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Bulletin Logo    December 2000
Volume 1, Number 3
In This Issue

Research Summary
   Growth in Transition: What Are the Lessons Learned?

Country Study

Conference on the Future of Monetary Policy and Banking

IMF Research Conference

IMF Staff Papers Table of Contents (Volume 47, No. 2)

IMF Occasional Papers
   IMF Occasional Paper No. 195
   IMF Occasional Paper No. 196
   IMF Occasional Paper No. 197
   IMF Occasional Paper No. 198

Books from IMF
   Sovereign Assets and Liabilities Management
   East Timor: Establishing the Foundations of Sound Macroeconomic
   Inflation Targeting in Practice: Strategic and Operational Issues and
      Application to Emerging Market Economies

External Publications by IMF Staff

Policy Discussion Papers

Economic Issues


Visiting Scholars at the IMF, July–September 2000

IMF Working Papers

International Capital Markets, September 2000

Research Summary
Growth in Transition:
What Are the Lessons Learned?

Mark De Broeck

The initial years of transition from a planned to a market-based economy in Central Europe, Russia, and other countries of the former Soviet Union witnessed deep and long declines in output and an upsurge in inflation. As of 2000, at the end of the first decade of the transition process in these countries, growth had resumed and, with the exception of some slow reformers, inflation had dropped to moderate or low levels. Only a handful of countries, however, have returned to output levels at or exceeding those at the start of the transition. These developments have prompted extensive research on the forces driving the behavior of output in the transition economies and on the appropriate policies for achieving macroeconomic stability and sustained growth. This survey reviews recent research conducted at the IMF in these areas.1

The unexpectedly deep and lengthy output declines early in the transition, and pronounced differences in output performance across the transition economies, have been the motivation for a number of quantitative studies of the determinants of output in transition.2 These studies typically pool cross-section and time-series data and generally adopt a single-equation specification that relates a measure of output performance to a set of explanatory variables, including those representing initial conditions, structural reforms, and macroeconomic policies. While the size of the data sample, the degree of econometric sophistication, and the range of explanatory variables differ across the studies, their broad conclusions are the same—they support the view that slow progress in macroeconomic stabilization and structural reform plus unfavorable initial conditions (for example, overindustrialization or distorted trade patterns) were associated with weaker output performance. There are some differences, however, in the answers to more specific questions regarding the relative importance of these explanatory variables and the dynamic patterns of their effects.

A number of papers attempt to offer a more comprehensive explanation of output developments in transition. They include Hernández-Catá (1997), Fischer, Sahay, and Végh (1998a), Havrylyshyn, Izvorksi, and van Rooden (1998), and Berg and others (1999).3 All four papers confirm that macroeconomic stabilization, progress in structural reform, and initial conditions—in the early years of transition in particular—are key factors explaining output performance. But there are some significant differences among the more specific findings. For instance, Fischer, Sahay, and Végh conclude that a fixed exchange rate regime affected growth positively. The other papers do not find strong evidence supporting this view. As Hernández-Catá suggests, this may reflect the fact that they include inflation as a separate variable, which may capture the indirect impact of the fixed exchange rate regime on growth by helping to bring inflation down. Berg and others find that structural reform has positive output effects already from the beginning of the transition, while Havrylyshyn, Izvorksi, and van Rooden and also Hernández-Catá argue that reform first had a negative effect. All four papers also establish the significance of an aggregate measure of progress in structural reform, but obtain different results when individual components that constitute the index are included separately.

Other papers adopt the same panel growth regression approach, but focus on the contributions of specific variables.4 Cristoffersen and Doyle (1998) examine the role of export market growth and find this variable to be strongly associated with output growth in transition. They also provide evidence that inflation above a threshold rate in the low teens affected growth negatively, but that disinflation did not have a negative impact, even in the moderate inflation range. Mercer-Blackman and Unigovskaya (2000) find countries that implemented IMF programs early on and completed them successfully tended to have a better growth performance. The program implementation indicator, however, is highly correlated with an aggregate structural reform measure, suggesting that both indices could be related to an underlying, unobserved factor such as commitment to reform.

Reflecting the increasing importance attached to building effective institutions in support of the market, Havrylyshyn and van Rooden (2000) add a separate set of variables measuring institutional development to a benchmark panel growth regression. Their results retain the significance of the core macroeconomic stabilization, structural reform, and initial conditions variables, and show the institutional variables to have a significant, although small, additional effect. Abed and Davoodi (2000) focus on the role of a corruption index in explaining key measures of economic performance, including growth, in the transition economies. They argue that corruption is largely a symptom of underlying structural and institutional weaknesses and show that a structural reform variable has more explanatory power empirically than the corruption index.

The panel growth regression approach gives robust conclusions on the overall importance of a core set of variables, but also suffers from limitations and methodological weaknesses. As discussed above, studies based on this approach come to different conclusions regarding more specific issues. Also, panel growth regressions do not necessarily perform well in explaining the growth performance of individual countries. Focusing on the case of Uzbekistan—a slow reformer with a better-than-average output performance—Zettelmeyer (1998) shows that a standard panel estimation systematically underpredicts the country’s growth during the period 1992–96.5 Better results are obtained when country-specific factors are taken into account.

From a more methodological point of view, most panel studies tend to ignore the fact that policy variables are not exogenous but, rather, depend on the economic environment. They also do not take into account that some factors, initial conditions for instance, can influence growth both directly and, by affecting policy capacities and choices, indirectly. These shortcomings reflect the underlying weakness that the regression specifications generally involve a single equation and are not based on a structural model of growth in transition. Hernández-Catá (1997) is the only example in this literature of a study that derives the estimated equation from a formal model. His model focuses on the reallocation of capital from a less productive, old sector to a more productive, new sector, and shows that stronger reform efforts may result in a steeper output fall early on, but a stronger recovery later.6

The panel regression approach has been the most common framework to empirically study growth in transition, but other methodologies have been applied as well. Fischer, Sahay, and Végh (1998a) use the coefficients estimated in the benchmark Barro (1991) and Levine and Renelt (1992) growth regressions for market economies to assess the longer-run growth prospects of the transition economies.7 Fischer, Sahay, and Végh (1998b) use the same approach but focus on a smaller sample of EU accession candidates, and estimate that it could take the most advanced Central and Eastern European countries less than two decades to catch up with low-income EU countries.8 This paper also tries to quantify the income losses incurred under central planning, on average about one generation of growth.

