Back Matter

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
May 2011
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    New Publications from the Western Hemisphere Department, July 2009–April 2011

    1. IMF Working Papers

    WP/11/44 – Sovereign Credit Ratings and Spreads in Emerging Markets: Does Investment Grade Matter?, by Michelle Tejada and Laura Jaramillo.

    WP/11/32 – Recession and Policy Transmission to Latin American Tourism: Does Expanded Travel to Cuba Offset Crisis Spillovers?, by Andrew M. Wolfe and Rafael Romeu.

    WP/11/17 – Strengthening Chile’s Rule-Based Fiscal Framework, by Teresa Daban Sanchez.

    WP/11/14 – Interpreting Currency Movements During the Crisis: What’s the Role of Interest Rate Differences?, by Thomas Dowling and Nicoletta Batini.

    WP/11/10 – What Is Driving Financial De-dollarization in Latin America?, by Mercedes Garcia-Escribano and Sebastian Sosa.

    WP/11/2 – The Chilean Output Gap, by Nicolas E. Magud and Leandro Medina.

    WP/10/292 – Weathering the Global Storm: The Benefits of Monetary Policy Reform in the LA5 Countries, by Jorge Iván Canales Kriljenko, Luis Ignacio Jácome, Ali Alichi, and Ivan Luis de Oliveira Lima.

    WP/10/279 – A Note on Terms of Trade Shocks and the Wage Gag, by David O. Coble Fernandez and Nicolas E. Magud.

    WP/10/271 – When and Why Worry About Real Exchange Rate Appreciation? The Missing Link between Dutch Deisease and Growth, by Nicolas E. Magud and Sebastian Sosa.

    WP/10/248 – Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to Do with Them?, by Carlos Caceres, Ana Corbacho, and Leandro Medina.

    WP/10/241 – On the Distributive Effects of Terms of Trade Shocks: The Role of Non-tradable Goods, by Sebastian Galiani, Daniel Heymann, and Nicolas E. Magud.

    WP/10/192 – The Dynamic Effects of Commodity Prices on Fiscal Performance in Latin America, by Leandro Medina.

    WP/10/169 – Peru: Drivers of De-dollarization, by Mercedes Garcia-Escribano.

    WP/10/168 – Does Procyclical Fiscal Policy Reinforce Incentives to Dollarize Sovereign Debt?, by Anastasia Guscina, Anna Ilyina, and Herman Kamil.

    WP/10/117 – Determinants of Investment Grade Status in Emerging Markets, by Laura Jaramillo.

    WP/10/108 – The Global Financial Crisis and its Impact on the Chilean Banking System, by Jorge A. Chan-Lau.

    WP/10/107 – Balance Sheet Network Analysis of Too-Connected-to-Fail Risk in Global and Domestic Banking Systems, by Jorge A. Chan-Lau.

    WP/10/102 – The Global Credit Crunch and Foreign Banks’ Lending to Emerging Markets: Why Did Latin America Fare Better?, by Herman Kamil and Kulwant Rai.

    WP/10/98 – Regulatory Capital Charges for Too-Connected-to-Fail Institutions: A Practical Proposal, by Jorge A. Chan-Lau.

    WP/10/86 – The Embodiment of Intangible Investment Goods: A Q-Theory Approach, by Nazim Belhocine.

    WP/10/62 – The U.S. Federal Debt Outlook: Reading the Tea Leaves, by Oya Celasun and Geoffrey Keim.

    WP/10/60 – The Influence of “Big Brothers”: How Important Are Regional Factors for Uruguay?, by Sebastián Sosa.

    WP/10/59 – Caribbean Bananas: The Macroeconomic Impact of Trade Preference Erosion, by Paul Cashin, Cleary Haines, and Montfort Mlachila.

    WP/10/54 – Precautionary Reserves: An Application to Bolivia, by Fabian Valencia.

    WP/10/43 – Current Account Balance Estimates for Emerging Market Economies, by Leandro Medina, Jordi Prat, and Alun Thomas.

    WP/10/42 – Informal Labour and Credit Markets: A Survey, by Nicoletta Batini, Young-Bae Kim, Paul Levine, and Emanuela Lotti.

