June 2011: The Q&A in this issue features seven questions on the global trade collapse of 2008-09 (by Rudolfs Bems); the research summaries are "The Impact of the Great Recession on Emerging Markets" (by Ricardo Llaudes, Ferhan Salman, and Mali Chivakul) and "The Missing Link between Dutch Disease, Appreciation, and Growth (by Nicolás E. Magud and Sebastián Sosa). The issue also lists the contents of the June 2011 issue of the IMF Economic Review, Volume 59 Number 2; visiting scholars at the IMF during April-June 2011; and recent IMF Working Papers and Staff Discussion Notes.
This Selected Issues paper and Statistical Appendix on Bhutan underlie the macroeconomic impact of Tala, rapid private sector credit growth, and macroeconomic risks. In Bhutan, as the bulk of Tala-related flows go through the government accounts, this requires an appropriate fiscal stance and skillful expenditure management. Strong economic growth will require and lead to a deepening and further development of the financial system in Bhutan. The financial sector seems to be relatively shielded from adverse events, although risks remain.
This paper outlines the payment agreements and trade agreements. Resident inconvertibility in relation to other inconvertible countries is largely organized on the basis of bilateral trade agreements establishing quotas for imports, exports, and invisibles, and of the Organization for European Economic Cooperation (OEEC) Code of Liberalization. Resident inconvertibility vis-a-vis convertible countries is implemented mainly by unilaterally imposed quantitative import and exchange restrictions that usually are subject to a high degree of administrative discretion. Under bilateral payments agreements, the partner countries undertake to affect their reciprocal current settlements in a way that will minimize the use of convertible exchange and gold. In a typical case, the two central banks open accounts in their respective currencies in each other’s names, but agreements may also provide for one (main) agreement account. Settlements in convertible currencies or gold have to be made only when one partner’s net debtor position in the designated accounts exceeds an amount established in the agreement as the limit up to which each partner is prepared to sell its currency for the other’s currency without demanding cover.
Nominal interest rate pegging leads to instability in an IS-LM model with a vertical long-run Phillips curve and backward-looking inflation expectations. However, it does not lead to instability in several large multicountry econometric models, apparently primarily because these models have nonvertical long-run Phillips curves. Nominal interest rate pegging leads to price level and output indeterminacy in a model with staggered contracts and rational expectations. However, when a class of money supply rules with interest rate smoothing is introduced, and interest rate pegging is viewed as the limit of interest rate smoothing, the price level and output are determinate.
A simple two-country stochastic model is used to analyze monetary policy interaction in a system of exchange rate bands such as the EMS, in the context of internationally-integrated financial markets. We consider the widely-acknowledged asymmetry of the system, as it pertains to member countries’ use of monetary policy to offset shocks that impinge on their national incomes. Our results suggest, among other things, that tightening the exchange-rate bands would lead to more intervention by all members, even if formal responsibility for keeping exchange rates within the bands lay only with the peripheral countries.
This paper considers the demand for various monetary aggregates with a view to assessing their potential roles as intermediate variables for monetary policy. Illustrative estimates using a generalized autoregressive distributed lag model are presented. For M1, the results support an “error correction” model. However, the demand function for M1 may still be subject to shifts due to the continuing process of financial reform and innovation. The demand function for M1A resulting from the particular empirical strategy used in this paper is not well behaved. The estimated equation for M2 is well behaved and robust, though the use of M2 as an intermediate target variable is questionable due to an inability accurately to control it.
Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.
We study the impact of bank credit on firm productivity. We exploit a matched firm-bank
database covering all the credit relationships of Italian corporations, together with a natural
experiment, to measure idiosyncratic supply-side shocks to credit availability and to estimate
a production model augmented with financial frictions. We find that a contraction in credit
supply causes a reduction of firm TFP growth and also harms IT-adoption, innovation,
exporting, and adoption of superior management practices, while a credit expansion has
limited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts for
about a quarter of observed the decline in TFP.
This paper analyzes the determinants of credit cyclicality. It constructs a financial development index and studies whether it affects the amplitude of impulse responses to shocks to output, terms of trade, global liquidity, and global risk appetite. The paper uses both country-specific VARs for cross-country analyses and panel VARs to compare impulse responses between various country groupings. The study finds evidence that financial development-especially stronger creditor rights-can mitigate credit cyclicality, given that the response of credit to output or terms of trade shocks is stronger in countries with weaker financial systems.