De Broeck and Kostial (1998) and De Broeck and Koen (2000a and 2000b) use a growth accounting methodology to explain the output performance of Poland, Russia, and other countries of the former Soviet Union.9 These authors conclude that the output fall and subsequent recovery in the early years of the transition were accounted for mainly by a sharp V-shaped movement in total factor productivity rates. Based on the experience of Poland—the country with the longest record of sustained positive growth—factor accumulation and sectoral reallocation to higher productivity sectors take on increasing importance as growth becomes more robust. These insights are in line with the results obtained from panel growth regressions, which indicate that factor input movements do not have important explanatory power during the contraction and initial recovery phases. Keane and Prasad (2000) provide a political economy interpretation of the relationship between inequality, transfers, and growth in transition economies.10 Using a cross-section analysis, they confirm that progress toward establishing a market economy enhances growth, but also find that, conditional upon the degree of structural reform, policies that maintain a greater degree of equality are more conducive to growth.

1The article, "Inflation and Growth," in the June 2000 issue of the Research Bulletin surveys evidence on the relationship between these two variables, including in transition economies.
2For a more in-depth survey, which also covers research outside the IMF, see Oleh Havrylyshyn, "Recovery and Growth in Transition: A Decade of Evidence" (IMF, forthcoming).
3Ernesto Hernández-Catá, "Liberalization and the Behavior of Output During the Transition from Plan to Market," IMF Working Paper 97/53, 1997; Stanley Fischer, Ratna Sahay, and Carlos Végh, "From Transition to Market: Evidence and Growth Prospects," IMF Working Paper 98/52, 1998a; Oleh Havrylyshyn, Ivailo Izvorksi, and Ron van Rooden, "Recovery and Growth in Transition Economies 1990­97: A Stylized Regression Approach," IMF Working Paper 98/141, 1998; Andrew Berg, Eduardo Borensztein, Ratna Sahay, and Jeromin Zettelmeyer, "The Evolution of Output in Transition Economies: Explaining the Differences," IMF Working Paper 99/73, 1999. For more survey-oriented analyses, see Oleh Havrylyshyn, Thomas Wolf, Julian Berengaut, Marta Castello-Branco, Ron van Rooden, and Valerie Mercer-Blackman, "Growth Experience in Transition Countries, 1990­98," IMF Occasional Paper No. 184, 1999; Stanley Fischer and Ratna Sahay, "The Transition Economies after Ten Years," IMF Working Paper 00/30, 2000.
4Peter Christoffersen and Peter Doyle, "From Inflation to Growth: Eight Years of Transition," IMF Working Paper 98/100, 1998; Valerie Mercer-Blackman and Anna Unigovskaya, "Compliance with IMF Program Indicators and Growth in Transition Economies," IMF Working Paper 00/47, 2000; Oleh Havrylyshyn and Ron van Rooden, "Institutions Matter in Transition, but So Do Policies," IMF Working Paper 00/70, 2000; George Abed and Hamed Davoodi, "Corruption, Structural Reforms, and Economic Performance in the Transition Economies," IMF Working Paper 00/132, 2000.
5Jeromin Zettelmeyer, "The Uzbek Growth Puzzle," IMF Working Paper 98/133, 1998; see also Günther Taube and Jeromin Zettelmeyer, "Output Decline and Recovery in Uzbekistan: Past Performance and Future Prospects," IMF Working Paper 98/132, 1998.
6The basic idea that successful transition involves the reallocation of resources to a more productive new sector also underlies the theoretical analysis in Zuzana Brixiova, Wendi Li, and Tarik Yousef, "Skill Acquisition and Firm Creation in Transition Economies," IMF Working Paper 99/130, 1999.
7Robert Barro, "Economic Growth in a Cross Section of Countries," Quarterly Journal of Economics, May 1991; Ross Levine and David Renelt, "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, September 1992.
8Stanley Fischer, Ratna Sahay, and Carlos Végh, "How Far is Eastern Europe from Brussels?" IMF Working Paper 98/53, 1998b.
9Mark De Broeck and Kristina Kostial, "Output Decline in Transition: the Case of Kazakhstan," IMF Working Paper 98/45, 1998; Mark De Broeck and Vincent Koen, "The ’Soaring Eagle’: Anatomy of the Polish Take-Off in the 1990s," IMF Working Paper 00/06, 2000a, and "The Great Contractions in Russia, the Baltics, and the Other Countries of the former Soviet Union: A View from the Supply Side," IMF Working Paper 00/32, 2000b.
10Michael Keane and Eswar Prasad, "Inequality, Transfers and Growth: New Evidence from the Economic Transition in Poland," IMF Working Paper 00/117, 2000.

Research Summary
Era Dabla-Norris

In recent years, the issue of corruption—generally defined as the abuse of public office for private gain—has attracted renewed interest among both academics and policymakers. In growing recognition of the adverse impact of corruption on economic performance and its ensuing impact on the success of IMF programs, research within the IMF has contributed to the burgeoning literature in this area by highlighting the impact of corruption on economic efficiency, equity, and growth, while also providing insights into its origins, effects, and possible remedies.

The theoretical literature on the economic consequences of corruption has focused on the detrimental impact of corruption on economic growth, efficiency, equity, and welfare.1 Corruption reduces economic growth by lowering incentives to invest and can be expected to lower the quality of public infrastructure and services, reduce public revenues, misallocate talent to rent-seeking activities, and distort the composition of government expenditures and of tax revenues. Empirical evidence based on cross-country comparisons does indeed suggest that corruption has large, adverse effects on private investment and growth. Mauro (1995), in the first study of its kind, used subjective indices of corruption produced by private rating agencies to show that a country that improves its standing on the corruption index from 6 to 8—a rating of 0 being the most corrupt and 10 being the least—will experience something on the order of a 4 percentage point increase in its investment rate and a 0.5 percentage point increase in its annual per capita GDP growth rate.2 Tanzi and Davoodi (forthcoming) discuss how corruption affects growth through its impact on small- and medium-sized enterprises, which are often seen as the engine of development.3

One specific way in which corruption may hamper economic performance is by distorting the composition of government expenditures. Corrupt governments may shift spending away from productive activities (such as health and education or high-quality physical infrastructure) and toward the construction of "white elephant" projects or lower quality investments in infrastructure that are not actually needed. This conjecture has been confirmed in a large number of cross-section studies undertaken at the IMF.4 Empirical evidence suggests that corruption reduces spending on government operations and maintenance, and results in lower spending on health care and education services, such as medicine and textbooks. Higher levels of corruption also tends to be associated with rising military spending.

