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Christine Ebrahim-zadeh

This paper analyzes why the Middle East and North Africa (MENA) region has lagged in growth and globalization. Despite attempts to spur recovery and initiate structural reforms, many countries in the region remain on a slow growth path, effectively sidelined from globalization and the benefits of closer economic integration with the rest of the world. The benefits from oil failed to generate a sustained growth dynamic or bring about greater regional economic integration. The paper highlights that the slowdown in economic reforms is a key factor for the economic depression in the MENA region.

WILLIAM H. WHITE

In some recent discussions, the view has been expressed that the findings of reasonably good statistical relationships for the demand-for-money function reflect the dominance of money supply changes that occur in passive response to exogenous changes in the demand for money. But where monetary policy—carried out through either exogenous or unexpected changes in money—is used to affect the economy, then the public must temporarily accept changes in its money holdings via a passive, buffer-stock reaction. In terms of the conventional equilibrium form of demand function, this means that the public is, in fact, forced temporarily to hold disequilibrium amounts of money that are off its short-run demand curve. (This short-run disequilibrium is often called flow disequilibrium, with the divergence of the short-run desired level (indicated by the short-run demand curve) from the long-run desired level called stock disequilibrium.)

Mr. Paulo Drummond, Mr. Ari Aisen, Mr. Emre Alper, Ms. Ejona Fuli, and Mr. Sébastien Walker
This paper examines how susceptible East African Community (EAC) economies are to asymmetric shocks, assesses the value of the exchange rate as a shock absorber for these countries, and reviews adjustment mechanisms that would help ensure a successful experience under a common currency. The report draws on analysis of recent experiences and examines likely future changes in the EAC economies.
J. J. Polak and William H. White

THERE IS AMPLE theoretical and empirical evidence that income expansion and inflation are often associated with increases in the money supply. Since, as a rule, monetary statistics are readily and currently available while inflationary pressure is a concept that is hard to measure, it has become customary to accept monetary statistics as reliable indicators of inflation and deflation, of expansion and contraction. When it is observed that the money supply in a country is rising, it is inferred that expansionary factors must be at work and that anti-inflationary policies should be introduced. Likewise, when the money supply declines, it is inferred that contractionary forces are more powerful and that anti-inflationary policies can safely be relaxed or reversed.

International Monetary Fund. Research Dept.
This paper discusses the underlying objectives of the exchange rate regime are necessarily related to broader objectives of the international financial system and the international economy. The exchange rate regime should help to promote a satisfactory working of the adjustment process. The exchange rate regime should help to promote, or at least support, the pursuit of economic and financial policies that contribute to countries’ domestic objectives, as regards both real economic variables and financial variables, notably including the degree of price stability. Attainment of the underlying objectives for the exchange rate regime suggests a number of instrumental or operational desiderata, which are listed below without regard to potential conflict between them and therefore without consideration of any trade-off among themselves. A system of adjustable parities and narrow margins should score well on the objective of exchange stability, provided that the adjustments are not too large or too frequent.
International Monetary Fund
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.
Galen Sher
Over the last two decades, cash holdings in nonfinancial firms around the world have increased. This phenomenon is particularly concerning in Japan, where the success of Abenomics depends on a transition from stimulus-driven to self-sustaining growth based on private consumption and investment. This paper finds that Japanese nonfinancial firms have accumulated cash at the expense of investment and dividends, hampering this transition. The evidence suggests that cash accumulation is due to financial imperfections combined with rising corporate profitability and uncertainty, while corporate governance plays only a limited role. These firms have cash holdings available for investment of about 5 percent of GDP. Policy options for encouraging the use of these cash holdings include improving firms’ access to market-based financing and discouraging CEO duality.
International Monetary Fund
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.
International Monetary Fund

The note delves on the U.S. housing market outlook, the potential benefits of mitigating distressed sales household deleveraging, and the recovery. Policies to facilitate labor market adjustment to reduce the large employment volatility without affecting efficient labor allocation could prevent problems. U.S. firms are hoarding money but it is likely to be spent to boost firms’ capital expenditure, rather than kept as precautionary balances. The note discusses commodity price shocks affecting Treasury inflation protected securities (TIPS), budget institutions for federal fiscal consolidation, and mortgage delinquencies in the United States.