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Patrick Blagrave
Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement. By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation. In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.
International Monetary Fund. Asia and Pacific Dept

. Policy Implications References TABLES 1. Inflation Correlation with India 2. Inflation Co-Movement Regression Results MANAGING EFFECTIVE FISCAL FEDERALISM A. Nepal’s Fiscal Federalism Structure B. Key Issues and Challenges C. Policy Implications References FIGURES 1. Transition to Federal Structure 2. Cross-Country Subnational Government Operations TABLE 1. General Government Operations Under Fiscal Federalism SUSTAINABLE FINANCE TO SUPPORT LONG-TERM GROWTH References FIGURE 1. Financial Sector Structure

International Monetary Fund. Asia and Pacific Dept

-movement in the case of food price inflation, as does nominal effective exchange-rate co-movement Regression results for the determinants of core inflation co-movement are much less precisely estimated—neither rainfall (through possible second-round effects) nor trade integration, nor exchange-rate co-movement with India are found to have a statistically significant impact on core inflation co-movement This suggests that core inflation is primarily determined by domestic (idiosyncratic) factors. 3 Table 2. Inflation Co-Movement Regression Results (1) Food

International Monetary Fund. Asia and Pacific Dept
This Selected Issues paper examines the degree to which inflation co-moves between India and a panel of countries in Asia. The paper shows that the considerable co-movement in headline inflation rates between India and Nepal is driven almost exclusively by food-inflation co-movement. By contrast, the role for inflation spillovers emanating from India in driving non-food inflation in Nepal appears limited. The implication is that Nepal should rely on domestic monetary policy rather than stable inflation in India to achieve stable domestic inflation. The main takeaway from the results is that food inflation co-movement between India and other countries is higher in cases where the co-movement in rainfall deviations from seasonal norms is highest. Since core inflation co-movement is weak, idiosyncratic domestic factors such as economic slack, exchange-rate movements, and differing degrees of passthrough from food- and energy-price shocks play an important role. This finding is critically important for monetary policy, especially since domestic policy is primarily effective only in controlling core inflation. Thus, domestic monetary policy needs to be calibrated to domestic inflationary pressures—Nepal cannot necessarily rely on stable inflation in India to achieve stable domestic inflation.
Charalambos G. Tsangarides, Mr. Pierre Ewenczyk, and Mr. Michal Hulej

-movements is higher for Africa. This is an important observation, as co-movements are lower in Africa (see summary statistics in Appendix C ). The coefficient of currency union for Africa (0.04 with country fixed-effects) is quite high because mean co-movements of prices are equal to −0.15 for that subsample. The fact that the estimated coefficients on the currency union dummy variable are not significantly different from zero in the output co-movement regressions may arise because the theoretical link between currency union and output co-movement is ambiguous, and largely

International Monetary Fund. African Dept.

account norm is estimated at a deficit of -10.7 percent of GDP for 2014. The actual current account was slightly below 10 percent of GDP and the gap implies a very slight undervaluation of about 2 percent. Although controls for low income countries have been applied, Malawi’s relatively low position within SSA means predictions from such regression may have to be nuanced by Malawi’s particular conditions. Indeed, an approach based on direct estimation of the equilibrium exchange rate (based on a commodity price movement regression, “the commodity currency approach

conditions. Indeed, an approach based on direct estimation of the equilibrium exchange rate (based on a commodity price movement regression, “the commodity currency approach”) suggests the Kwacha was roughly in equilibrium by 2014.3 2 Current account balance calculations are based on the External Balance Assessment (EBA-lite) methodology (IMF Working Paper, WP/13/272), and employ elasticities for the current account in the range of -0.47,-0.20 of the current account balance to the exchange rate (IMF Working Paper

Mr. Michal Hulej, Mr. Charalambos G Tsangarides, and Mr. Pierre Ewenczyk
This paper explores and quantifies several aspects of the performance of currency unions using an augmented version of the gravity model and focusing on two samples, the world and Africa. Our empirical findings suggest that, in principle, membership in a currency union should benefit Africa as much as it does the rest of the world. In addition, we find evidence from both samples that the effect of currency unions on trade is large, almost a doubling; currency unions are associated with trade creation, increase price co-movements among members, and make trade more stable; and longer duration of currency union membership brings about more benefits, although with some diminishing returns.
International Monetary Fund. African Dept.
This 2015 Article IV Consultation highlights that bold economic reforms undertaken in mid-2012 in Malawi transformed the policy environment and greatly improved the outlook of the economy. Over 2012–14, real GDP growth and inflation averaged 4.3 percent and 24.5 percent, respectively. The economic outlook remains difficult reflecting the negative impact of weather-related shocks, the ongoing suspension of budget support, persistently high inflation and weaker global demand which could hurt Malawi’s exports. Real GDP growth is projected to fall by 2.7 percentage points to 3 percent in 2015.