Corruption can also adversely affect the provision and the quality of publicly provided social services by reducing government revenue.5 Reduced quality may discourage individuals from using these services and make them less willing to pay for them. Individuals would then engage more in tax evasion and firms would have greater incentive to participate in the underground economy, which shrinks the tax base and further diminishes the government’s ability to provide quality public services. Because corruption exacerbates an unequal distribution of wealth and unequal access to education, and other means to increase human capital, corruption can be expected to increase income inequalities and poverty.6 Hindriks, Keen, and Muthoo (1999) find that distributional effects of tax evasion and corruption are unambiguously regressive.7

The existing literature on the consequences of corruption leaves unanswered the question of why, given the high costs of corruption, governments do not eliminate it. A possible answer is that if corruption is systemic, the likelihood of detection and punishment decreases and incentives are created for corruption to increase further. Individuals at the highest levels of government may, themselves, have no incentives to control corruption or to refrain from taking part in rent-seeking activities (discussed below). At the same time, eradication of corruption may be costlier in countries where the level of institutional development and the general economic environment is weak. Dabla-Norris and Freeman (1999) develop a model of the interconnectedness of underdevelopment and corruption in which pervasive corruption discourages market activity, thus reducing the incentives to allocate resources for eliminating it.8 The mutual importance of corruption and economic activity is illustrated by the model’s multiplicity of equilibria: one with low corruption and a high level of economic activity, and the other with widespread corruption that discourages economic activity.

The multiplicity of equilibria provides an explanation not only for the persistence of corruption, but also for the observation that the incidence of corruption varies across countries, even for similar activities. The existence of two stable equilibria in corruption suggests that, once corruption becomes ingrained, it may be very difficult to eradicate. This leads to an important policy implication: ad hoc, anticorruption campaigns will have little effect in eliminating corruption. For anticorruption policy to be effective it must be sustained. An important question is what characteristics make countries more likely to fall into a high-corruption, low-growth trap in the first place.

Corruption always results from a combination of opportunities and incentives. Opportunities for the abuse of power are prevalent in areas where restrictions and government intervention lead to the availability of rents, such as complex tax and customs systems, exchange rate controls and financial market regulations, trade restrictions, windfall gains from natural resource wealth privatization decisions, and discretionary public spending.9 Empirical evidence suggests that the rule of law, particularly effective anticorruption legislation, the availability of natural resources, the economy’s degree of competition and trade openness and the country’s industrial policy affect the breadth and scope of corruption.10

Incentives to engage in corrupt behavior are shaped, among other things, by the nature of meritocratic recruitment and promotion in civil service, public sector salaries, the quality and effectiveness of legal enforcement, the degree of transparency in government operations. Several studies at the IMF demonstrate the link between low public sector salaries and high levels of corruption in economies where monitoring is costly or ineffective and penalties for engaging in corruption are low. Ul Haque and Sahay (1996) present a model that shows there is an optimal level of wages that maximizes the government’s net revenues—that is, raising wages may more than pay for itself in terms of increased tax receipts.11 Low public sector wages, by attracting low-skilled human capital to the government sector, reduce tax collections. The implication for the IMF’s policy advice is that wage cuts can undermine public sector efficiency, and prescriptions for raising statutory tax rates, alone, may not increase revenue collection. Dabla-Norris (2000) shows that, in the absence of appropriate institutional controls, governments can economize on the costs of providing efficiency wages by allowing corruption to take place.12 Empirical evidence points to a fairly robust link between civil service pay and corruption across countries, suggesting that raising civil service pay could be a necessary, albeit not sufficient, condition for preventing corruption.13

Much of the more recent literature on this topic examines the political economy of corruption. In a study of corruption in a representative democracy, Pani (2000) shows that corruption reduces the level of taxes and public expenditures in equilibrium if citizens respond to corruption by changing their votes and policy preferences.14 Other studies argue that corruption patterns may be endogenous to political structures, with institutionalized corruption often associated with kleptocratic states.15 In this respect, recent empirical evidence on transition economies suggests that initial conditions such as the past political history of a country and its propensity to embark on structural reforms are important determinants of corruption.16

1See for instance, the essays collected in Vito Tanzi, Policies, Institutions and the Dark Side of Economics, (Northampton, Massachusetts: Edward Elgar, 2000).
2Paolo Mauro, "Corruption and Growth," Quarterly Journal of Economics, August 1995.
3Vito Tanzi and Hamid Davoodi, "Corruption, Growth and Public Finances," IMF Working Paper (forthcoming).
4Vito Tanzi and Hamid Davoodi, "Corruption, Public Investment and Growth," IMF Working Paper 97/139, 1997; Paolo Mauro, "Corruption and the Composition of Government Expenditure," IMF Working Paper 9/98, 1998, Journal of Public Economics, August 1998; Sanjeev Gupta, Luizde Mello, and Rajii Saran, "Corruption and Military Spending," IMF Working Paper 00/23, 2000, and forthcoming in the European Journal of Political Economy; Sanjeev Gupta, Hamid Davoodi, and Irwin Tinogson, "Corruption and the Provision of Health Care and Education Services," IMF Working Paper 00/116, 2000.
5Vito Tanzi and Hamid Davoodi, "Corruption, Public Investment and Growth," IMF Working Paper 97/139, 1997; Sanjeev Gupta, Hamid Davoodi, and Irwin Tinogson, "Corruption and the Provision of Health Care and Education Services," IMF Working Paper 00/116, 2000.
6Sanjeev Gupta, Hamid Davoodi, and Rosa Alonso-Terme, " Does Corruption Affect Income Inequality and Poverty?" IMF Working Paper 98/76, 1998.
7Jean Hindriks, Michael Keen, and Abhinay Muthoo, "Corruption, Extortion, and Evasion," Journal of Public Economics, December 1999.
8Era Dabla-Norris and Scott Freeman, "The Enforcement of Property Rights and Underdevelopment," IMF Working Paper 99/127, 1999.
9Vito Tanzi, "Corruption Around the World: Causes, Consequences, Scope and Cures," IMF Staff Papers, December 1998; George Abed and Hamid Davoodi, "Corruption, Structural Reforms, and Economic Performance in the Transition Economies," IMF Working Paper 00/132, 2000.
10Carlos Leite and Jens Weidmann, "Does Mother Nature Corrupt?: Natural Resources, Corruption, and Economic Growth," IMF Working Paper 99/85, 1999.
11Nadeem Haque and Ratna Sahay, "Do Government Wage Cuts Close Budget Deficits? Costs of Corruption?," IMF Staff Papers, December 1996.
12Era Dabla-Norris, "A Game-Theoretic Model of Corruption in Bureaucracies," IMF Working Paper 00/106, 2000.
13Caroline Van Rijckeghem and Beatrice Weder, "Corruption and the Rate of Temptation: Do Low Wages in the Civil Service Cause Corruption?" IMF Working Paper 97/73, 1997.
14Marco Pani, "Corruption and Political Equilibrium," IMF Working Paper (forthcoming).
15Joshua Charap and Christian Harm, "Institutionalized Corruption and the Kleptocratic State," IMF Working Paper 99/91, 1999; Era Dabla-Norris, "A Game-Theoretic Model of Corruption in Bureaucracies," IMF Working Paper 00/106, 2000.
16George Abed and Hamid Davoodi, "Corruption, Structural Reforms, and Economic Performance in the Transition Economies," IMF Working Paper 00/132, 2000; Emine Gurgen and Thomas Wolf, "Improving Governance and Fighting Corruption in the Baltics and CIS Countries: The Role of the IMF," IMF Working Paper 00/1, 2000.

