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In low-income, capital-scarce economies that face financial and fiscal constraints, managing revenues from newly found natural resources can be a daunting challenge. The policy debate is how to scale up public investment to meet huge needs in infrastructure without generating a higher public deficit, and avoid the Dutch disease. This paper uses an open economy dynamic stochastic general equilibrium model that is compatible with low-income economies and calibrated on Ugandan's data to tackle this problem. The paper explores macroeconomic dynamics under three stylized fiscal policy approaches for managing resource windfalls: investing all in public capital, saving all in a sovereign wealth fund, and a sustainable-investing approach that proposes a constant share of resource revenues to finance public investment and the rest to be saved. The analysis finds that a gradual scaling-up of public investment yields the best outcome, as it minimizes macroeconomic volatility. The analysis then investigates the optimal oil share to use for public investment; the criterion minimizes a loss function that accounts for households' welfare and macroeconomic stability in an environment featuring oil price volatility. The findings show that, depending on the policy maker's preference for stability, 55 to 85 percent of oil windfalls should be invested.
Fiscal Policy --- Macroeconomic Volatility --- Optimal Resource Allocation --- Public Investment --- Resource-Rich Developing Countries
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This paper measures the size of automatic fiscal revenue stabilizers and evaluates their role in Latin America. It introduces a relatively rich tax structure into a dynamic, stochastic, multi-sector small open economy inhabited by rule-of-thumb consumers (who consume their wages and do not save or borrow) and Ricardian households to study the stabilizing properties of different parameters of the tax code. The economy faces multiple sources of business cycle fluctuations: (1) world capital market shocks; (2) world business cycle shocks; (3) terms of trade shocks; (4) government spending shocks; and (5) nontradable and (6) tradable sector technology innovations. Calibrating the model economy to a typical Latin American economy allows the evaluation of its ability to mimic the region's observed business cycle frequency properties and the assessment of the quantitative relationship between tax code parameters, business cycle forcing variables, and business cycle behavior. The model captures many of the salient features of Latin America's business cycle facts and finds that the degree of smoothing provided by the automatic revenue stabilizers-described by various properties of the tax system-is negligible. Simulation results seem to suggest an invariance property for middle-income countries: the amplitude of the business cycle is independent of the tax structure. And government size-measured by the GDP ratio of government spending-plays the role of an automatic stabilizer, but its smoothing effect is very weak.
Bank Policy --- Business cycle --- Capital market --- Currencies and Exchange Rates --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Finance and Financial Sector Development --- Fiscal policy --- Government spending --- Macroeconomic volatility --- Macroeconomics and Economic Growth --- Open economy --- Private Sector Development --- Tax --- Tax code --- Tax system --- Taxation and Subsidies
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East Asia has experienced a dramatic decrease in output growth volatility over the past 20 years. This is good news, as output growth volatility affects poor households because of coping strategies that have long-term, harmful consequences, and the overall economy through its negative impact on economic growth. This paper investigates the factors behind this long decline in volatility, and derives lessons about ways to mitigate renewed upward pressure in face of the financial crisis. The authors show that if, on the one hand, high trade openness has sustained economic growth in the past several decades, on the other hand, it has made countries more vulnerable to external fluctuations. Although less frequent terms of trade shocks and more stable growth rates of trading partners have helped to reduce volatility in the past, the same external factors are now putting renewed pressure on volatility. The way forward seems therefore to be to counterbalance the external upward pressure on volatility by improving domestic factors. Elements under domestic control that can help countries deal with high volatility include more accountable institutions, better regulated financial markets, and more stable fiscal and monetary policies.
Business cycle --- Capita growth --- Crisis volatility --- Economic Conditions and Volatility --- Economic growth --- Economic outlook --- Economic performance --- Emerging Markets --- Financial markets --- Fluctuations --- Growth rate --- Growth rates --- Growth volatility --- High trade openness --- Income --- Low-income countries --- Macroeconomic volatility --- Macroeconomics and Economic Growth --- Monetary policies --- Private Sector Development --- Recessions --- Standard deviation --- Trade shocks --- World economy
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Using the dating algorithm by Harding and Pagan (2002) on a quarterly database for 23 emerging market economies (EMEs) and 12 developed countries over the period 1980.Q1 - 2006.Q2, the authors proceed to characterize and compare the business cycle features of these two groups. They first find that recessions are deeper and more frequent among EMEs (especially, among LAC countries) and that expansions are more sizable and longer (especially, among East Asian countries). After this characterization, this paper explores the linkages between the cost of recessions (as measured by the average annual rate of output loss in the peak-to-trough phase of the cycle) and several country-specific factors. The main findings are: (a) adverse terms of trade shocks raises the cost of recessions in countries with a more open trade regime, deeper financial markets and, surprisingly, a more diversified output structure. (b) U.S. interest rate shocks seem to have a significant impact on the cost of recessions in East Asian countries. (c) Recessions tend to be deeper if they coincide with a sudden stop, but the effect tends to be mitigated in countries with deeper domestic credit markets. (d) Countries with stronger institutions tend to have less costly recessions.
