The consequences of large depreciations on economic activity depend on the relative strength of the contractionary balance sheet and expansionary expenditure switching effects. However, the two operate over different time horizons: the balance sheet effect hits almost immediately, while expenditure switching is delayed by nominal rigidities and other frictions. The paper hypothesizes that the overshooting phase—observed early in the depreciation episode and driven by the balance sheet effect—is largely irrelevant for expenditure switching, which is more closely aligned with ex-post equilibrium depreciation. Given this, larger real exchange rate overshooting should signal a relatively stronger balance sheet effect. Empirical findings support this hypothesis: (i) overshooting is driven by factors associated with the balance sheet effect (high external debt, low reserves, low trade openness), (ii) overshooting-based measures of the balance sheet effect foreshadow post-depreciation output losses, and (iii) the balance sheet effect is strongest early on, while expenditure switching strengthens over the medium term.
Ms. Era Dabla-Norris, Giang Ho, and Ms. Annette J Kyobe
This paper empirically assesses the role of structural and institutional reforms in driving productivity growth across countries at different stages of development, using a distance-to-frontier framework. It gauges whether particular policies and reforms matter more for increasing productivity growth at the aggregate and sectoral levels for some emerging market and developing economies (EMDEs) than others. Recognizing the possibility of time lags between reform implementation and reform payoffs, the paper also examines how productivity gains from various reforms evolve over the the short- and medium-term.
Rahul Anand, Ms. Kalpana Kochhar, and Mr. Saurabh Mishra
Structural transformation depends not only on how much countries export but also on what
they export and with whom they trade. This paper breaks new ground in analyzing India’s
exports by the technological content, quality, sophistication, and complexity of the export
basket. We identify five priority areas for policies: (1) reduction of trade costs, at and
behind the border; (2) further liberalization of FDI including through simplification of
regulations and procedures; (3) improving infrastructure including in urban areas to enhance
manufacturing and services in cities; (4) preparing labor resources (skills) and markets
(flexibility) for the technological progress that will shape jobs in the years ahead; and (5)
creating an enabling environment for innovation and entrepreneurship to draw the economy
into higher productivity activities.
Ms. Era Dabla-Norris, Mr. Alun H. Thomas, Mr. Rodrigo Garcia-Verdu, and Ms. Yingyuan Chen
This paper documents stylized facts on the process of structural transformation around the world and empirically analyzes its determinants using data on real value added by sector of economic activity (agriculture, manufacturing and services) for a panel of 168 countries over the period 1970-2010. The analysis points to large differences in sector shares both across and within regions as well as for countries at similar levels of economic development. Using both linear and quantile regression methods, it finds that a large proportion of the cross-country variation in sector shares can be accounted for by country characteristics, such as real GDP per capita, demographic structure, and population size. It also finds that policy and insitutional variables, such as product market reforms, openness to trade, human and physical capital, and finance improve the baseline model’s ability to account for the variation in sectoral shares across countries.
This paper explores the role of foreign aid and remittance inflows in the mitigation of the effects of food price shocks. Using a large sample of developing countries and mobilising dynamic panel data specifications, the econometric results yield two important findings. First, remittance and aid inflows significantly dampen the effect of food price shocks in the most vulnerable countries. Second, a lower remittance-to-GDP ratio is required in order to fully absorb the effects of food price shocks compared to the corresponding aid-to-GDP ratio.
This paper uses the 1991 Indian trade liberalization to measure the impact of trade liberalization on poverty, and to examine the mechanisms underpinning this impact. Variation in sectoral composition across districts and liberalization intensity across production sectors allows a difference-in-difference approach. Rural districts, in which production sectors more exposed to liberalization were concentrated, experienced slower decline in poverty and lower consumption growth. The impact of liberalization was most pronounced among the least geographically mobile, at the bottom of the income distribution, and in Indian states where inflexible labor laws impeded factor reallocation across sectors.
This special issue on exchange rates is drawn from the Eighth Jacques Polak Annual Research Conference held at the International Monetary Fund in Washington in November 2007. The Mundell-Fleming Lecture by Stanley Fischer focuses on exchange rate systems, surveillance, and advice. Jeffrey Frankel and Shang-Jin Wei examine the techniques for estimating de facto exchange rate regimes, while J. Lawrence Broz, Jeffry Frieden, and Stephen Weymouth review survey data to discern exchange rate policy attitudes. In a paper entitled "Fear of Declaring", Adolfo Barajas, Lennart Erickson, and Roberto Steiner try to determine the extent to which markets care about what countries say regarding their exchange rate policies.
This report reviews the work of the Fund since the 2007 Spring Meetings and the priorities for the period ahead. Progress has been made in the past few months with respect to the framework for surveillance and its implementation, quota and voice, and the Fund’s income model. Other key aspects of the MTS have also advanced, including with regard to Bank-Fund collaboration and the Fund’s role in low-income countries. Future work will focus on completion of the quota and voice reform, reaching agreement on the Fund’s new income model, and delivering budgetary restraint, as well as addressing the evolving challenges facing the Fund and the world economy, notably the financial market turbulence and financial globalization. The paper reports on recent developments in the global economy (Section II) and progress in the following key areas: reshaping surveillance (Section III); emerging market economies and crisis prevention (Section IV); the role of the Fund in low-income countries (Section V); quota and voice issues (Section VI), building institutions and capacity (Section VII); and managing an effective institution (Section VIII).