Country Study
Ramana Ramaswamy

IMF surveillance of the Japanese economy, and the policy advice that the organization gives to the national authorities, has relied heavily on analytical work produced by the IMF staff. The research agenda of the Japan desk has been driven, in large part, by the need to grapple with evolving policy challenges. This article provides an overview of the recent research conducted by the IMF staff on Japan.

With the Japanese economy experiencing its worst postwar crisis in recent years, the IMF’s research agenda has shifted from its earlier emphasis on trade and exchange rate issues, to more of a focus on why the 1990s became a "lost decade" for Japan, and the policy options and tradeoffs involved in getting the economy back on track. Much of this research has been collected in two recent books, Aghevli, Bayoumi, and Meredith (1998), and Bayoumi and Collyns (2000).1 IMF staff have also published a number of other articles on Japan.

Why did the Japanese economy stagnate in the 1990s, and why is the recent recovery still so fragile? This question constitutes the main theme of two recent papers—Bayoumi (1999) and Ramaswamy and Rendu (1999).2 Both articles employ a vector autoregression framework and identify the negative and persistent effects of the collapse of asset prices in the early 1990s as the principal cause of stagnant output. While the focus of Bayoumi’s paper is on identifying the channels through which the asset price collapse had a negative impact on activity, the emphasis of Ramaswamy and Rendu’s article is more on how the collapse in asset prices affected the different expenditure components, and it identifies the steep decline in private investment as the main factor behind Japan’s disappointing economic performance in the 1990s. Using somewhat different econometric techniques, both articles find that fiscal stimulus in Japan has had a limited and waning impact on activity. The reasons for the steep decline in business investment, and the impact that this decline had on capital stock and potential output in Japan are, respectively, the main themes of Ramaswamy (2000) and Bayoumi (1999).3

The issue of how monetary policy can provide support to the economy when interest rates are close to zero has stimulated a lively debate in both academic and policy circles. Morsink and Bayoumi (2000) shed light on this debate by analyzing the importance of the bank lending channel in Japan, and identifying how the banking crisis has dampened the monetary transmission mechanism by clogging up the lending channel. Using micro data on bank lending, Woo (1999) provides additional evidence in support of the "capital crunch" hypothesis during 1997–98. Both of these papers point to the importance of resolving the banking problems in Japan as a precondition for sustained economic revival. Towe (1998) addresses a different issue concerning monetary policy—the identification of leading indicators of output and inflation in Japan. Using time series techniques, Towe finds that the relationship between financial variables and future output and inflation has been unstable in recent years, making the task of conducting monetary policy all the more difficult.4

Activist fiscal policy has been one of the main tools used by the Japanese authorities in the latter half of the 1990s to revive a faltering economy, and a number of "stimulus" packages have been the primary conduit through which fiscal support has been provided. Mühleisen (2000a) deconstructs the various stimulus packages, and sheds light on why they have had only a limited impact on reviving activity. Mühleisen’s paper also shows that a sharp deterioration in the tax elasticity played an important role in the worsening of Japan’s public finances in the 1990s. The fiscal challenges facing Japan from a longer-run perspective, particularly given population aging, are discussed in Mühleisen (2000b). Bayoumi (1998) provides a primer for those seeking to understand Japan’s complex fiscal system.5

Given Japan’s systemic importance for the global economy, exchange rate issues have continued to be an important part of the IMF Japan desk’s research agenda.6 Meredith (1998) develops a general equilibrium model to provide a comprehensive analysis of the forces governing the exchange value of the yen, and the staff’s approach to evaluating exchange rate misalignments. Ramaswamy and Samiei (2000) provide a forward looking model of the exchange rate to evaluate the effectiveness of interventions in the yen-dollar market. Chadha and Prasad (1997) provide a structural vector autoregression model to explore the types of shocks that have driven variations in the real exchange rate, and analyze the relationship between the real exchange rate and the business cycle in Japan.

As the Japanese authorities have embarked on the process of reforming their capital and labor markets, the IMF’s research has also focused on structural issues.7 Levy (2000) discusses the factors that are driving Japanese corporations to restructure, and evaluates the effectiveness of recent restructuring efforts. Faruqee (2000) develops a general equilibrium model to examine the economic implications of aging in Japan and the policies designed to address it. Prasad (1997) analyzes the determinants of the long-term trends in the sectoral composition of employment and output, shedding light on the speed with which structural change has taken place over different time periods in Japan. Nagaoka (2000) explores the links between labor and product markets in Japan.

1Bijan B. Aghevli, Tamim Bayoumi, and Guy Meredith, editors, Structural Change in Japan: Macroeconomic Impact and Policy Challenges (Washington: IMF, 1998); Tamim Bayoumi and Charles Collyns, editors, Post-Bubble Blues: How Japan Responded to Asset Price Collapse (Washington: IMF, 2000).
2Tamim Bayoumi, "The Morning After: Explaining the Slowdown in Japanese Growth in the 1990s," IMF Working Paper 99/13, 1999, and forthcoming in the Journal of International Economics; Ramana Ramaswamy and Christel Rendu, "Japan’s Stagnant Nineties: A Vector Autoregression Retrospective," IMF Working Paper 99/45, 1999, and forthcoming in IMF Staff Papers.
3Ramana Ramaswamy, "Explaining the Slump in Japanese Business Investment," in Bayoumi and Collyns (2000).
4James Morsink and Tamim Bayoumi, "Monetary Policy Transmission in Japan," in Bayoumi and Collyns (2000); David Woo, "In Search of ’Capital Crunch’: Supply Factors Behind the Credit Slowdown in Japan," IMF Working Paper 99/03, 1999; Christopher Towe, "Structural Change and Information Content of Financial Variables for Monetary Policy," in Aghevli, Bayoumi and Meredith (1998).
5Martin Mühleisen, "Too Much of a Good Thing? The Effectiveness of Fiscal Stimulus," 2000a, in Bayoumi and Collyns (2000); Martin Mühleisen, "Sustainable Fiscal Policies for an Aging Population," 2000b, in Japan: Selected Issues, IMF Staff Country Report 00/144 (Washington: IMF, 2000). Tamim Bayoumi, "The Japanese Fiscal System and Fiscal Transparency," in Aghevli, Bayoumi and Meredith (1998).
6Guy Meredith, "The Yen: Past Movements and Future Prospects," in Aghevli, Bayoumi and Meredith (1998); Ramana Ramaswamy and Hossein Samiei, "The Yen-Dollar Rate: Have Interventions Mattered?," IMF Working Paper 00/95, 2000 (this paper was presented at the NBER’s "Japan Project" conference in Tokyo, September 2000); Bankim Chadha and Eswar Prasad, "Real Exchange Rate Fluctuations and the Business Cycle: Evidence From Japan," IMF Staff Papers, September 1997.
7Joaquim Levy, "Financial Reorganization and Corporate Restructuring in Japan," in Bayoumi and Collyns (2000); Hamid Faruqee, "Population Aging and Its Macroeconomic Implications," in Japan: Selected Issues, IMF Staff Country Report 00/144 (Washington: IMF, 2000). Eswar Prasad, "Sectoral Shifts and Structural Change in the Japanese Economy: Evidence and Interpretation," Japan and the World Economy, Vol. 9, No. 3, 1997; Takashi Nagaoka, "Japan: The Unemployment-Deflation Puzzle," in Japan: Selected Issues, IMF Staff Country Report 00/144 (Washington: IMF, 2000).

