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Sanjay Kalra and Mr. Thomas Rumbaugh

Global merchandise trade expanded rapidly over the last 6½ decades and its relationship with global income has seen ebbs and flows. This paper examines the shifts in this relationship using time series data over 1950-2014 and situates it in the current and longer term context. The conjunctural context comes from, among other things, the “great trade collapse” (GTC) and the global financial crisis (GFC) in 2009, and developments since then. The longer term context comes from the relative role of “globalization” and “technology” shocks in accounting for the short and long run variance of global exports and income. The paper estimates trade and income elasticities using ADL models taking account of structural breaks, and impulse response functions from structural VARs. The estimated SVAR model provides a lens to ask whether global trade and income are in a “new normal’ or only “back to (an old) normal” after the GTC and GFC.

Mr. Matteo Ciccarelli and Mr. Alessandro Rebucci

This paper reviews recent advances in the specification and estimation of Bayesian Vector Autoregressive models (BVARs). After describing the Bayesian principle of estimation, we first present the methodology originally developed by Litterman (1986) and Doan et al. (1984) and review alternative priors. We then discuss extensions of the basic model and address issues in forecasting and structural analysis. An application to the estimation of a system of time-varying reaction functions for four European central banks under the European Monetary System (EMS) illustrates how some of the results previously presented may be applied in practice.

Mick Silver, Brian Graf, and Mr. Kimberly D. Zieschang

Transaction-price residential (house) and commercial property price indexes (RPPIs and CPPIs) have inherent problems of sparse data on heterogeneous properties, more so CPPIs. In an attempt to control for heterogeneity, (repeat-sales and hedonic) panel data regression frameworks are typically used for estimating overall price change. We address the problem of sparse data, demonstrate the need to include spatial price spillovers to remove bias, and propose an innovative approach to effectively weight regional CPPIs along with improvements to higher-level weighting systems. The study uses spatial panel regressions on granular CPPIs for the United States (US).

Allan Drazen

The relation between IMF conditionality and country ownership of assistance programs is considered from a political economy perspective, focusing on the question of why conditionality is needed if it is in a country’s best interests to undertake the reform program. It is argued that heterogeneity of interests must form the basis of any discussion of conditionality and ownership. The paper stresses a conflict between a reformist government and domestic interest groups that oppose reform, leading to a distinction between government and country ownership of a program. After discussing conceptual issues, I present a model of lending and policy reform that illustrates the effects of unconditional and conditional assistance first without and then with political constraints. It is shown that conditionality can play a key role even when the IMF and authorities agree on the goals of an assistance program.

Carlos Janada, Iulia Ruxandra Teodoru, and Ms. Inci Otker

This paper argues that structural weaknesses may make private investment particularly sensitive to business confidence relative to other traditional investment drivers and global shocks. It gauges the importance of confidence over recent years in selected countries in Central America, including Costa Rica, the Dominican Republic, El Salvador, and Guatemala. Using a vector error correction model to carry out the empirical work, a system representing global activity and the domestic economy, including a set of investment drivers (interest rates, unit labor costs, and confidence) is analyzed. The findings suggest that confidence has been, on average, the most important driver of investment in these countries, exceeded only by global factors. Since confidence, arguably, can be influenced by policymakers’ decisions, structural reforms to improve the business climate and reduce uncertainty play an important role in promoting investment and economic growth.