    WP/10/35 – Spillovers to Central America in Light of the Crisis: What a Difference a Year Makes, by Andrew Swiston.

    WP/10/23 – Financial Shocks and TFP Growth, by Marcello Estevão and Tiago Severo.

    WP/10/13 – Canada’s Potential Growth: Another Victim of the Crisis?, by Marcello Estevão and Evridiki Tsounta.

    WP/10/5 – The Impact of the Global Crisis on Canada: What Do Macro-Financial Linkages Tell Us?, by Rupa Duttagupta and Natalia Barrera.

    WP/10/3 – Investment by Large Firms in Argentina, by Alvaro Piris.

    WP/10/2 – Public Debt Sustainability and Management in a Compound Option Framework, by Jorge A. Chan-Lau and Andre Santos.

    WP/10/1 – Post-Crisis Bank Behavior: Lessons from Mercosur, by Sarah Sanya and Montfort Mlachila.

    WP/09/280 – The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact, by Pelin Berkmen, Gaston Gelos, Robert Rennhack, and James P. Walsh.

    WP/09/272 – Who Disciplines Bank Managers?, by Martin Cihák, Andrea Maechler, Klaus Schaeck, and Stéphanie Stolz.

    WP/09/266 – How Does Public External Debt Affect Corporate Borrowing Costs in Emerging Markets?, by Senay Agca and Oya Celasun.

    WP/09/264 – Investment-Specific Productivity Growth: Chile in a Global Perspective, by Gabriel Di Bella and Martin Cerisola.

    WP/09/259 – From Lombard Street to Avenida Paulista: Foreign Exchange Liquidity Easing in Brazil in Response to the Global Shock of 2008–09, by Mark R. Stone, W. Christopher Walker, and Yosuke Yasui.

    WP/09/250 – The Stock of Intangible Capital in Canada: Evidence from the Aggregate Value of Securities, by Nazim Belhocine.

    WP/09/240 – Treating Intangible Inputs as Investment Goods: The Impact on Canadian GDP, by Nazim Belhocine.

    WP/09/235 – Is the Canadian Housing Market Overvalued? A Post-Crisis Assessment, by Evridiki Tsounta.

    WP/09/199 – Modernizing Bank Regulation in Support of Financial Deepening: The Case of Uruguay, by Gustavo Adler, Mario Mansilla, and Torsten Wezel.

    WP/09/198 – The Real Effects of Financial Sector Risk, by Alexander F. Tieman and Andrea Maechler.

    WP/09/162 – Recent Advances in Credit Risk Modeling, by Christian Capuano, Jorge Chan-Lau, Giancarlo Gasha, Carlos Medeiros, Andre Santos, and Marcos Souto.

    WP/09/152 – Why Are Canadian Banks More Resilient?, by Rocco Huang and Lev Ratnovski.

    2. Selected Issues Papers

    Barbados

    • Growth Dynamics, by Gamal El-Masry and Lulu Shui.

    • External Stability, by John Ralyea.

    • Barbados’ Financial System in the Aftermath of the Global Crisis, by Carla Macario.

    Bolivia

    • Hydrocarbon Revenue Sharing Arrangements, by Fabian Bornhorst.

    • Precautionary Reserves: An Application to Bolivia, by Fabian Valencia.

    Canada

    • The Post-Crisis Canadian Housing Market, by Evridiki Tsounta.

    • Interpreting Canada’s Currency Movements During the Crisis, by Nicoletta Batini and Thomas Dowling.

    • Canada’s Potential Growth: A Post-Crisis Assessment, by Evridiki Tsounta.

    • The Bumpy Road Ahead for North American Automakers, by Nicoletta Batini, Grace Bin Li, and John Dowling.

    • Canada’s Housing Finance System: Policy Backdrop, by John Kiff.

    • Canadian Banks and the Credit Turmoil, by Lev Ratnovski and Rocco Huang.

    • Canadian Residential Mortgage Markets: Boring But Effective?, by John Kiff.

    • How Do Commodity Prices Affect Economic Slumps in Commodity Exporters?, by Rupa Duttagupta.