Conference on the Future of Monetary Policy and Banking
Giovanni Dell’Ariccia

On July 11, 2000, the IMF, the World Bank, and the journal, International Finance, jointly organized a conference on the future of monetary policy and banking. Speakers and discussants talked about issues related to the conduct of monetary policy in a hypothetical future economy where various forms of electronic media were to replace currency as the main vehicle of payment settlement. In addition, issues related to exchange rate defense, institutional design, and inflation targeting were discussed.

Can Central Banking Survive the IT Revolution?
Charles Goodhart, London School of Economics

Monetary Policy Implementation: Past, Present, and Future—Will the Advent of Electronic Money Lead to the Demise of Central Banking?
Charles Freedman, Bank of Canada

Monetary Policy in a World Without Money
Michael Woodford, Princeton University

A Response to Goodhart, Freedman, and Woodford
Benjamin Friedman, Harvard University

Electronic Finance: Reshaping the Financial Landscape Around the World
Stijn Claessens, Thomas Glaessner, and Daniela Klingebiel; World Bank

Toward a Common Currency?
Richard Cooper, Harvard University

An Interest Rate Defense of a Fixed Exchange Rate?
Robert Flood and Olivier Jeanne, International Monetary Fund

Monetary Policy Without Central Bank Money: A Swiss Perspective
Georg Rich and Michel Peytrignet, Swiss National Bank

Solbruchstelle: Mass Democracy, Deep Uncertainty, and the Design of Monetary Institutions
Susanne Lohmann; University of California, Los Angeles

The Present and Future of Monetary Policy Rules
Bennett McCallum, Carnegie Mellon University and NBER

Is Fighting Inflation a Just War?
Adam Posen, Institute for International Economics

Manuel Conthe and Adam Posen made the introductory remarks at the conference. Kemal Dervis, Michael Mussa, and Benn Steil chaired the sessions. Alan Blinder, Barry Bosworth, Agustín Carstens, Andrew Hughes Hallett, Donald Kohn, and John Williamson were discussants of the papers, which are summarized below.

Charles Freedman observes that the combination of the central bank’s monopoly power over the supply of reserves or settlement balances, and its ability to impose terms and conditions related to the excess or shortfall of reserves or settlement balances, is crucial for monetary policy implementation. The central bank’s control of the supply of reserves and settlement balances reflects its advantages as provider of the mechanism to settle payments imbalances among banks. These advantages, including the riskless character of the central bank and its ability to act as lender of last resort, make it very unlikely that other mechanisms, including variants of electronic money, will supplant the current types of arrangements for the foreseeable future.

Charles Goodhart challenges the view that development of e-commerce and associated computerization will eliminate the demand for a monetary base; and that such vanishing demand for a monetary base will, in turn, limit the central bank from setting nominal interest rates. He argues that the central bank’s ability to affect interest rates ultimately depends on the fact that it is the government’s bank and, thus, has the power to intervene in (financial) markets without concern for profitability (let alone profit maximization), while at the same time its credit rating is higher than that of any other entity. Hence, the central bank can always dictate the terms on either the bid, or ask, side of the money market. In addition, he stresses that currency has unique features that make it difficult to replace. Currency is anonymous in the sense that the recipient of a cash payment neither has to know, nor learn, anything about the counterparty in the process of trade, allowing free transferability between users without recourse to the underlying issuers.

Michael Woodford concludes that while advances in information technology may require changes in the way monetary policy is implemented, the ability of central banks to control inflation will not be undermined. He points out that the central bank only needs to be able to control the short-term nominal interest rate. This ability will always be preserved as long as the creditworthiness of the central bank remains unimpeachable. Under such circumstances, the central bank could control short-term interest rates by standing ready to accept overnight deposits or to lend overnight cash at a fixed rate. Indeed, the Bank of Canada, the Reserve Bank of Australia, and the Reserve Bank of New Zealand already control short-term interest rates by varying the interest rate paid on balances held with the central bank. The successful experiences of these central banks indicate that there is little reason to expect monetary control to be any more difficult following the development of new electronic media for making payments.

In their paper, Stijin Claessens, Thomas Glaessner, and Daniela Klingebiel, observe that the financial industry is undergoing dramatic changes due to technological advances and the advent of the Internet. In many countries, such evolution can accelerate the development of the financial sector by reducing costs, increasing breadth and quality, and widening access to financial services. They argue that advances in information technology are likely to reduce asymmetric information, diminishing the importance of banks’ "special" character. Consequently, there will be a need to reevaluate (and probably reduce) the role of the safety net and prudential regulation and supervision. On the contrary, the increasing globalization of financial markets calls for an international harmonization of competition policy, and raises important consumer protection issues.

In his paper, Richard Cooper reviews the experience of industrial and developing countries with fixed and flexible exchange rate regimes and observes that flexible exchange rates have not performed as their early advocates insisted they would. Nominal exchange rate flexibility has led to substantial real exchange rate volatility, creating a source of uncertainty for business decisions. He then argues that, as capital market integration deepens, financial movements will increasingly dominate changes in exchange rates. Financial movements will be only loosely linked to changes in economic fundamentals, developing their own short-term and medium-term dynamics, and the benefits that a flexible exchange rate provides as a macroeconomic shock absorber will be increasingly dominated and eventually overwhelmed by its costs as a generator of shocks unrelated to fundamentals. The worsening of this cost-benefit ratio will make the case for a common currency among the world’s major economies.