Banks & Banking Reform --- Business cycle --- Business cycles --- Central bank --- Commodity prices --- Credit markets --- Currencies and Exchange Rates --- Debt Markets --- Domestic credit --- Economic policies --- Economic Theory & Research --- Emerging economies --- Emerging market --- Emerging market economies --- Emerging Markets --- Exchange rate --- Finance and Financial Sector Development --- Financial markets --- Financial shocks --- Interest rate --- International bank --- Macroeconomic volatility --- Macroeconomics and Economic Growth --- Output loss --- Private Sector Development --- Tax --- Trade regime
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Using the dating algorithm by Harding and Pagan (2002) on a quarterly database for 23 emerging market economies (EMEs) and 12 developed countries over the period 1980.Q1 - 2006.Q2, the authors proceed to characterize and compare the business cycle features of these two groups. They first find that recessions are deeper and more frequent among EMEs (especially, among LAC countries) and that expansions are more sizable and longer (especially, among East Asian countries). After this characterization, this paper explores the linkages between the cost of recessions (as measured by the average annual rate of output loss in the peak-to-trough phase of the cycle) and several country-specific factors. The main findings are: (a) adverse terms of trade shocks raises the cost of recessions in countries with a more open trade regime, deeper financial markets and, surprisingly, a more diversified output structure. (b) U.S. interest rate shocks seem to have a significant impact on the cost of recessions in East Asian countries. (c) Recessions tend to be deeper if they coincide with a sudden stop, but the effect tends to be mitigated in countries with deeper domestic credit markets. (d) Countries with stronger institutions tend to have less costly recessions.
Banks & Banking Reform --- Business cycle --- Business cycles --- Central bank --- Commodity prices --- Credit markets --- Currencies and Exchange Rates --- Debt Markets --- Domestic credit --- Economic policies --- Economic Theory & Research --- Emerging economies --- Emerging market --- Emerging market economies --- Emerging Markets --- Exchange rate --- Finance and Financial Sector Development --- Financial markets --- Financial shocks --- Interest rate --- International bank --- Macroeconomic volatility --- Macroeconomics and Economic Growth --- Output loss --- Private Sector Development --- Tax --- Trade regime
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East Asia has experienced a dramatic decrease in output growth volatility over the past 20 years. This is good news, as output growth volatility affects poor households because of coping strategies that have long-term, harmful consequences, and the overall economy through its negative impact on economic growth. This paper investigates the factors behind this long decline in volatility, and derives lessons about ways to mitigate renewed upward pressure in face of the financial crisis. The authors show that if, on the one hand, high trade openness has sustained economic growth in the past several decades, on the other hand, it has made countries more vulnerable to external fluctuations. Although less frequent terms of trade shocks and more stable growth rates of trading partners have helped to reduce volatility in the past, the same external factors are now putting renewed pressure on volatility. The way forward seems therefore to be to counterbalance the external upward pressure on volatility by improving domestic factors. Elements under domestic control that can help countries deal with high volatility include more accountable institutions, better regulated financial markets, and more stable fiscal and monetary policies.
Business cycle --- Capita growth --- Crisis volatility --- Economic Conditions and Volatility --- Economic growth --- Economic outlook --- Economic performance --- Emerging Markets --- Financial markets --- Fluctuations --- Growth rate --- Growth rates --- Growth volatility --- High trade openness --- Income --- Low-income countries --- Macroeconomic volatility --- Macroeconomics and Economic Growth --- Monetary policies --- Private Sector Development --- Recessions --- Standard deviation --- Trade shocks --- World economy
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This paper measures the size of automatic fiscal revenue stabilizers and evaluates their role in Latin America. It introduces a relatively rich tax structure into a dynamic, stochastic, multi-sector small open economy inhabited by rule-of-thumb consumers (who consume their wages and do not save or borrow) and Ricardian households to study the stabilizing properties of different parameters of the tax code. The economy faces multiple sources of business cycle fluctuations: (1) world capital market shocks; (2) world business cycle shocks; (3) terms of trade shocks; (4) government spending shocks; and (5) nontradable and (6) tradable sector technology innovations. Calibrating the model economy to a typical Latin American economy allows the evaluation of its ability to mimic the region's observed business cycle frequency properties and the assessment of the quantitative relationship between tax code parameters, business cycle forcing variables, and business cycle behavior. The model captures many of the salient features of Latin America's business cycle facts and finds that the degree of smoothing provided by the automatic revenue stabilizers-described by various properties of the tax system-is negligible. Simulation results seem to suggest an invariance property for middle-income countries: the amplitude of the business cycle is independent of the tax structure. And government size-measured by the GDP ratio of government spending-plays the role of an automatic stabilizer, but its smoothing effect is very weak.