    • Is the Canadian Housing Market Overvalued? A Tale of Two Regions, by Evridiki Tsounta.

    • The Impact of Global Shocks on Canada—What do Macro-Financial Linkages Tell Us?, by Rupa Duttagupta and Natalia Barrera.

    Caribbean

    • Growth in the ECCU: What Went Wrong and Can It Be Fixed?, by Nita Thacker, Sebastian Acevedo, Joong Shik Kang, Roberto Perrelli, and Melesse Tashu.

    • Public debt in ECCU Countries, by Arnold McIntyre and Sumiko Ogawa.

    • Rationalizing Public Expenditure in the ECCU, by Shamsuddin Tareq, Alejandro Simone, Koffie Nassar, and Arina Viseth.

    • Insurance Against Natural Disasters in the Caribbean, by Yu Ching Wong, Anthony Lemus, and Nancy Wagner.

    • Risk Analysis of Public Debt in the Caribbean: A “Fan-Chart” Approach, by Koffie Nassar and Catherine Pattillo.

    Chile

    • Strengthening Chile’s Rule-based Fiscal Framework, by Teresa Dabán.

    • Too-Connected-to-Fail Risk in the Chilean Banking System: A Balance Sheet Network Analysis, by Jorge A. Chan-Lau.

    • A Note on Terms of Trade Shocks and the Wage Gap, by Nicolas Magud.

    • Revisiting the Estimation of the Chilean Output Gap, by Nicolas Magud and Leandro Medina.

    • A Longer-Term Approach to Fiscal Policy in Chile, by Borja Gracia, Gabriel Di Bella, and Martin Cerisola.

    • Investment-Specific Productivity Growth: Chile in a Global Perspective, by Gabriel Di Bella and Martin Cerisola.

    • The Global Financial Turmoil and Its Impact on Chilean Banks, by Jorge Chan-Lau.

    Colombia

    • An Assessment of Financial Sector Indicators for the Colombian Corporate Sector, by Mercedes Vera-Martin.

    • Are Capital Controls Effective in the 21st Century? The Recent Experience of Colombia, by Benedict J. Clements and Herman Kamil.

    • Determinants of Investment Grade Status and Implications for Colombia’s Public Debt, by Laura Jaramillo.

    • Does Financial Soundness Affect Credit Growth?, by Iva Petrova and Enrique Flores.

    • Monetary and Fiscal Policy Options for Dealing with External Shocks: Insights from the GIMF for Colombia, by Benedict J. Clements, Enrique Flores, and Daniel Leigh.

    • The Colombian Banking Sector—A Contingent Claims Analysis, by Marcos Souto and Lisandro Abrego.

    Guyana

    • The Impact of the Global Crisis and Policy Response, by Magda Kandil.

    • The Impact of the EU Sugar Trade Preferences and their Erosion, by Felix Eschenbach.

    • Assessing the Fiscal Structural Stance, by Carla Macario.

    Mexico

    • Estimating Default Frequences and Macrofinancial Linkages in the Mexican Banking System, by Rodolphe Blavy and Marcos Souto.

    • Exchange Rate Exposure of the Mexican Corporate Sector: Progress and Remaining Vulnerabilities, by Herman Kamil and W. Christopher Walker.

    • Expanding the Regulatory Perimeter: The Case of Sofoles and Sofomes, by Jose Giancarlo Gasha.

    • Labor Market Informality and Macroeconomic Performance, by Kristin Magnusson Bernard.

    • Reforming the Fiscal Framework: Budget Rules and Fiscal Risks, by Geremia Palomba.

    • The Global Crisis and Potential Growth in Mexico, by Kornelia Krajnyak.

    Panama

    • Benefits From Attaining Investment Grade Status and Implications for Panama, by Mario Dehesa.

    • Macro-Financial Linkages in Panama, by Juliana Araujo and Kristin Magnusson.

    Paraguay

    • Assessing the Appropriateness of Monetary and Fiscal Policies in an Adverse External Environment, by Montfort Mlachila and Brieuc Monfort.

