global excess liquidity is sometimes believed to limit sovereign monetary policy even in large economies, including the euro area. There is much discussion about what constitutes global excess liquidity and our approach adjusts liquidity for longer-term interest rate and output effects. We find that especially excess liquidity in the U.S. leads developments in euro area liquidity. U.S. excess liquidity also enters consistently positive as a determinant of euro area inflation. There is some evidence that this result may be related to a weakening of the effectiveness of monetary policy in the euro area during times of excessive U.S. liquidity.
Working Paper No. 09/19: An Index Number Formula Problem: The Aggregation of Broadly Comparable Items
Author/Editor: Silver, Mick
Summary: Index number theory informs us that if data on matched prices and quantities are available, a superlative index number formula is best to aggregate heterogeneous items, and a unit value index to aggregate homogeneous ones. The formulas can give very different results. Neglected is the practical case of broadly comparable items. This paper provides a formal analysis as to why such formulas differ and proposes a solution to this index number problem.
Author/Editor: Bayoumi, Tamim; Sgherri, Silvia
Summary: An increasing body of evidence suggests that the behavior of the economy has changed in many fundamental ways over the last decades. In particular, greater financial deregulation, larger wealth accumulation, and better policies might have helped lower uncertainty about future income and lengthen private sectors' planning horizon. In an overlapping-generations model, in which individuals discount the future more rapidly than implied by the market rate of interest, we find indeed evidence of a falling degree of impatience, providing empirical support for this hypothesis. The degree of persistence of "windfall" shocks to disposable income also appears to have varied over time. Shifts of this kind are shown to have a key impact on the average marginal propensity to consume and on the size of policy multipliers.
Working Paper No. 09/17: Does Global Liquidity Matter for Monetary Policy in the Euro Area?
Author/Editor: Berger, Helge; Harjes, Thomas
Summary: Global excess liquidity is sometimes believed to limit sovereign monetary policy even in large economies, including the euro area. There is much discussion about what constitutes global excess liquidity and our approach adjusts liquidity for longer-term interest rate and output effects. We find that especially excess liquidity in the U.S. leads developments in euro area liquidity. U.S. excess liquidity also enters consistently positive as a determinant of euro area inflation. There is some evidence that this result may be related to a weakening of the effectiveness of monetary policy in the euro area during times of excessive U.S. liquidity.
Working Paper No. 09/19: An Index Number Formula Problem: The Aggregation of Broadly Comparable Items
Author/Editor: Silver, Mick
Summary: Index number theory informs us that if data on matched prices and quantities are available, a superlative index number formula is best to aggregate heterogeneous items, and a unit value index to aggregate homogeneous ones. The formulas can give very different results. Neglected is the practical case of broadly comparable items. This paper provides a formal analysis as to why such formulas differ and proposes a solution to this index number problem.
Working Paper No. 09/21: Causes, Benefits, and Risks of Business Tax Incentives
Author/Editor: Klemm, Alexander
Summary: This paper provides an updated overview of tax incentives for business investment. It begins by noting that tax competition is likely to be a major force driving countries' tax reforms, and discusses tax incentives as a possible response to this. This is complemented by other arguments for and against tax incentives, and by an illustrative analysis of different incentives using effective tax rates. Findings from the empirical literature on tax incentives are also presented. Based on the overview of theoretical and empirical findings, the paper then suggests a matrix of criteria to determine the usefulness of different tax incentives depending on a country's circumstances.
Working Paper No. 09/20: Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the DutchDisease?
Author/Editor: Saborowski, Christian
Summary: This paper argues that, in improving the efficient allocation of resources, financial sector development could dampen the appreciation effect of capital inflows. Using dynamic panel data techniques, the paper finds that the exchange rate appreciation effect of FDI inflows is indeed attenuated when financial and capital markets are larger and more active. The main implication of these results is that one of the main dangers associated with large capital inflows in emerging markets-the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate-can be mitigated partly by developing a deep financial sector.
Author/Editor: Klemm, Alexander
Summary: This paper provides an updated overview of tax incentives for business investment. It begins by noting that tax competition is likely to be a major force driving countries' tax reforms, and discusses tax incentives as a possible response to this. This is complemented by other arguments for and against tax incentives, and by an illustrative analysis of different incentives using effective tax rates. Findings from the empirical literature on tax incentives are also presented. Based on the overview of theoretical and empirical findings, the paper then suggests a matrix of criteria to determine the usefulness of different tax incentives depending on a country's circumstances.
Working Paper No. 09/20: Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the DutchDisease?
