Front Matter

Front Matter

Anna Ter-Martirosyan, Sally Chen, Lawrence Dwight, Mwanza Nkusu, Mehdi Raissi, and Ashleigh Watson
Published Date:
January 2014
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    © 2014 International Monetary Fund

    Cataloging-in-Publication Data Joint Bank-Fund Library

    External assessments in special cases [electronic resource] / a staff team led by Anna Ter-Martirosyan. – Washington, D.C.: International Monetary Fund, c2014. 1 online resource.

    Includes bibliographical references.

    ISBN 978-1-47557-640-5

    1. Foreign exchange rates. I. Ter-Martirosyan, Anna. II. International Monetary Fund.

    HG3851.E98 2014eb

    Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.

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    This Departmental Paper was prepared by a staff team from the IMF’s Strategy, Policy, and Review Department, led by Anna Ter-Martirosyan, and including Sally Chen, Lawrence Dwight, Mwanza Nkusu, Mehdi Raissi, Francis Vitek, and Ashleigh Watson, under the general guidance of Vikram Haksar.


    IMF staff has recently developed new methods for multilaterally consistent external sector and exchange rate assessments. In particular, the pilot External Balances Assessment (EBA) methodology provides estimates for current account and exchange gaps for a group of advanced and emerging market economies. These estimates have been used as inputs into external assessments for 29 large economies in the 2013 Pilot External Sector Reports (ESR).

    While the new methods are a significant step forward, several issues arise in implementation. First, EBA applies to 49 economies, but the IMF membership consists of 188 countries. Thus, other approaches must be applied to conduct external assessments for countries not participating in EBA. Second, countries not included in EBA often have very concentrated sources of foreign income (e.g., commodity exports), unlike most countries in the EBA sample. Country desks often make allowances for such country-specific circumstances, which can introduce other types of errors, including questions of potential overfitting, unequal treatment, and multilateral inconsistency. Third, measurement issues can affect external gap estimates. These issues will be discussed in this paper, along with alternative tools and approaches to inform such assessments.

    Practices and Issues

    • Assessment methods for non-EBA countries. Country teams often use the older Consultative Group on Exchange Rate (CGER) methods to generate quantitative estimates for exchange rate gaps. But these rely on an older theoretical framework, and estimates of the impact of explanatory variables and implementation can vary across teams.

    • Assessments in special cases. Teams often modify CGER methods to account for special circumstances. This paper examines such modifications for countries with concentrated sources of external income. Common modifications include the addition of explanatory variables, changes in sample periods or the countries included in a panel, and/or modifying the underlying exchange rate model. However, teams must balance the potential errors arising from omitting relevant variables with the potential errors arising from using selective subsamples or alternative specifications.

    • Measurement issues. Estimates of external gaps may be affected by distortions in the attribution of investment income (e.g., for financial centers). In other cases, data limitations may complicate exchange rate analysis.

    Tools and Approaches

    • Exchange rate assessment toolkit. This paper presents an internal toolkit that extends CGER-type methods to a wide panel of countries, pending further development of the EBA methodology and extension of the sample. This helps in providing more up-to-date coefficient estimates, allowing for special country circumstances while preserving multilateral consistency. This toolkit is also adjustable and can accommodate country-specific characteristics.

    • External indicators template. Reflecting the need to supplement modelbased assessments with alternative approaches, this paper also describes a template for the comparison of various external indicators across countries.

    • Framework for analysis of a capital-intensive, foreign-owned sector. If a country has a resource sector that is largely foreign-owned, flows related to the resource sector are likely to dominate external flows, revenues, and output. This may lead to difficulties assessing the health of the non–resource-oriented economy. Data limitations often complicate analysis. In such cases, distinguishing transactions with the foreign-owned sector may have implications for policy advice.

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