    • Financial Sector Issues: Advances in the Implementation of the Financial Sector Assessment Program Recommendations, by Sylwia Nowak.

    • Paraguay’s Tax System in a Regional Perspective, by Ernesto Crivelli.

    • Post-Crisis Behavior of Banks in Mercosur, by Sarah O. Sanya and Montfort Mlachila.

    • Sustainable Management of Revenues from Itaipu, by Teresa Dabán-Sánchez and Walter Zarate.

    • The Monetary Policy Transmission Mechanism in Paraguay, by Santiago Acosta-Ormaechea and Teresa Dabán-Sánchez.

    Peru

    • Balance Sheet Vulnerabilities in a Dollarized Economy, by Maria Gonzalez.

    • Credit Growth: Anatomy and Policy Responses, by Luis Breuer, Jose Gasha, Giancarlo Peschiera, and Juan Alonso Perez-Salmon.

    • Disentangling the Motives for Foreign Exchange Intervention in Peru, by Maria Gonzalez.

    • Drivers of De-Dollarization, by Mercedes Garcia-Escribano.

    • Macroeconomic Stability and the Role of Fiscal Policy, by Daniel Leigh.

    • Performance of Alternative Fiscal Rules: An Application to Peru, by Isabel Rial.

    • Potential Growth and Output Gap in Peru, by Leandro Medina.

    • Progress in Strengthening Peru’s Prudential Framework, by Patrick Amir Imam and Jose Giancarlo Gasha.

    • Regional Disparities and Public Transfers, by Mercedes Garcia-Escribano.

    • What to Expect when you are Expecting...Large Capital Inflows? Lessons from Cross-Country Experiences, by Mercedes Vera Martin.

    Uruguay

    • Commodity Prices, Growth and the Fiscal Position in Uruguay, by Rita Babihuga.

    • Dynamic Loan Loss Provisioning in Uruguay, by Torsten Wezel.

    • Exchange Rate and Competitiveness Assessment, by Felipe Zanna.

    • How Important Are Regional Factors for Uruguay?, by Sebastian Sosa.

    United States

    • The Great Recession and Structural Unemployment, by Thomas Dowling, Marcello Estevão, and Evridiki Tsounta.

    • Prospects for the U.S. Household Saving Rate, by Martin Sommer.

    • Production and Jobs: Can We Have One Without the Other?, by Nicoletta Batini, Marcello Estevão, and Geoff Keim.

    • The Financing of U.S. Federal Budget Deficits, by Oya Celasun and Martin Sommer.

    • The U.S. Government’s Role in Reaching the American Dream, by Evridiki Tsounta.

    • The U.S. Fiscal Gap: Who Will Pay and How?, by Nicoletta Batini, Giovanni Callegari, and Julia Guerreiro.

    • Spillovers from U.S. Federal Debt Issuance: The Case of Emerging Market Sovereign Borrowing, by Oya Celasun.

    • Strategic Priorities for the Reform of U.S. Financial Regulation, by Ashok Bhatia, Andrea Maechler, and Paul Mills.

    • The U.S. Federal Debt Outlook: A Stochastic Simulation Approach, by Oya Celasun and Geoffrey Keim.

    • U.S. Potential Growth in the Aftermath of the Crisis, by Natalia Barrera, Marcello Estevao, and Geoffrey Keim.

    Note: This chapter was prepared by Gustavo Adler and Camilo E. Tovar, with research assistance from Ben Sutton.

    In the current juncture, strong appreciation pressures resulting from capital inflows have raised concerns among policymakers about risks of sudden and sharp reversals, as well as possible “Dutch-disease” effects. For a discussion of these considerations, and of alternative policy tools to confront such risks, see Eyzaguirre and others (2011); IMF (2011c); Ostry and others (2011), and the May 2010 and October 2010 Regional Economic Outlook—Western Hemisphere.

    See, for example, Jara and others (2009) for a discussion on FX intervention policies during the global crisis.

    Unsterilized intervention, as a policy that induces an expansion of the money supply would, ceteris paribus, lead to a loss of value of the currency (in terms of both inflation and exchange rate depreciation).

