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GEORGE E. LENT

Financial statements based on historical costs increasingly depart from current values during an inflationary period and have distorting effects on the measurement of business profits. For this reason, periods of rapid inflation, especially following a major war or economic crisis, have been met in some countries by measures for the revaluation of business accounts for purposes of reports to shareholders and the determination of taxable income.

PETER STELLA

Although rarely acknowledged explicitly, the financial strength of an independent and credible central bank must be commensurate with its policy tasks and the risks it faces. This paper explores the relationship between central bank financial strength and policy outcomes, stressing the importance of financial independence as a fundamental support to policy credibility. The attributes of an adequate central bank capital policy are discussed and implications drawn for the appropriate way in which central banks ought to be recapitalized. Reasons why this issue has not been clearly analyzed in the past—primarily owing to idiosyncratic and obscure central bank accounting—are also presented. [JEL E42, E58, E61]

Mr. Kevin Fletcher, Mr. Sanjeev Gupta, Mr. Duncan P Last, Mr. Gerd Schwartz, Mr. Shamsuddin Tareq, Mr. Richard I Allen, and Ms. Isabell Adenauer

Abstract

The first step in establishing a medium-term resource envelope is to collect information on the intentions of official and private donors. Governments typically lack information on private aid flows, and a part of the aid from official sources is also provided outside the budget. The increase in the average number of donors per country, as well as an increase in the number of aid channels, has complicated the task of gathering accurate information on external flows. The average number of donors per country has increased from about 12 in the 1960s to more than 30 during 2001–05 (World Bank, 2007a). In some sectors, such as health, aid channels have also proliferated, stretching the already weak capacity of low-income countries. Governments should encourage private aid organizations to strengthen their representation in recipient countries, while official donors should reach out to key private donors and invite them to participate in existing donor coordination structures.

Mr. Kevin Fletcher, Mr. Sanjeev Gupta, Mr. Duncan P Last, Mr. Gerd Schwartz, Mr. Shamsuddin Tareq, Mr. Richard I Allen, and Ms. Isabell Adenauer

Abstract

The IMF’s advice and program design encourage aid recipients to spend all aid fully and effectively. How much and how fast scaled-up aid should be spent over the medium term is a function of the following:

Mr. Kevin Fletcher, Mr. Sanjeev Gupta, Mr. Duncan P Last, Mr. Gerd Schwartz, Mr. Shamsuddin Tareq, Mr. Richard I Allen, and Ms. Isabell Adenauer

Abstract

Aid volatility complicates fiscal policy implementation. Aid flows are more volatile than revenues (Bulíř and Hamann, 2007) and significantly more volatile than remittances (Gupta, Pattillo, and Wagh, 2007). Moreover, such volatility has increased over time. The relative volatility of aid, even for HIPCs, with respect to revenue (when variables are expressed as a share of GDP) has increased to 62 in 2000–03 compared to 25 in 1995–98 (Bulíř and Hamann, 2007) (see Appendix 1). This problem is likely to worsen, for two reasons. First, even if the volatility of aid does not change, a larger aid volume implies that a larger portion of the budgetary spending would be aid financed and thus subject to volatility. Second, the volatility of aid itself may increase because of shifts in the composition of aid away from project aid and toward budget support and program loans. A rising share of budget support can aggravate aid volatility because of the inability of donors to make long-term commitments for budget support.

Mr. Kevin Fletcher, Mr. Sanjeev Gupta, Mr. Duncan P Last, Mr. Gerd Schwartz, Mr. Shamsuddin Tareq, Mr. Richard I Allen, and Ms. Isabell Adenauer

Abstract

Ensuring efficient public expenditure calls for strengthening fiscal institutions, including PFM systems.20 Sound and effective PFM systems are important for several reasons: (1) to increase the prospects of achieving key economic and social priorities; (2) to support transparency and accountability—that is, to ensure that the government is held responsible for managing public resources and that donors and taxpayers have access to information about the allocation and use of such funds; and (3) to reduce the transaction costs of aid-related donor requirements. Weaknesses in PFM systems can undermine budgetary planning, execution, and reporting and result in leakage of scarce public resources.

Mr. Kevin Fletcher, Mr. Sanjeev Gupta, Mr. Duncan P Last, Mr. Gerd Schwartz, Mr. Shamsuddin Tareq, Mr. Richard I Allen, and Ms. Isabell Adenauer

Abstract

Sound fiscal policies are critical for handling aid volatility as well as for making effective use of scaled-up aid and other flows. By easing resource constraints, these flows allow low-income countries to increase spending aimed at enhancing growth and reducing poverty. Effective management of these policies, however, presents a host of macroeconomic challenges, many of them fiscal.

Mr. Robert P Flood

The paper discusses a model in which growth is a negative function of fiscal burden. Moreover, growth discontinuously switches from high to low as the fiscal burden reaches a critical level. The paper provides an overview of key elements of corporate bankruptcy codes and practice around the world that are relevant to the debate on sovereign debt restructuring. It also describes the broad trends in international financial integration for a sample of industrial countries and explains the cross-country and time-series variation in the size of international balance sheets.

SELIM ELEKDAG, ALEJANDRO JUSTINIANO, and IVAN TCHAKAROV

This paper develops a small open economy model in which entrepreneurs partially finance investment using foreign currency-denominated debt subject to an external finance premium. We use Bayesian estimation techniques to evaluate the importance of balance sheet-related credit market frictions for emerging market countries by incorporating the financial accelerator mechanism. We obtain a sizable value for the external finance premium, which is tightly estimated away from zero. Our results support the inclusion of the financial accelerator in an otherwise standard model that—acting through balance sheets—magnifies the impact of shocks, thereby increasing real and financial volatility.

International Monetary Fund. Secretary's Department

Abstract

To the Board of Governors of the International Monetary Fund