Author/Editor: Saborowski, Christian
Summary: This paper argues that, in improving the efficient allocation of resources, financial sector development could dampen the appreciation effect of capital inflows. Using dynamic panel data techniques, the paper finds that the exchange rate appreciation effect of FDI inflows is indeed attenuated when financial and capital markets are larger and more active. The main implication of these results is that one of the main dangers associated with large capital inflows in emerging markets-the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate-can be mitigated partly by developing a deep financial sector.
Surveys
Global Slowdown Damages Progress in Low-Income Countries
Low-income countries, already weakened by high food and energy prices, are likely to be hit hard by effects of the financial crisis in advanced economies and the global recession, says a panel at an IMF-World Bank meeting with labor unions.
Low-income countries, already weakened by high food and energy prices, are likely to be hit hard by effects of the financial crisis in advanced economies and the global recession, says a panel at an IMF-World Bank meeting with labor unions.
Germany Faces Extended Downturn Despite Stimulus
A combination of slowing demand for German exports because of the global recession, continued caution among German consumers, and a sharp drop in investment will result in a dramatic contraction in Europe's largest economy in 2009, according to an IMF analysis.
Don't Forget the Role Automatic Stabilizers Can Play
When recession hits a market economy, trends such as lower tax takes and higher unemployment benefit payouts effectively ease fiscal policy. These "automatic stabilizers" have a prominent role in European economies, writes Horst Siebert of the Kiel Institut.
A combination of slowing demand for German exports because of the global recession, continued caution among German consumers, and a sharp drop in investment will result in a dramatic contraction in Europe's largest economy in 2009, according to an IMF analysis.
Don't Forget the Role Automatic Stabilizers Can Play
When recession hits a market economy, trends such as lower tax takes and higher unemployment benefit payouts effectively ease fiscal policy. These "automatic stabilizers" have a prominent role in European economies, writes Horst Siebert of the Kiel Institut.
Are 'Temporary' Fiscal Boost Measures Really Reversible?
Fiscal measures to stimulate sluggish economies should be reversible, the IMF recommends, and governments should precommit to unwinding once economies recover. But the bulk of Europe's public expenditures are entitlements and for political reasons they are not reversible, writes Jean-Pierre Dumas.
Country Reports
Fiscal measures to stimulate sluggish economies should be reversible, the IMF recommends, and governments should precommit to unwinding once economies recover. But the bulk of Europe's public expenditures are entitlements and for political reasons they are not reversible, writes Jean-Pierre Dumas.
Country Reports
Qatar: 2008 Article IV Consultation - Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion;
Barbados: Report on the Observance of Standards and Codes - FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
Republic of Armenia: 2008 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility - Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Armenia.
Bolivia: 2008 Article IV Consultation - Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Bolivia
Greece: Report on the Observance of Standards and Codes - FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
Republic of Belarus: Financial System Stability Assessment - Update, including Report on the Observance of Standards and Codes on Banking Supervision
Qatar: Statistical Appendix
Côte d'Ivoire: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative - Preliminary Document
Malawi: Request for a One-Year Exogenous Shocks Facility Arrangement - Staf fReport; Press Release on the Executive Board Discussion; and Statement by theExecutive Director for Malawi
Germany: 2008 Article IV Consultation - Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Germany
Barbados: Report on the Observance of Standards and Codes - FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
Republic of Armenia: 2008 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility - Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Armenia.
Bolivia: 2008 Article IV Consultation - Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Bolivia
Greece: Report on the Observance of Standards and Codes - FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
Republic of Belarus: Financial System Stability Assessment - Update, including Report on the Observance of Standards and Codes on Banking Supervision
Qatar: Statistical Appendix
Côte d'Ivoire: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative - Preliminary Document
Malawi: Request for a One-Year Exogenous Shocks Facility Arrangement - Staf fReport; Press Release on the Executive Board Discussion; and Statement by theExecutive Director for Malawi
Germany: 2008 Article IV Consultation - Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Germany
Ukraine - Stand-By Arrangement - Review Under the Emergency Financing Mechanism
Kenya: Third Review Under the Poverty Reduction and Growth Facility Arrangement and Request for Waivers of Nonobservance of Performance Criteria - Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Kenya
Republic of Serbia: Request for Stand-By Arrangement - Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Serbia
Hungary - Stand-By Arrangement - Interim Review Under the Emergency Financing Mechanism
Kenya: Third Review Under the Poverty Reduction and Growth Facility Arrangement and Request for Waivers of Nonobservance of Performance Criteria - Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Kenya
Republic of Serbia: Request for Stand-By Arrangement - Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Serbia
Hungary - Stand-By Arrangement - Interim Review Under the Emergency Financing Mechanism
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