    In some countries, the Treasury may have also conducted FX operations with the aim of influencing the exchange rate. However, disentangling those from regular cash operations is difficult as data are frequently unavailable. In other instances, central banks conducted FX operations on behalf of other agents (with no change in their FX position). The analysis leaves aside the first type, but corrects for the second type of transactions, by focusing on central bank FX operations net of those undertaken on behalf of other agents.

    The sample includes 15 countries, of which 8 are Latin American (Brazil, Chile, Colombia, Costa Rica, Guatemala, Mexico, Peru, and Uruguay), and the remainder are either EMEs (India, Indonesia, Russia, Thailand, and Turkey) or “small” advanced economies (Australia and Israel).

    This is the “endogeneity problem,” well known in the literature on FX intervention.

    These studies describe how central banks characterize and evaluate their own policies. The Bank for International Settlements (BIS), 2005, for example, presents a description of central banks’ approaches to FX intervention in Chile and Mexico, in the context of strengthening the credibility of their monetary frameworks, and on the relevance of policy announcements (see De Gregorio and Tokman, 2005; and Sidaoui, 2005). In the case of Peru, the survey offers an overview of FX intervention considerations for a highly dollarized economy (Armas, 2005). Finally, the reviews for Colombia and Mexico present a discussion on the use of option rules for FX intervention (Uribe and Toro, 2005; and Sidaoui, 2005).

    High frequency data on intervention are available for Australia, Chile, Colombia, Costa Rica, Guatemala, Israel, Mexico, Peru, Turkey, and Uruguay. Countries for which reserves data are used instead are Brazil, India, Indonesia, Russia, and Thailand. See details in Annex 3.1.

    There is a large body of literature examining the reasons behind the accumulation of international reserves, which we do not address in this chapter. Interested readers are referred to IMF (2011c).

    In early 2011, the central bank of Brazil intervened heavily in these three markets. As of late February, FX spot, swap, and forward purchases amounted to US$ 14.9 billion, US$ 6.4 billion, and US$ 0.4 billion, respectively.

    The analysis is asymmetric, focusing only on “positive” interventions (that is, purchases of foreign exchange or derivative operations with similar effects).

    Countries with preannounced quantity-based rules—or no intervention—for most of the period (Chile, Israel, Mexico, and Turkey) do not have sufficient variance in their interventions to allow estimation of this reaction function.

    See also Gonzalez (2009) for an analysis of motives for intervention in Latin America.

    Several measures are explored, including the simple 30-day change in the exchange rate as well as the 30-day slope of a (recursively estimated Hodrick-Prescott) trend.

    Alternative measures of volatility are also explored, including the standard deviation of daily exchange rate changes; and a measure of variance stripped of the variance generated by the trend (this entails computing the variance of the exchange rate with respect to the Hodrick-Prescott trend rather than the period average).

    Ratios are measured relative to other countries in the sample to emphasize the importance of relative, rather than absolute, ratios—as recently stressed by the literature on reserve accumulation.

    Results of the reaction function should be interpreted as reflecting the “average” behavior over the sample period, and thus may not reflect current preferences.

    Some countries display negative coefficients, possibly reflecting reverse causality (that is, intervention reduces volatility).

    This may partly reflect low variability of the reserve ratios.

    This likely reflects that most variables included in the right-hand side of the regression move relatively slowly (except for lagged exchange rate and volatility). Such specification allows us to construct an instrumental variable for the exchange rate equation that is less correlated with contemporaneous exchange rate movements (by capturing motives for intervention that respond primarily to trends rather than high frequency shocks).

    Economic theory and past work provide limited guidance on how to model determinants of the exchange rate. We choose a simple specification, as described in Annex 3.2.

    For countries with preannounced quantity-based rules, actual intervention data are used (see further details in Annex 3.2).

    This reflects precisely the differences in behavior that allow us to identify the effect of intervention in the econometric exercise.

    This should be interpreted as an average effect. Possibly other country characteristics not included in this estimation (for example, FX market size) may also play a role in determining the degree of effectiveness.

    This result is consistent with previous findings in the literature showing that there is no clear evidence of a difference between discretionary and rule-based intervention in terms of their effectiveness (see Fatum and King, 2005).

