Balance of payments

• carry trade and, 100

• exchange rate and, 113

• external conditions and, 109, 111t, 114t

• shocks, 37

Bayesian techniques, 17

Brazil

• capital inflows into, 83–84

• derivatives market, 84

• foreign investment in, 84, 85f

Broad money, 40, 41f

Budget cycles, 120, 123, 133

Business cycle

• expenditure smoothing and, 124

• fiscal behavior and, 126f

• public debt targeting and, 133–138

• structural balance rules and, 123

Capital controls

CFMs, 91–98

• effectiveness of, 99, 102

• IOF imposition, 90–91

Capital flows

• composition of, 93–96

• currency appreciation and, 7, 12–13

• exchange rate and, 92–93, 113

• monthly, 93t

Capital flows management measures (CFMs)

• downsides of, 97–98

• IOF imposition and, 90–91

• role and effectiveness, 91–98, 102–103

Capital inflows

• into Brazil, 83–84

• currency appreciation and, 7, 12–13

• Dutch disease phenomenon and, 14

• economic growth and, 21

• emerging markets and, 85f

• exchange rate and, 86

• gross and net, 84f, 87f

• introduction to, 1–2

• policy response, 86–91

• predicted and actual, 87f

• stylized facts on, 84–86

Capital market development, 159, 160f, 167

Caribbean countries

• budget issues, 139

• fiscal framework proposal for, 125–133

Carry trade

• in the futures market, 89, 100, 101f

• monetary policy and, 96–97

Central America, international reserve accumulation in, 38–44, 51

Chicago Board of Options Exchange Volatility Index (VIX), 106, 107f

Choleski decomposition, 155

Commodity exporters, 44, 106, 173

Commodity prices, 8f, 96, 172n

Consumer price index (CPI) inflation, 175, 177t, 182, 183f

Consumption insurance, 44, 45, 49, 50, 56

Credit dollarization

• capital market development and, 159, 160f

• by category, 153f

• changes in, 154n

• decline in, 151

• empirical approach, 155

• impulse responses and, 160–161

• variance decomposition, 166t

• See also Deposit dollarization

Credit growth, 89, 90, 107, 108, 111t

Credit markets, 173, 184

Credit-to-output ratio, 184, 185

Currency appreciation

• capital flows and, 7, 12–13

• CFMs and, 91, 92

Current account balance (CAB), 63, 64f, 67, 71–72f, 77f, 78t

Current account norms

• conditional distribution of, 70f

• fixed-effects panel regression and, 75t

• introduction to, 61

• net foreign assets and, 73t

Cyclically adjusted primary balances, 134, 135t

Debt-to-GDP ratio, 43, 125, 131, 133, 137, 138

Dedollarization

• decline in, 151

• decomposition of, 154t

• empirical approach, 154–160

• empirical results, 160–167

• exchange rate and, 150, 163

• inflation and, 150, 167

• introduction to, 149–150

• monetary policy and, 186–187

• reserve requirements and, 160

• short-term drivers of, 151, 166–167

• stylized facts, 151–154

De-industrialization, 9, 14, 23

Deposit dollarization

• decline in, 151, 152, 164

• empirical approach, 155

• impulse responses and, 160–161

• by maturity, 153f

• variance decomposition, 166t

Derivatives market, 84, 85, 90t, 97, 98

Developing economies

• domestic impact for, 107–108

• econometric regression and, 108–112

• exchange rate regimes and, 112–116

• external environment for, 105–107

• See also Emerging markets

Dollar deposits, 44, 45, 46, 47, 48, 149n

Dollarization

• banking sector, 174f

• conclusion about, 167–168

• decline in, 153, 156, 167

• description of, 149

• exchange rate and, 157–158f, 163f 164f

• forced, 150

• in Latin American countries, 150f, 152f

• prudential measures and, 162f

• public bonds and, 162f

• reserve requirements and, 161f

• See also Dedollarization; Monetary policy transmission

• Domestic bonds, 42, 84, 90, 97

• Domestic demand, 107, 108, 109–110f, 114t, 116

• Domestic savings, 10, 22, 97

• Dutch disease phenomenon

  • application and empirical studies, 16–20, 25f

  • economic growth and, 7, 13

  • effects of, 14

  • exchange rate and, 16

  • fiscal policy and, 28

  • foreign-aid-induced, 14–15

  • literature review in numbers, 23–27

  • low-income countries and, 15

  • negative implications of, 15

  • net foreign assets and, 14

  • policy discussion, 27–29

  • real appreciation and, 11–12

  • RER and, 9–11, 15

  • theory related to, 12–16

  • See also Real exchange rate (RER)

