- Anna Ter-Martirosyan, Sally Chen, Lawrence Dwight, Mwanza Nkusu, Mehdi Raissi, and Ashleigh Watson
- Published Date:
- January 2014
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Barajas, Adolpho, R.Chami, D.Hakura, and P.Montiel, 2010, “Workers’ Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence,” IMF Working Paper 10/287 (Washington: International Monetary Fund).
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Berg, A., J.Gottschalk, R.Portillo, and L. F.Zanna, 2010, “The Macroeconomics of Medium-Term Aid Scaling-up Scenarios,” IMF Working Paper 10/160 (Washington: International Monetary Fund).
Berg, A., R.Portillo, Shu-Chun S.Yang, and L. F.Zanna, 2012, “Public Investment in Resource-abundant Developing Countries,” IMF Working Paper 12/274 (Washington: International Monetary Fund).
Catão, LuisA.V., and Gian MariaMilesi-Ferretti, 2012, “External Liabilities and Crisis Risk,” forthcoming.
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Hendry, D. F., 1995, Dynamic Econometrics, Oxford: Oxford University Press.
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The Pilot External Sector Report and External Balances Assessment methodology is available via the Internet: http://www.imf.org/external/np/spr/2013/esr/.
Most of the 88 countries surveyed are not a part of the approximately 50 countries covered by the EBA exercise.
Lee and others (2008, pp. 2 and 19) suggest that the three approaches are intended to be complementary to one another in exchange rate assessments. They also indicate that taken together and combined with additional country-specific information, the three approaches can help researchers reach an informed judgment about medium-term real exchange rate (RER) and current account (CA) balances.
In several cases, details on either the “standard” CGER methodologies used, such as the relevant regression updates applied, or the type of customization added, are not provided. In other cases, use of CGER methodologies simply means that coefficients from regressions in Lee and others (2008) have been applied to medium-term fundamentals for a non-CGER country.
The definition of groups is based on quantitative criteria defined in Appendix 2.
Pineda, Cashin, and Sun (2009, p. 18) elaborate on this issue in the context of exchange rate assessment for countries of the Eastern Caribbean Currency Union.
As regards possible RER appreciation associated with remittances, while Chami and others (2008) find that higher remittance receipts tend to appreciate the RER, Barajas and others (2010) suggest standard Dutch disease effects of remittances are substantially weakened or even overturned depending on factors such as the degree of openness of the economy, the share of tradable goods in consumption, and the countercyclicality of remittances. Their panel-based econometric analysis indicates that ERER appreciation in response to sustained remittance flows tends to be quantitatively small.
“Average Directional Difference” measures the extent to which exchange rate misalignment estimates may be understated (shifted toward zero) for different groups. Specifically, staff estimated the exchange rate misalignment gaps (REER minus equilibrium REER) for the full sample (184 countries), as well as for different subsamples, and subtracted the latter from the former to measure the potential bias if the full sample results were assumed to be accurate while taking into account the sign of the misalignment estimates (positive or negative).
Some useful examples include Hong Kong SAR and Switzerland, where staff reports contained discussions on exchange rate assessments and comparisons across methodologies.
The toolkit, documented in Vitek (2009), consists of documentation, data, program, and output files that implement the PPP, MB, ERER, and ES approaches.
In particular, the use of a fiscal balance regressor in the CGER’s MB approach risks distorting current account gaps in cases where fiscal policy is inappropriate. This shortcoming could be addressed by applying an EBA-like fiscal policy gap treatment, in which the current account norm is calculated based on a desirable fiscal balance, which may differ from the actual fiscal policy setting and remains an avenue for further extensions.
Analysis largely draws from Di Bella, Lewis, and Martin (2007). Measures of relative prices include changes in internal terms of trade and consumer price index–based REER over the last five years. Internal terms of trade is defined as the ratio of the price of domestically produced goods to the price of imports. Export indicators include changes in exports volumes and shares in total global trade. Production costs include number of internet users per 100 people and prices for gasoline and diesel fuel. Institutional measures are based on ranking in Doing Business and Corruption Perception indexes. The final score is an average across these indicators. A higher score means that the country is relatively more competitive.
There are a number of other potential extensions of the toolkit (e.g., dividing countries into groups with and without capital market access) that could be implemented following a similar methodology.
Explanations for differences in these slope coefficients could be more complex than those provided. This exercise explores the empirical justification for and exchange rate assessment implications of accounting for such differences.
Our measure of aid does not distinguish between official grants and loans. To the extent that these foreign aid inflows are official grants and are included in the current account, they may raise the current account surplus and estimated norm. However, to the extent that aid inflows take the form of loans, they may provide financing for a significant increase in the current account deficit, reducing the estimated current account norm.
Table 3 reports the average potential directional bias of exchange rate gaps. However, there are significant cross-country differences in directional bias estimates for different countries in our special groups. See Annex 4, Figure 1.
A further extension may include continuous interaction terms rather than binary dummies (e.g., the terms of trade regressor could be interacted with the size of a country’s net oil exports, rather than a dummy for being a net oil exporter). This is the customization approach used by the EBA methodology (see Box 1).
The ongoing efforts of the IMF’s Statistics Department to develop consistent comparable official data for offshore financial centers should help in this regard.
The country classification criteria are distinct from those used in other policy analyses in the IMF, but they give rise to comparable compositions of country groups where relevant. The thresholds chosen for each group are generally one-and-a-half standard deviations from the 1973–2010 sample means. Except for a few cases, countries classified as exporters of nonrenewable commodities based on these thresholds generally overlap with those in the group of fuel exporters or that of exporters of nonfuel primary commodities in the World Economic Outlook, even though the World Economic Outlook criterion for a country to be classified as exporter of a particular commodity or commodity group is that the country should have earned an annual average of more than 50 percent of its exports from that commodity or commodity group during the past five years. For the group of remittance-dependent economies, the threshold of 15 percent of GDP is above that of 10 percent of GDP used in the revised guidelines for debt sustainability analysis in low-income countries.
See Hendry (1995, Chapter 9) for further details on this data-based model selection methodology.
Similar model selection procedures can be followed for other groupings (e.g., based on the level of economic development, or access to market financing) by country desks.
Financial centers can also be defined along two lines: small “offshore financial centers,” as defined by the IMF, and the 25 systemically important financial centers identified by the Financial Stability Board.
Indeed, the issue that NFAs may be as relevant for external sector assessments is valid beyond financial centers, including countries with large official reserves.
There are of course, conceptual arguments for current statistical methodologies tallying current account balances. Please reference IMF’s Balance of Payments and International Investment Position Manual for more information.
As the detailed data for these flows is not available for all years, it was assumed that income payments account for 40 percent of resource export revenues and that resource-related imports amount to 40 percent of FDI inflows, steadily declining through time as the sector matures and requires less capital investment.