    See Chinn and Ito, 2008.

    The appropriate length of the interval remains an open issue. Although long intervals could provide more information on the persistence of the effects, short intervals provide more assurances that other factors (new idiosyncratic or global shocks) are not polluting the comparison.

    Infrequent regime changes, by definition, do not depend on contemporaneous shocks and therefore endogeneity problems are unlikely.

    Chile, like other EMEs, accumulated significant foreign assets in recent years. However, unlike most other EMEs, this was achieved via fiscal saving rather than central bank intervention, thus preventing the accumulation of domestic liabilities observed in other countries (see also section on quasi-fiscal costs).

    The sample includes Australia, Brazil, Chile, Colombia, Costa Rica, Guatemala, India, Indonesia, Israel, Mexico, Peru, Russia, Thailand, Turkey, and Uruguay.

    In most cases, the fit of the model on the 180 days prior to the event is good, confirming that significant information on global shocks is available in the behavior of other currencies. Furthermore, this finding suggests that most short-term movements of emerging market currencies against the U.S. dollar are driven by external shocks, rather than by shocks specific to themselves. This fact is also exploited in the full-fledged panel approach to identify the effect of intervention.

    Sterilization can be defined as a policy that insulates the desired monetary policy stance from FXI; in quantity terms, this is often thought of simply as insulating the normal path of the monetary base from changes in the central bank’s net FX position. In practice, this can be gauged by comparing the dynamics of the central bank’s NFAs (a proxy of the FX position) and NDAs.

    In Brazil and Uruguay, this may have reflected, at least initially, a deliberate policy of rebuilding reserve buffers, as these countries started the period with low NFA positions (a legacy of financial crises earlier in the decade).

    The extent of book costs depends on the degree of sterilization and the instruments used, as these determine the actual amount of interest payments arising from central bank liabilities. In contrast, the economic cost of FX interventions is determined only by the changes in net foreign assets arising from operations in the FX market. Expansions of the monetary base conducted through (the unsterilized part of) FX operations still carry the opportunity cost of the central bank’s domestic liabilities (that is, the monetary expansion alternatively could have been done by purchasing local currency debt instruments). Similarly, the use of certain sterilization instruments, such as reserve requirements remunerated at below-market rates, or sterilization through fiscal surpluses, can reduce book costs. Such approaches, however, can be considered as separate policy decisions that could have been taken irrespective of the FX intervention policies.

    It is also worth mentioning that the cost of intervention is different from the cost of holding reserves. While intervention can be defined as an operation that changes central banks’ net FX position, a reserve accumulation operation can be thought of as a portfolio reallocation (toward more liquid instruments) within FX assets. Thus, the cost of intervention can be measured by the deviations from interest rate parity, and the costs of reserve accumulation can be measured as the risk-adjusted return differential between reserve assets and other (nonliquid) FX assets. For a discussion on how to measure the costs of holding reserves, see Levy Yeyati, 2008; and Jeanne and Ranciere, 2009.

    These estimates may overstate the costs of intervention for some countries to the extent that the “cycle” of exchange rate fluctuations has not been completed. For example, in cases of overvalued currencies, valuation losses can be expected to be offset by eventual gains that could arise from the adjustment of the exchange rate toward its equilibrium value—provided that these are also accompanied by similar deviations from interest rate parity.

    See footnote 1 on page 46.

    Cases of preannounced amount-based rules (Chile, Israel, Mexico, and Turkey) do not show sufficient variability, for the most part, in their interventions series in order to estimate a reaction function.

    The valuation adjustment is based in the shares of the different currencies in the stock of international reserves of the average EM country as reported by the Currency Composition of Official Foreign Exchange Reserves (COFER) database. Individual country data are not available (owing to confidentiality restrictions). See http://www.imf.org/extemal/np/sta/cofer/eng/index.htm for details.

    While lack of instrumentation in these cases could, in principle, introduce a source of bias, this is unlikely to be significant as interventions of this form only change sporadically (that is, they do not react to contemporaneous shocks), and therefore suffer less of the endogeneity problem.

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