Robert Flood and Olivier Jeanne investigate the scope for policy tradeoffs involving interest rates, nominal-liability growth (money and bonds), the real government deficit, and international reserve management in the context of a Krugman-Flood-Garber (KFG) speculative attack model. They evaluate policies in terms of how long the policies preserve a given fixed exchange rate. By adapting the KFG model to allow for an interest rate defense, they show that increasing the domestic-currency interest rate makes domestic assets more attractive according to an asset substitution effect, but weakens the domestic currency by increasing the government’s fiscal liabilities. As a result, raising the interest rate hastens the speculative attack when speculation is motivated by underlying fiscal fragility.

In their paper, Georg Rich and Michel Peytrignet review the experience of the Swiss National Bank (SNB) with monetary targeting and its switch to a policy based on inflation forecasts. He observes that instabilities in base-money demand have been a factor in the SNB decision to change its policy framework, and that financial innovation and the spread of electronic money have contributed to errors in the SNB calculations. He also argues, however, that these were not the main reasons that led to the policy switch, and that there was no evidence that financial evolution has weakened the central bank’s control over monetary policy.

In her paper, Susan Lohmann argues that well-designed institutions are credibly committed to following a sound monetary policy, but are also flexible in the face of deep uncertainty. They respond to economic and social developments as well as to shifting understandings of the way the macroeconomy works. They accommodate political pressures, renege on promises, and change their institutional stripes, and, if they become obsolete, they disappear. She argues that mass democracy is uniquely well suited to support institutions that implement a favorable credibility-flexibility tradeoff in monetary policy. Indeed, the rationale for the creation of monetary institutions is to provide a public focal point for large audiences to coordinate on when to apply punishments associated with the implementation of bad policies. Optimal design then consists of setting up monetary institutions so they invoke the ideal audience: the guardians of the guardians will have an incentive and ability to inflict costs on the policymaker if he or she should break an agreement, thus generating credibility; but they would also have an incentive and ability to excuse defections when extreme shocks or unforeseen contingencies are realized, thus allowing for flexibility.

Bennet McCallum examines whether inflation targeting can be considered a rule-based approach to monetary policy and discusses the future role of monetary rules in general. Rule-based policies are characterized as policies that are conducted to satisfy relationships specified from a "timeless perspective," that is, designed in a manner that is not affected by current macroeconomic conditions. If this perspective is taken, the rules or relationships can be updated periodically without imparting any inflationary bias, even if the central bank’s objectives specify a target output rate that exceeds the natural rate value. Within this framework, inflation targeting regimes largely represent rule-based policymaking. Regarding the effects of a gradually diminishing role for money in developed economies, McCallum argues that the feasibility and attractiveness of rule-based monetary policymaking will not be seriously impaired as long as a tangible medium of exchange has some importance, even if it is small.

Finally, Adam Posen compares monetary policy to war and uses that analogy to discuss whether fighting inflation is actually a just war. First, he establishes the relevance of "moral" reasoning for monetary policy by pointing out that not only policy goals, but also choices about how and when disinflation is undertaken are important. Second, he argues that monetary policy faces many of the same moral dilemmas raised by nuclear deterrence during the cold war. Third, he turns to the topic of what grounds and goals are sufficient justification for undertaking a costly disinflation. Fourth, he considers what means in the pursuit of those goals are ethically supportable, and whether some damage-limiting efforts are incumbent upon monetary policymakers. Finally, he looks at the duties of central bankers to keep their power to wage war on inflation subject to democratic control, and to reduce the likelihood of such wars over time.

The agenda and papers can be found in full-text format at http://www.worldbank.org/research/interest/confs/upcoming/papersjuly11/july11_2000.htm.

Proceedings of IMF conferences and seminars, including agenda and papers, can be obtained through the "Conferences, Seminars, and Workshops" link at the Research at the IMF website at http://www.imf.org/external/pubs/res/index.htm.

IMF Research Conference

The first annual IMF Research Conference was held in Washington, DC, on November 9­10, 2000. Organized by the Research Department of the IMF, this event brought together prominent researchers from various universities and institutions around the world and young researchers in the IMF to present and discuss papers on topics of current policy interest. The main themes of the conference were: private sector involvement in crisis resolution; monetary and exchange rate policies in crisis situations; the effects of adjustment programs on inequality, poverty and financial markets; and issues related to exchange rate regimes.

Maurice Obstfeld (University of California, Berkeley) delivered the first Mundell-Fleming Lecture in which he reevaluated the famed Mundell-Fleming model, a paradigm of international monetary economics for several decades, from a current perspective. Robert Mundell (Columbia University), winner of last year’s Nobel Prize in Economics and a former staff member of the IMF Research Department, delivered a keynote address.

A full report on the conference will appear in the next issue of this bulletin. A selection of the papers presented, along with comments and discussions, will be published in a special issue of IMF Staff Papers in 2001. The agenda and papers can be found in full-text format at http://www.imf.org/external/pubs/ft/staffp/2000/00-00/arc.htm.


IMF Staff Papers
Volume 47, No. 2

Portfolio Diversification, Leverage, and Financial Contagion
Garry J. Schinasi and R. Todd Smith

How Persistent Are Shocks to World Commodity Prices?
Paul Cashin, Hong Liang, and C. John McDermott

Ratchet Effects in Currency Substitution: An Application to the Kyrgyz Republic
Joannes Mongardini and Johannes Mueller

Safety from Currency Crashes
Kent Osband and Caroline Van Rijckeghem

Japan’s Stagnant Nineties: A Vector Autoregression Retrospective
Ramana Ramaswamy and Christel Rendu

IMF Staff Papers, the IMF’s scholarly journal, edited by Robert Flood, publishes selected high-quality research produced by IMF staff and invited guests on a variety of topics of interest to a broad audience, including academics and policymakers in IMF member countries. The papers selected for publication in the journal are subject to a rigorous review process using both internal and external referees. The journal and its contents (including an archive of articles from past issues) are available on the IMF website at http://www.imf.org/external/pubs/ft/staffp/index.htm

IMF Occasional Papers

Detailed summaries of IMF Occasional Papers are available at the Research at the IMF website at http://www.imf.org/external/pubs/res/index.htm.