• Dynamic stochastic general equilibrium (DSGE), 17

Economic growth

• Dutch disease phenomenon and, 7, 13

• fear of appreciation on, 22

• foreign aid and, 17–18

• real exchange rate and, 7–8, 10, 20–22, 26f, 27

Emerging markets

• capital inflows and, 85f

• macroeconomic indicators, 109–110f

• quantile regression framework and, 77–78

• REER in, 8f

• reserve holdings of, 37, 38, 39–40f, 51

Equilibrium exchange rate, 61, 63–67

Equilibrium phenomenon, 8, 11, 27, 29

Exchange rate

• adjustment, 63–64

• assessment of, 61, 62, 70

• capital flows and, 92–93, 113

• capital inflows and, 86

• dedollarization and, 150, 163

• dollarization and, 156, 157–158f, 163f, 164f

• Dutch disease phenomenon and, 16

• inflation and, 182, 183f

• interest rate and, 182

• IOF imposition and, 88f

• misalignment, 62

• nominal, 142, 143, 157f

• volatility, 27, 156, 158f, 161, 163, 164f

Exchange rate flexibility

• domestic demand and, 113

• exchange rate regimes and, 112–116

• export and imports and, 113

• reserve holdings and, 41, 43

• Exports and imports, 43, 62, 63, 107, 109, 110

Factor reallocation, 12, 23, 24–25f, 27, 29

FDI inflows, 94, 95

Financial dollarization. See Dollarization

Fiscal adjustment, 66f, 86–87

Fiscal balances, 65, 72, 73, 76, 78, 115t

Fiscal policy

• Dutch disease phenomenon and, 28

• fiscal framework proposal and, 121–123, 140–141

• introduction to, 2

• passive, 131–132f

Fixed-effects panel regression, 70, 75–76f

Foreign aid

• Dutch disease phenomenon and, 14–15

• growth and, 17–18

• low-income countries and, 18

• real exchange rate and, 18

• shocks to, 24f

Foreign currency debt, 41, 52t, 129, 158

Foreign exchange inflows, 8, 11

Foreign investment, 84, 85f 101f

Forward prices, 102–103

Futures market, 97, 100, 101f

Greenspan-Guidotti rule, 39, 41, 44, 57

Growth. See Economic growth

Impulse response functions, 160, 180, 181f 183f 185

Increasing-returns-to-scale (IRS) sector, 19

Inflation

• actual and expected, 175, 176f

• average annual, 156f

• dedollarization and, 150, 167

• dollarization and, 149

• domestic currency and, 186f

• exchange rate and, 182, 183f

• policy rate and, 177t

Inflation targeting regime, 171, 172n, 180, 187

Intercompany loans, 94, 95f

Interest rate

• domestic and futures-implied, 98f, 102

• exchange rate and, 182

• high, 84, 89, 96

• IOF imposition and, 103f

• nominal, 84, 142, 143

• pass-through, 177–178, 179t

• See also Monetary policy

International reserve accumulation

• actual vs. optimal, 44–50, 58–59f

• broad money and, 41f

• data sources, 52t

• defined, 38n

• evolution of, 39f

• median, 112f

• in months of imports, 39f

• rationale for, 37

• reserve demand regressions and, 40–43, 53t

• rules of thumb for, 38–43

• short-term debt and, 40f

IOF imposition

• carry trade and, 96–97

• exchange rate and, 88f

• interest rate and, 103f

• as a new measure, 90–91

• regulatory changes affecting, 90t

• See also Capital flows management measures (CFMs)

