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Mrs. Poonam Gupta, Asli Demirgüç-Kunt, and Ms. Enrica Detragiache
Using aggregate and bank level data for several countries, the paper studies what happens to the banking system in the aftermath of a banking crisis. Contemporary crises are not accompanied by declines in aggregate bank deposits, and credit does not fall relative to output, although the growth of both deposits and credit slows down substantially. Output recovery begins in the second year after the crisis and is not led by a resumption in credit growth. Banks, including the stronger ones, reallocate their asset portfolio away from loans.
Ivanna Vladkova Hollar, Mr. Giovanni Dell'Ariccia, and Mr. Carlo Cottarelli
Following a period of privatization and restructuring, commercial banks in Central and Eastern Europe and, more recently, in the Balkans have rapidly expanded their lending to the private sector. This paper describes the causes of this expansion, assesses future trends, and evaluates its policy implications. It concludes that bank credit to the private sector is likely to continue rising faster than GDP in the next few years throughout the region, picking up also in countries where so far it has been stalled. Although this growth should be regarded as a structural and positive development, policymakers will have to evaluate carefully its implications for macroeconomic developments and financial stability.
Mr. David William Harold Orsmond and Mr. Stanley Fischer
Israel’s post-stabilization experience of moderate inflation and eventual disinflation is compared with experiences in other countries. Lessons that emerge from an examination of international experiences indicate the importance of establishing early on credibility in the nominal anchor and a commitment to persevere with disinflation policies, achieving and maintaining a tight fiscal position, measures to reduce nominal rigidities, and widespread structural reform. Israel falls short on several criteria which explains why taming inflation in the post-stabilization period has been difficult. The paper concludes with a consideration of institutional arrangements that could sustain the current low inflation levels.
Mr. Jack Diamond and Mr. Duncan P Last
For the republics of the former Socialist Federal Republic of Yugoslavia (SFRY) as for many other transition economies, an important step in introducing a more market-oriented system was the restructuring of their budget systems. This paper reviews and evaluates the process of budget system reform during the transition period extending from the time they emerged from the collapse of the SFRY in 1989 until the end of 2002. For at least a decade of this period, the Fiscal Affairs Department of the IMF has been providing technical assistance (TA) to these countries to facilitate such reforms. Based on the material generated by this effort, the authors offer a review of the progress made and an assessment of the reform elements still to be completed. Given that the former Yugoslav republics all commenced the reform process with the same institutions, this paper offers a unique opportunity to analyze the critical elements in successful budget system reform. An attempt is made to explain the varying degrees of success experienced by different countries, and a reform agenda is suggested to guide future TA.
Ms. Emilia M Jurzyk and Olena Havrylchyk
Using a combination of propensity score matching and difference-in-difference techniques we investigate the impact of foreign bank ownership on the performance and market power of acquired banks operating in Central and Eastern Europe. This approach allows us to control for selection bias as larger but less profitable banks were more likely to be acquired by foreign investors. We show that during three years after the takeover, banks have become more profitable due to cost minimization and better risk management. They have additionally gained market share, because they passed their lower cost of funds to borrowers in terms of lower lending rates. Previous studies failed to pick up the improvements in performance of takeover banks, because they did not account for the performance of financial institutions before acquisitions.
Mr. Alexander D Klemm
This paper provides an overview of full and partial allowance for corporate equity (ACE) tax systems in practice. In the recent past, ACE systems have been used in Austria, Croatia, and Italy. Brazil still applies a variant of such a system and Belgium introduced one this year. This paper summarizes the empirical literature on past ACE systems, and provides a theoretical and empirical assessment of the Brazilian ACE variant. The main finding is that the Brazilian reform introduced an ACE system for a minority of firms only, with the majority instead having a system of dividend deductibility. Despite the reduction in the tax preference for debt finance, capital structures have not changed much, but dividends have increased. Investment appears to have benefited from the reform, although the extent to which this was due to the new structure rather than the tax cut is unclear.
Mr. Tihomir P Stucka
A reduced-form model approach was used to estimate the trade balance response to permanent domestic currency depreciation. For this purpose, long-run and short-run effects were estimated, using three modeling methods along with two real effective exchange rate measures. On average, a 1 percent permanent depreciation improves the equilibrium trade balance by between 0.94 percent and 1.3 percent. The new equilibrium is established after approximately 2.5 years. Evidence of the J-curve is also found. Overall, in the light of the results obtained, it is questionable whether permanent depreciation is desirable to improve the trade balance, taking into account potential adverse effects on the rest of the economy.
Miss Eva Gutierrez
This paper reviews a broad set of indicators of competitiveness in the Macedonian economy and estimates the equilibrium real effective exchange rate (REER) using different methodologies. Although the REER is broadly in equilibrium at present, structural factors are found to hamper competitiveness. While a more competitive exchange rate might improve short-term export performance, sustained improvements require enhanced productivity and resource reallocation to more dynamic sectors, which depends on reforms to improve the business environment.