IMF Occasional Paper No. 195
The Eastern Caribbean Currency Union: Institutions, Performance, and Policy Issues
Frits van Beek, Jose Roberto Rosales, Mayra Zermeno, Ruby Randall, and Jorge Shepherd

The Eastern Caribbean Central Bank (ECCB) is one of just a few regional central banks in the world and is the only one where member countries pool their foreign reserves, the convertibility of the common currency is self-supported, and the parity of the exchange rate has not changed. The "strong Eastern Caribbean dollar" policy pursued by the ECCB has imposed hard limits on its ability to extend credit to participating governments. As a result, a premium has been placed on fiscal discipline, with most participating governments following prudent fiscal policies.

This paper argues that price and exchange rate stability have also contributed to regional financial system stability. Despite the relatively frequent occurrence of major natural disasters, and the secular decline of key economic activities, the financial systems in the Caribbean have remained stable and virtually free of banking crises.

A detailed summary of this IMF Occasional Paper is available on the IMF website at

IMF Occasional Paper No. 196
Trade and Trade Policies in Eastern and Southern Africa
Arvind Subramanian, Enrique Gerlbard, Richard Harmsen, Katrin Elborgh-Woytek, and Piroska Nagy

This occasional paper analyzes trade and trade policy developments in the countries of Eastern and Southern Africa (ESA) during the 1990s. It describes and quantifies the trade liberalization undertaken by these countries in the area of goods and services, encompassing unilateral and multilateral efforts as well as those undertaken in the context of regional integration initiatives. Drawing upon the experience of individual countries, the paper explores the macroeconomic aspects of trade liberalization, including the factors that have influenced trade liberalization efforts and their impact on macroeconomic performance. Finally, it addresses the main trade policy issues that ESA countries will confront given the impending changes in their external trading environment.

A detailed summary of this IMF Occasional Paper is available on the IMF website at http://www.imf.org/external/pubs/cat/longres.cfm?sk=3716.0.

IMF Occasional Paper No. 197
Deposit Insurance: Actual and Good Practices
Gillian G.H. Garcia

In recent years, a number of countries that faced banking problems gave their banks’ depositors and creditors blanket guarantees; other countries explicitly initiated more limited deposit insurance systems (DIS). All of these countries took steps to try and help stabilize their financial systems, protect consumers, and facilitate economic recovery.

This paper offers guidance on designing or reforming a limited DIS and on placing and removing a full guarantee. To be successful, a DIS must set up a coordinated system of incentives that encourages all parties dealing with banks to keep their financial institutions safe and sound. That is, the system must avoid the pitfalls of moral hazard, adverse selection, political interference, and regulatory capture. This paper also surveys the configurations of 67 presently known DIS and traces a growing movement by countries toward the adoption of good deposit insurance practices.

IMF Occasional Paper No. 198
Setting Up Treasuries in the Baltics, Russia, and Other Countries of the Former
Soviet Union

Barry H. Potter and Jack Diamond

Since 1992, the IMF’s Fiscal Affairs Department has supported the Baltics, Russia, and other countries of the former Soviet Union by providing them with technical assistance to set up treasury systems. In most advanced countries, treasury systems provide central governments with comprehensive financial services—including processing of government payments and revenue receipts, accounting, fiscal reporting, and financial management. The countries of the former Soviet Union lacked comparable systems and faced the challenge of building treasury systems from scratch. The IMF helped these countries meet this challenge through specific technical assistance programs.

The IMF conducted a self-evaluation of its technical assistance with a view to assessing: how well the objective of setting up treasuries has been achieved; the relevance and sustainability of the reforms; the costs, efficiency, and effectiveness of the assistance; and the factors that affected the sources (or otherwise) in different countries. This paper presents the findings of this evaluation, looks at the problems that arise when introducing institutional changes in transition economies, and makes broader recommendations on assisting institutional change both in these countries and elsewhere.

A detailed summary of this IMF Occasional Paper is available on the IMF website at http://www.imf.org/external/pubs/cat/longres.cfm?sk=3714.0

Books from IMF

Full-text versions (or, in some cases, detailed summaries) of books published by the IMF are available online at the Research at the IMF website at http://www.imf.org/external/pubs/res/index.htm. Follow the link to IMF Publications.

Sovereign Assets and Liabilities Management
David Folkerts-Landau and Marcel Cassard (editors)

The papers contained in this volume were presented at a conference hosted by the IMF and the Hong Kong Monetary Authority in Hong Kong SAR in November 1996. The conference focused on a wide range of issues confronting policymakers in managing their sovereign assets and liabilities in a world of mobile capital flows and integrated capital markets. The papers draw on the experience of policymakers and private sector participants that have been actively involved in formulating and implementing debt and reserves policy.

A detailed summary of this book is available on the IMF website at http://www.imf.org/external/pubs/cat/longres.cfm?sk=3605.0.

East Timor: Establishing the Foundations of Sound Macroeconomic Management
Luis M. Valdivieso, Toshihide Endo, Luis V. Mendonca, Shamsuddin Tareq, and Alejandro López-Mejia

This report provides an overview of the economic and institutional developments in East Timor up until September 1999, and the immediate impact of the violent events that followed the August 30, 1999, referendum to decide the future status of East Timor. It then presents the key elements of the strategy recommended by IMF staff to the United Nations Transitional Administration in East Timor (UNTAET) to rebuild the institutions needed to support economic activity and public administration, including external financing requirements, technical assistance, and training needs in the area of macroeconomic management. Finally, the report assesses the status of the strategy’s implementation, and discusses the steps that should be taken to ensure the strategy will help prepare East Timor for future challenges.

A detailed summary of this book is available on the IMF website at http://www.imf.org/external/pubs/cat/longres.cfm?sk=3605.0.

Inflation Targeting in Practice: Strategic and Operational Issues and Application to Emerging Market Economies
Mario I. Blejer, Alain Ize, Alfredo M. Leone, and Sergio Werlang (editors)

The Central Bank of Brazil and the Monetary and Exchange Affairs Department of the IMF held a seminar on inflation targeting in Rio de Janeiro on May 3­5, 1999. Its purpose was to analyze the experience, to date, of the countries that have been operating under an inflation targeting framework, and to identify and review the steps that Brazil should consider in adopting such a framework so as to enhance the chances of its success. This volume gathers together the summaries of the presentations given at the seminar.

The full-text version of this book is available on the IMF website at http://www.imf.org/external/pubs/cat/longres.cfm?sk=3664.0.

External Publications by IMF Staff

A full listing of external publications of IMF staff in the second half of 2000 will appear in the next issue of this bulletin. A searchable database with updated information on recent external publications of IMF staff is available at the Research at the IMF website at http://www.imf.org/external/pubs/res/index.htm.

