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This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980-2010, the paper finds that: (i) in model specifications that do not include country fixed effects, terms of trade volatility has a significant negative average effect on economic growth; (ii) once country fixed effects are included in the model, the average effect of terms of trade volatility on economic growth is not significantly different from zero; (iii) robust to the inclusion of country fixed effects, terms of trade volatility has significantly adverse effects on economic growth in countries with pro-cyclical fiscal policy; and (iv) in model specifications that do not include country fixed effects, financial development is a significant mediating factor with regard to the effect that terms of trade volatility has on economic growth, however, the significance of this effect vanishes once country fixed effects are included in the model. The paper also explores these relationships for the Organization of Eastern Caribbean States region. A key conclusion from the research is that countercyclical fiscal policy and deeper financial markets will have particularly high payoffs in reducing the adverse growth effects of terms of trade volatility in the Organization of Eastern Caribbean States region.
Economic conditions and volatility --- Economic theory & research --- Emerging markets --- Financial development --- Fiscal policy --- Growth --- Inequality --- Macroeconomics and economic growth --- Poverty reduction --- Private sector development --- Pro-poor growth --- Procyclicality --- Terms of trade --- Volatility
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The global financial crisis has focused much attention on procyclicality, particularly in the context of a macroprudential framework. This paper reviews a set of prudential measures that can be adopted by national authorities to deal with procyclicality and discusses issues in designing and implementing such measures. For developing countries, in addition to some general considerations on policy design and implementation, a range of issues may warrant special attention. These include the balance between financial stability and financial development objectives, selection and calibration of policy instruments according to national circumstances and taking into account data limitations and capacity constraints as well as other practical challenges, and continued efforts to improve supervisory independence, supervisory powers and analytical capacity and to ensure adequate resources in order to perform the required tasks. Given the limited practical experience with countercyclical prudential measures, developing countries (as well as developed countries) will have to ascend a learning curve and experiment with select instruments while carefully monitoring and evaluating their effectiveness over time before a framework matures.
Bankruptcy and Resolution of Financial Distress --- Banks & Banking Reform --- Countercyclical --- Currencies and Exchange Rates --- Debt Markets --- Emerging Markets --- Finance and Financial Sector Development --- Financial regulation --- Macroprudential --- Private Sector Development --- Procyclicality
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This paper presents estimates of the effects that terms of trade volatility has on growth of real gross domestic product per capita. Based on five-year non-overlapping panel data comprising 175 countries during 1980-2010, the paper finds that: (i) in model specifications that do not include country fixed effects, terms of trade volatility has a significant negative average effect on economic growth; (ii) once country fixed effects are included in the model, the average effect of terms of trade volatility on economic growth is not significantly different from zero; (iii) robust to the inclusion of country fixed effects, terms of trade volatility has significantly adverse effects on economic growth in countries with pro-cyclical fiscal policy; and (iv) in model specifications that do not include country fixed effects, financial development is a significant mediating factor with regard to the effect that terms of trade volatility has on economic growth, however, the significance of this effect vanishes once country fixed effects are included in the model. The paper also explores these relationships for the Organization of Eastern Caribbean States region. A key conclusion from the research is that countercyclical fiscal policy and deeper financial markets will have particularly high payoffs in reducing the adverse growth effects of terms of trade volatility in the Organization of Eastern Caribbean States region.
Economic conditions and volatility --- Economic theory & research --- Emerging markets --- Financial development --- Fiscal policy --- Growth --- Inequality --- Macroeconomics and economic growth --- Poverty reduction --- Private sector development --- Pro-poor growth --- Procyclicality --- Terms of trade --- Volatility
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This paper finds that lending by state banks is less procyclical than lending by private banks, especially in countries with good governance. Lending by state banks in high-income countries is even countercyclical. On the liability side, state banks expand potentially unstable non-deposit liabilities relatively little during booms, especially in countries with good governance. Public banks also report loan non-performance more evenly over the business cycle. Overall the results of the analysis suggest that state banks can play a useful role in stabilizing credit over the business cycle as well as during periods of financial instability. However, the track record of state banks in credit allocation remains quite poor, questioning the wisdom of using state banks as a short-term countercyclical tool.
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The global financial crisis has focused much attention on procyclicality, particularly in the context of a macroprudential framework. This paper reviews a set of prudential measures that can be adopted by national authorities to deal with procyclicality and discusses issues in designing and implementing such measures. For developing countries, in addition to some general considerations on policy design and implementation, a range of issues may warrant special attention. These include the balance between financial stability and financial development objectives, selection and calibration of policy instruments according to national circumstances and taking into account data limitations and capacity constraints as well as other practical challenges, and continued efforts to improve supervisory independence, supervisory powers and analytical capacity and to ensure adequate resources in order to perform the required tasks. Given the limited practical experience with countercyclical prudential measures, developing countries (as well as developed countries) will have to ascend a learning curve and experiment with select instruments while carefully monitoring and evaluating their effectiveness over time before a framework matures.
Bankruptcy and Resolution of Financial Distress --- Banks & Banking Reform --- Countercyclical --- Currencies and Exchange Rates --- Debt Markets --- Emerging Markets --- Finance and Financial Sector Development --- Financial regulation --- Macroprudential --- Private Sector Development --- Procyclicality
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Using non-linear methods, this paper finds that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. For industrial countries, the problem originates in the fact that, contrary to one's priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the "true" long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In the case of developing countries, the bias results from the fact that the multiplier for recessions and government spending going down (the "when-it-rains-it-pours" phenomenon) is larger than when government spending is going up.
