Camila Casas, Mr. Federico J Diez, Ms. Gita Gopinath, and Pierre-Olivier Gourinchas
Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark
and its variants focus on pricing in the producer’s currency or in local currency. We
model instead a ‘dominant currency paradigm’ for small open economies characterized by
three features: pricing in a dominant currency; pricing complementarities, and imported input
use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency
exchange rate pass-through into export and import prices is high regardless of destination or
origin of goods; (c) exchange rate pass-through of non-dominant currencies
is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange
rate while exports respond weakly, if at all; (e) strengthening of the dominant currency
relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy
targets deviations from the law of one price arising from dominant currency fluctuations,
in addition to the inflation and output gap. Using data from Colombia we document strong
support for the dominant currency paradigm.
Ms. Kimberly Beaton, Aliona Cebotari, and Andras Komaromi
We revisit the relationship between international trade, economic growth and inequality
with a focus on Latin America and the Caribbean. The paper combines two approaches:
First, we employ a cross-country panel framework to analyze the macroeconomic effects
of international trade on economic growth and inequality considering the strength of trade
connections as well as characteristics of countries’ export markets and products. Second,
we consider event studies of past episodes of trade liberalization to extract general lessons
on the impact of trade liberalization on economic growth and its structure and inequality.
Both approaches consistently point to two broad messages: First, trade openness and
connectivity to the center of the trade network has substantial macroeconomic benefits.
Second, we do not find a statistically significant or economically sizable direct impact of
trade on overall income inequality.
Stephanie Medina Cas, Mr. Andrew J Swiston, and Mr. Luis D Barrot
This paper studies the potential for the export sector to play a more important role in promoting growth in Central America, Panama, and the Dominican Republic (CAPDR) through deeper intra-regional and global trade integration. CAPDR countries have enacted many free trade agreements and other regional integration initiatives in recent years, but this paper finds that their exports remain below the norm for countries of their size. Several indexes of outward orientation are constructed and suggest that the breadth of geographic trading relationships, depth of integration into global production chains, and degree of technological sophistication of exports in CAPDR are less conducive to higher exports and growth than in fast-growing, export-oriented economies. To boost exports and growth, CAPDR should implement policies to facilitate economic integration, particularly building a customs union, harmonizing trade rules, improving logistics and infrastructure, and enhancing regional cordination.
Central America has made substantial progress in recent years in moving economic reforms forward and deepening regional and global integration. As result of these efforts, the region has experienced higher growth, increased capital inflows, and some reductions in poverty rates. But Central America remains vulnerable to adverse shocks and continues to face widespread poverty. While today Central America is in better condition to face such shocks, the current turmoil in global financial markets and U.S. growth slowdown could put at risk the hard-won gains of recent years. Faced with these challenges, the authorities are monitoring developments closely and are taking precautionary measures, but they also need to continue implementing productivity-enhancing reforms and measures aimed at reducing income inequality and poverty.
This Selected Issues paper for Panama reports that the administration is developing a strategy to enhance growth and competitiveness in the Panamanian economy. Corruption is perceived as a widespread phenomenon that has affected both private and public sectors in Panama at various levels of decision making. Even though Panama currently attracts substantial foreign direct investment, corruption may prove an obstacle to a medium-term growth strategy based on foreign investment. One important component of Panama's medium-term strategy is the prospect of a free-trade agreement with the United States.
This Selected Issues and Statistical Appendix paper examines recent economic developments and medium-term outlook for Liberia. This paper focuses on economic developments during 2003 and 2004 and the medium-term challenges of reconstruction. The paper explores the pros and cons of adopting full (de jure) dollarization in Liberia. It reviews the theoretical arguments for and against adopting dollarization and the associated empirical evidence. The choices of monetary and exchange rate regimes made by other post-conflict countries are presented. The paper also assesses whether Liberia, in its current post-conflict situation, could benefit from dollarization.
This Selected Issues paper analyzes a study conducted by the International Labor Organization, which evaluates the Caja de Seguro Social or CSS's actuarial situation. The paper describes Panama's social security system, which consists of the Social Security Agency (Caja de Seguro Social or CSS) and several complementary schemes. The study reviews the basic characteristics of the system; the CSS's financial situation; the complimentary public pension scheme—Fondo Complementario de Prestaciones Sociales; and strategies for further reform. It also provides a statistical appendix for the country.
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
This paper surveys briefly the main issues for official management of foreign exchange, including the choice of exchange rate regime and exchange and trade restrictive systems. It concludes by identifying the main forms of arrangements that have demonstrated their merits and practicability for developing countries in recent years, including auction and interbank exchange markets, market-based forward exchange rates, import license auctions, open general import licensing, and liberalized capital controls.