Bank Policy --- Business cycle --- Capital market --- Currencies and Exchange Rates --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Finance and Financial Sector Development --- Fiscal policy --- Government spending --- Macroeconomic volatility --- Macroeconomics and Economic Growth --- Open economy --- Private Sector Development --- Tax --- Tax code --- Tax system --- Taxation and Subsidies
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The author evaluates the effectiveness of policy measures adopted by Chile and Colombia, aiming to mitigate the deleterious effects of pro-cyclical capital flows. In the case of Chile, according to his Generalized Method of Moments (GMM) analysis, capital controls succeeded in reducing net short-term capital flows but did not affect long-term flows. As far as Colombia is concerned, the regulations were capable of affecting total flows and also long-term ones. In addition, the co-integration models indicate that the regulations did not have a direct effect on the real exchange rate in the Chilean case. Nonetheless, the model used for Colombia did detect a direct impact of the capital controls on the real exchange rate. Therefore, the results do not seem to support the idea that those regulations were easily evaded.
Asset Price --- Balance Sheets --- Bank Policy --- Banks and Banking Reform --- Boom-Bust Cycle --- Capital Account --- Capital Flows --- Capital Inflows --- Currencies and Exchange Rates --- Debt Markets --- Developing Countries --- Economic Theory and Research --- Emerging Economies --- Emerging Markets --- Exchange --- Finance and Financial Sector Development --- Financial Liberalization --- Interest --- International Capital --- International Capital Markets --- International Economics & Trade --- Liquidity --- Macroeconomic Management --- Macroeconomic Volatility --- Macroeconomics and Economic Growth --- Monetary Policy --- Moral Hazard --- Private Sector Development --- Real Exchange Rate --- Short-Term Capital
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The author evaluates the effectiveness of policy measures adopted by Chile and Colombia, aiming to mitigate the deleterious effects of pro-cyclical capital flows. In the case of Chile, according to his Generalized Method of Moments (GMM) analysis, capital controls succeeded in reducing net short-term capital flows but did not affect long-term flows. As far as Colombia is concerned, the regulations were capable of affecting total flows and also long-term ones. In addition, the co-integration models indicate that the regulations did not have a direct effect on the real exchange rate in the Chilean case. Nonetheless, the model used for Colombia did detect a direct impact of the capital controls on the real exchange rate. Therefore, the results do not seem to support the idea that those regulations were easily evaded.
Asset Price --- Balance Sheets --- Bank Policy --- Banks and Banking Reform --- Boom-Bust Cycle --- Capital Account --- Capital Flows --- Capital Inflows --- Currencies and Exchange Rates --- Debt Markets --- Developing Countries --- Economic Theory and Research --- Emerging Economies --- Emerging Markets --- Exchange --- Finance and Financial Sector Development --- Financial Liberalization --- Interest --- International Capital --- International Capital Markets --- International Economics & Trade --- Liquidity --- Macroeconomic Management --- Macroeconomic Volatility --- Macroeconomics and Economic Growth --- Monetary Policy --- Moral Hazard --- Private Sector Development --- Real Exchange Rate --- Short-Term Capital
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This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export diversification indicators, it presents strong evidence pointing to an important role for export diversification in reducing the effect of trade openness on growth volatility. The authors also identify positive thresholds for product diversification at which the effect of openness on volatility changes sign. The effect is shown to be positive only for a minority of countries with highly concentrated export baskets. This result is shown to be robust to both explicit accounting for endogeneity as well as the inclusion of a host of additional controls.
Achieving Shared Growth --- Developing countries --- Economic activity --- Economic Conditions and Volatility --- Economic crisis --- Economic development --- Economic growth --- Economic management --- Emerging Markets --- External shocks --- Financial markets --- Fluctuations --- Free Trade --- Growth effect --- Growth effects --- Growth process --- Growth rates --- Growth volatility --- Interest rates --- International Economics and Trade --- International trade --- Liberalization --- Macroeconomic volatility --- Macroeconomics and Economic Growth --- Markets and Market Access --- Poverty Reduction --- Private Sector Development --- Structural characteristics --- Trade openness
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