“Joneses” variables, 42, 43

Latin America

• current account balances and, 77f 78t

• dollarization in, 150f 152f

• international reserves and, 37, 38, 39f, 41 f

Learning by doing (LBD) spillover effects, 9, 13, 15, 16, 17, 18

Lending rates, 177, 178f 179t

Low-income countries

• Dutch disease phenomenon and, 15

• foreign aid and, 18

Maastricht Treaty, 123

Macroeconomic balance approach

• for assessing equilibrium exchange rate, 63–67

• development of, 61

• purpose of, 62

Macroeconomic framework, medium-term, 122–123

Macroprudential instruments, 88–90

Manufacturing sector, 14, 18, 20, 28

Medium-term macroeconomic framework, 122–123

Monetary policy

• carry trade and, 96–97

• dedollarization and, 186–187

• introduction to, 2–3

Monetary policy transmission

• data sources, 188–190t

• empirical analysis of, 179–183

• exchange rate and, 182

• financial factors’ role in, 183–187

• interest rate and, 177–179

• policy rate and, 176, 177t, 178f

Money market rate, 172, 178, 179t, 180, 188t

Monte Carlo simulation, 128–130, 133, 134t, 135t, 137t, 141

Natural resource shocks, 9, 11, 12, 18–19

Net foreign assets (NFA)

• current account norms and, 73t

• Dutch disease phenomenon and, 14

• pooled OLS and, 67, 74f

New Zealand, 173, 175, 177t, 178, 179t, 180–187

Nondeliverable currency forwards (NDFs), 85, 97, 102, 103

Non-dollarized economies, 38, 172n

Nontradable goods, 9, 12, 13, 14, 15, 27

Oil-exporting countries, 20, 62, 63, 65

Old-age dependency ratio, 65, 75, 76

Peer or “Joneses” effects, 42, 51

Pooled ordinary least squares (OLS), 67, 70, 72f, 73, 74f, 75

PPP-GDP per capita, 65, 71t, 73t, 75

Primary expenditures

• cyclical properties of, 136–137

• debt-to-GDP ratio and, 131, 133

• financial variables and, 125

• public debt projections and, 129–130

Primary expenditure smoothing, 122, 124,133–135

Probability of a crisis, 50

Prudential measures, 158–161

Public bonds, 159, 161, 162f 166

Public debt targeting

• business cycle and, 133–138

• Caribbean countries and, 125–133

• debt-to-GDP ratio under, 131–132f

• dispersion and, 137t

• introduction to, 119–120

• smoothing properties of, 134t

• sovereign debt dynamics and, 141–144

• structural balance rules and, 123–124

Purchasing power parity (PPP), 20, 21, 64, 65

Quantile regression approach

• for assessing equilibrium exchange rate, 67–69

• description of, 62

• fixed-effects panel regression and, 76f

• Latin America and, 77–78

• pooled OLS and, 72f, 74f

Real appreciation, 86, 93f

Real effective exchange rate (REER)

• in emerging markets, 8f

• percent a year, 111 f

• savings-investment norm and, 63, 64f

Real exchange rate (RER)

• application, 9–13, 17–18, 28–30

• competitive, 22

• Dutch disease phenomenon and, 9–11, 15

• economic growth and, 7–8, 10, 20–22, 26f, 27

• foreign aid and, 18

• misalignment and instability, 20, 21, 24, 25, 26f, 29

• undervalued, competitive or overvalued, 10, 21, 22

Remittances, impact of, 16–17, 23, 24f

Reserve accumulation, 43, 51, 86, 92, 93t

Reserve cover

• conclusion about, 51

• models of, 44–50

• rules of thumb for, 38–43

Reserve requirements

• capital inflows and, 88, 89, 113

• dedollarization and, 160

• dollarization and, 161 f

• IOF imposition and, 90t, 97

• raising of, 159n

Reserves-to-GDP ratio, 42, 47, 50

Risk aversion parameter, 49

Savings-investment norms

• assessment of, 63

• determinants of, 64–66

• econometric models for, 67

• estimation of, 62, 78–79

• fiscal adjustment on, 66f

• fitted values of, 71t

• REER and, 63, 64f

Short-term foreign currency debt, 41, 52t

Size of output loss, 50

Sovereign debt dynamics, 141–144

Spillover effects, 9, 21, 28

Structural balance rules, 123–124, 135, 136, 139

Term premium, 49–50

Terms of trade

• export and import growth and, 109

• improvement in, 106, 107–108f

Tradable goods, 9, 13, 14, 15

Trade openness, 173, 174f

Unemployment, 13, 14, 15

U.S. dollar interest rate, 46, 95, 102, 103f

Variance decompositions, 125n, 126f 160, 166t

Vector autoregression (VAR) model, 127–128, 155t, 172, 185

World growth, 106f, 110, 115