Countercyclicality --- Cycle --- Debt Markets --- Economic Stabilization --- Finance and Financial Sector Development --- Fiscal Multiplier --- Fiscal Policy --- Macroeconomics and Economic Growth --- Procyclicality --- Public Sector Corruption and Anticorruption Measure --- Public Sector Development --- Urban Development --- Urban Economics
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Excessively procyclical fiscal policy can be harmful. This paper investigates to what extent the fiscal policies of sub-Saharan African countries were procyclical in recent years and the reasons for the degree of fiscal procyclicality among these countries. It finds that a tendency for procyclical fiscal policy was particularly pronounced among oil exporters and after the global financial crisis. It also finds a statistically significant causal link running from deeper financial markets and higher reserves coverage to lower fiscal policy procyclicality. Fiscal rules supported by strong political commitment and institutions seem to be key to facilitating progress for deeper financial markets and stronger reserves coverage.
Fiscal Policy --- Business Cycles --- Political Science --- Business & Economics --- Finance: General --- Macroeconomics --- Public Finance --- Production and Operations Management --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Macroeconomics: Production --- General Financial Markets: Government Policy and Regulation --- Finance --- Fiscal policy --- Fiscal stance --- Procyclical fiscal policy --- Output gap --- Procyclicality --- Production --- Financial sector policy and analysis --- Economic theory --- Financial risk management --- Chile
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This paper documents cyclical patterns of government expenditures in sub-Saharan Africa since 1970 and explains variation between countries and over time. Controlling for endogeneity, it finds government expenditures to be slightly more procyclical in sub-Saharan Africa than in other developing countries and some evidence that procyclicality in Africa has declined in recent years after a period of sharp increase through the 1990s. Greater fiscal space, proxied by lower external debt, and better access to concessional financing, proxied by larger aid flows, seem to be important factors in diminishing procyclicality in the region. The role of institutions is less clear cut: changes in political institutions have no impact on procyclicality.
Political Science --- Law, Politics & Government --- Public Finance --- Fiscal policy --- Finance, Public --- Africa, Sub-Saharan --- Economic policy. --- Cameralistics --- Public finance --- Tax policy --- Taxation --- Government policy --- Currency question --- Economic policy --- Public finances --- Finance: General --- Macroeconomics --- Fiscal Policy --- General Financial Markets: Government Policy and Regulation --- National Government Expenditures and Related Policies: General --- Debt --- Debt Management --- Sovereign Debt --- Public finance & taxation --- Finance --- Procyclicality --- Expenditure --- Fiscal space --- Public debt --- Financial risk management --- Expenditures, Public --- Debts, Public --- South Africa
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This paper examines fiscal cyclicality in the CEMAC region during 1980-2008. The issue has attracted very little empirical interest but is important if fiscal policies are to play a role in mitigating external shocks that exacerbate economic cycles across the region. We assess whether fiscal policies across these six countries have been procyclical using panel data to elaborate our analysis. Like in other sub-Saharan countries, total public expenditure in the CEMAC is found to be strongly procyclical. This is most pronounced for public investment, which overreacts to output growth with elasticity above 1. We further find that institutional weaknesses and poor governance partly explain this behavior. In contrast, the existence of an IMF-supported program can be a counterbalancing influence in attenuating this bias.
Business cycles --- Fiscal policy --- Tax policy --- Taxation --- Economic policy --- Finance, Public --- Econometric models. --- Government policy --- Finance: General --- Macroeconomics --- Public Finance --- Fiscal Policy --- National Government Expenditures and Related Policies: General --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- General Financial Markets: Government Policy and Regulation --- Public finance & taxation --- Finance --- Expenditure --- Fiscal stance --- Public investment spending --- Procyclicality --- Financial sector policy and analysis --- Expenditures, Public --- Public investments --- Financial risk management --- Gabon
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This paper examines the reasons for this, specifically focusing on regulations or market practices that can accentuate economic cycles. Although recognizing various practical limitations, new policy responses are identified that could help to mitigate procyclicality. Although economic cycles are taken as a natural and recurring phenomenon, there are ways in which private sector behavior and practices, prudential regulation, and macroeconomic policies can act to magnify such cycles. A key challenge for policymakers will be to counter the exacerbating effects of prudential regulations while at the same time keeping the risk-based decision-making processes that are increasingly used in the private sector. Procyclicality is also embedded in credit risk management systems and guidelines, because the inputs (default probabilities, loss severities, default correlations, and credit ratings) tend to vary positively with economic cycles. Credit ratings are supposed to be assigned on a “through-the-cycle” basis, and not according to transitory fluctuations in credit quality.
Banks and Banking --- Finance: General --- Macroeconomics --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: Government Policy and Regulation --- Portfolio Choice --- Investment Decisions --- Price Level --- Inflation --- Deflation --- Financial services law & regulation --- Finance --- Banking --- Liquidity risk --- Credit risk --- Procyclicality --- Liquidity --- Financial regulation and supervision --- Financial sector policy and analysis --- Asset and liability management --- Asset prices --- Prices --- Financial risk management --- Banks and banking --- Economics --- United States
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