The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Abstract

The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

The Third Annual IMF Research Conference was held in Washington, DC, on November 7-8, 2002. The conference had an overarching theme of capital flows and global governance but also dealt with an eclectic array of other issues that economists at the IMF and elsewhere are exploring. The Mundell-Fleming Lecture was delivered by Guillermo Calvo, Chief Economist at the Inter-American Development Bank and a professor at the University of Maryland. The conference included a panel discussion on “Promoting Better National Institutions” with Guillermo Ortiz, Governor of the Bank of Mexico; Nancy Birdsall, President of the Center for Global Development; Jeffrey Frankel, Professor of Economics at Harvard University; and Jeffrey Sachs, Professor of Economics at Columbia University. The conference agenda and brief descriptions of the papers follow. All the conference papers and the full text of the panel discussion are available at the IMF’s website at www.imf.org/external/pubs/ft/staffp/2002/00-00/arc.htm.

Mundell-Fleming Lecture

Explaining Sudden Stop, Growth Collapse and BOP Crisis: The Case of Distortionary Output Taxes

Guillermo A. Calvo (Inter-American Development Bank, University of Maryland, and NBER)

This paper discusses a model in which growth discontinuously switches from high to low as the fiscal burden reaches a critical level. Growth collapse is associated with a sudden stop of capital inflows, real depreciation, and a drop in output—all of which have occurred during recent financial crises in emerging markets. An important policy implication of the model is that, to avoid sudden stop crises, policymakers should aim at improving fiscal institutions.

Papers

Towards a Statutory Approach to Sovereign Debt Restructuring: Lessons from Corporate Bankruptcy Practice Around the World

Patrick Bolton (Princeton University)

Discussant: Jeffrey Frankel (Harvard University)

This paper provides an overview of key elements of corporate bankruptcy codes and practice around the world that are relevant to the debate on sovereign debt restructuring. It highlights the main components common to most bankruptcy reorganization institutions. It argues that these components ought to be present in some form in any sovereign debt restructuring procedure even if important differences exist between corporations and sovereign states.

IS-LM-BP in the Pampas

Luis Felipe Céspedes (IMF), Roberto Chang (Rutgers University), and Andrés Velasco (Harvard University)

Discussant: Michael Devereux (University of British Columbia)

Emerging markets (sometimes endowed with fertile pampas) have limited access to world capital markets and suffer from “original sin”: they cannot borrow in their own currency. Does this mean that monetary and exchange rate policy has nonstandard effects in such countries? The authors develop a simple IS-LM-BP model with balance sheet effects to study that question. Their answer: it all depends.

Securities Transaction Taxes and Financial Markets

Karl Habermeier (IMF) and Andrei A. Kirilenko (IMF)

Discussant: Kristin Forbes (MIT)

This paper considers the impact of transaction taxes on financial markets, drawing on the literature on market microstructure, asset pricing, rational expectations, and international finance. The authors argue that securities transaction taxes “throw sand” not at the wheels, but into the engine of financial markets. Transaction taxes can have negative effects on price discovery, volatility, and liquidity and lead to a reduction in the informational efficiency of markets.

Financial Integration and Macroeconomic Volatility

M. Ayhan Kose (IMF), Eswar S. Prasad (IMF), and Marco Terrones (IMF)

Discussant: Roberto Rigobon (MIT)

This paper examines how macroeconomic volatility depends on financial openness in a large group of industrial and developing economies over the period 1960-99. The authors find that the volatility of consumption growth relative to that of income growth has increased for more financially integrated developing economies in the 1990s. This effect is reversed when financial openness exceeds a threshold.

International Financial Integration

Philip R. Lane (Trinity College, Dublin, and CEPR) and Gian Maria Milesi-Ferretti (IMF and CEPR)

Discussant: Charles Engel (University of Wisconsin)

This paper describes the broad trends in international financial integration for a sample of industrial countries, and seeks to explain the cross-country and time-series variation in the size of international balance sheets. The authors also examine the behavior of the rates of return on foreign assets and liabilities, relating them to “market” returns.

Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?

Torbjörn Becker (IMF), Anthony Richards (Reserve Bank of Australia), and Yunyong Thaicharoen (Bank of Thailand)

Discussant: Michael Mussa (Institute for International Economics)

Recent emerging market crises have prompted debate about the costs and benefits of collective action clauses (CACs) in bond contracts. Proponents of CACs argue that they should lower borrowing costs, while opponents contend that they should increase them. This paper finds no evidence that the presence of CACs has increased yields for either higher- or lower-rated issuers.

Keynes, Cocoa, and Copper: In Search of Commodity Currencies

Paul Cashin (IMF), Luis Céspedes (IMF), and Ratna Sahay (IMF)

Discussant: Paolo Pesenti (Federal Reserve Bank of New York)

This paper examines the behavior of the real exchange rate of commodity-exporting countries. The authors find a long-term relationship between the real exchange rate and the real price of the exported commodity for about two-fifths of the commodity-exporting countries in their sample. There is little evidence that these countries are reluctant to allow their real exchange rates to fluctuate, and the behavior of the real exchange rates of commodity currencies seems to be independent of the exchange rate regime.

Money in a Theory of Banking

Douglas W. Diamond (University of Chicago and NBER) and Raghuram G. Rajan (University of Chicago and NBER)

Discussant: Enrica Detragiache (IMF)

This paper introduces money in a model of banking to examine how open market operations can affect aggregate bank lending and output. The authors use the model to see how changes in money supply can create, alleviate, or be ineffective in banking crises.

Bubbles and Capital Flows

Jaume Ventura (CREI, Universitat Pompeu Fabra, and MIT)

Discussant: Robert Flood (IMF)

This paper presents a stylized model of international trade and asset price bubbles. Its central insight is that bubbles tend to appear and expand in countries where productivity is low relative to the rest of the world. The author attempts to provide a simple account of some real world phenomena that have been difficult to model so far, such as the recurrence and depth of financial crises or their puzzling tendency to propagate across countries.