Policy Discussion Papers

Policy Discussion Paper PDP/00/7
Large-Scale Post-Crisis Corporate Sector Restructuring
Mark Stone

Policy Discussion Paper PDP/00/8
Reconsidering External Financing of Domestic Budget Deficits: Debunking Some Received Wisdom
David Gray, David Woo

Economic Issues

Economic Issues No. 21
Improving Governance and Fighting Corruption in the Baltic and CIS Countries: The Role of the IMF
Thomas Wolf, Emine Gürgen

Economic Issues No. 22
The Challenge of Predicting Economic Crises
Andrew Berg, and Catherine Pattillo

Economic Issues No. 23
Promoting Growth in Sub-Saharan Africa: Learning What Works
Anupam Basu, Evangelos Calamitsis, and Dhaneshwar Ghura


The IMF and the Silent Revolution: Global Finance and Development in the 1980s
James M. Boughton

This pamphlet is based on the forthcoming IMF history volume, Silent Revolution: The International Monetary Fund, 1979–1989.

The full-text version of this pamphlet is available on the IMF website at http://www.imf.org/external/pubs/cat/longres.cfm?sk=3687.0.

Visiting Scholars at the IMF, July–September 2000

Ajayi, Ibidayo; University of Ibadan, Nigeria
Attanasio, Orazio; University College London, U.K.
Auernheimer, Leonardo; Texas A&M University
Begg, David; Birbeck College, U.K.
Bikalova, Nadezhda A.; Parliament of the Russian Federation, Russia
Bonaccorsi Di Patti, Emilia; Bank of Italy
Bordo, Michael; Rutgers University
Branson, William; Princeton University
Canova, Fabio; Universitat Pompeu Fabra, Spain
Choudri, Ehsan; Carleton University
Christiano, Lawrence; Northwestern University
Davis, Philip; Bank of England, U.K.
Disney, Richard; University Park, Worthington, England
Dooley, Michael; University of California, Santa Cruz
Feltenstein, Andrew; Virginia Polytechnic Institute
Hassan, Kabir; University of New Orleans
Hughes-Hallett, Andrew; University of Strathclyde, U.K.
Jerome, Theo; University of Ibadan, Nigeria
Kugler, Peter; WWZ-der Universitat Basel, Switzerland
Leroux, Francois; Ecole des Hautes Etudes Commerciales
MacDonald, Ronald; University of Strathclyde, U.K.
Manzur, Meher; Curtin University of Technology
Marin, Dalia; University of Munich, Germany
McDermott, John; Reserve Bank of New Zealand
Montiel, Peter; Williams College
Mungule, Oswald; University of Zambia, Zambia
Njikam, Ousmanou; University of Yaounde II, Cameroon
Nkurunziza, Janvier; University of Exford, U.K.
Ogawa, Eiji; Hitotsubashi University, Japan
Omole, Davidson; National University of Lesotho, Lesotho
Panagariya, Arvind; University of Maryland
Razin, Assaf; Tel Aviv University, Israel
Rebelo, Sergio; Northwestern University
Roubini, Nouriel; U.S. Treasury, Washington, D.C.
Sala-I-Martin, Xavier; Universitat Pompeu Fabra, Spain
Saxena, Sweta; University of Pittsburgh
Sobodu, Aderonke; University of Ibadan, Nigeria
Sorensen, Peter B.; University of Copenhagen
Steiner, Roberto; Universita de los Andes
Tabellini, Guido; IGIER - Universita Bocconi, Italy
Vegh, Carlos; UCLA
Weber, Shlomo; Southern Methodist University
Xu, Chenggang; London School of Economics, U.K.

IMF Working Papers

Working Paper No. 00/106
A Game-Theoretic Analysis of Corruption in Bureaucracies
Dabla-Norris, Era

Working Paper No. 00/107
Managing Financial Crises: The Experience in East Asia
Boorman, Jack; Lane, Timothy; Schulze-Ghattas, Marianne; Bulir, Ales; Ghosh, Atish R.; Hamann, Javier; Mourmouras, Alexandros; Phillips, Steven

Working Paper No. 00/108
Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis
Dabos, Marcelo; Juan-Ramon, V. Hugo

Working Paper No. 00/109
Budgetary Convergence in the WAEMU: Adjustment Through Revenue or Expenditure?
Dore, Ousmane; Nachega, Jean-Claude

Working Paper No. 00/110
Threshold Effects in the Relationship Between Inflation and Growth
Khan, Mohsin S.; Senhadji, Abdelhak S.

Working Paper No. 00/111
Bidding Behavior in Treasury Bill Auctions: Evidence from Pakistan
Hardy, Daniel C.

Working Paper No. 00/112
Review of the Experience with Oil Stabilization and Savings Funds in
Selected Countries

Fasano, Ugo

Working Paper No. 00/113
Fiscal Reform Over Ten Years of Transition
Tanzi, Vito; Tsibouris, George C.

Working Paper No. 00/114
The Corporate Sector Dynamics of Systemic Financial Crises
Stone, Mark

Working Paper No. 00/115
Demographic Change in Asia: The Impact on Optimal National Saving, Investment, and the Current Account
Besanger, Serge; Guest, Ross S.; McDonald, Ian

Working Paper No. 00/116
Corruption and the Provision of Health Care and Education Services
Gupta, Sanjeev; Davoodi, Hamid; Tiongson, Erwin

Working Paper No. 00/117
Inequality, Transfers and Growth: New Evidence from the Economic Transition in Poland
Keane, Michael; Prasad, Eswar

Working Paper No. 00/118
Optimal Fiscal Strategy for Oil Exporting Countries
Valdes, Rodrigo O.; Engel, Eduardo

Working Paper No. 00/119
Money Demand in Guyana
Egoume-Bossogo, Philippe

Working Paper No. 00/120
External Sector Reform and Public Enterprise Restructuring
Bhattacharya, Rina

Working Paper No. 00/121
Convergence of Per Capita Output Levels Across Regions of Bangladesh, 1982­97
Hossain, Akhtar

Working Paper No. 00/122
Exchange-Rate-Based Stabilization: A Model of Financial Fragility
Sobolev, Yuri Vladimirovich

Working Paper No. 00/123
The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates
Lane, Philip; Milesi-Ferretti, Gian Maria

Working Paper No. 00/124
Cost of Living Adjustment and Business Cycles: Disaggregated Evidence
Kandil, Magda

Working Paper No. 00/125
Costly Collateral and the Public Supply of Liquidity
Schellekens, Philip

Working Paper No. 00/126
Life-Cycles, Dynasties, Savings: Implications for Closed and Small, Open Economies
Faruqee, Hamid; Laxton, Douglas

Working Paper No. 00/127
Determinants of Inflation in The Islamic Republic of Iran: A Macroeconomic Analysis
Liu, Olin; Adedeji, Olumuyiwa S.

Working Paper No. 00/128
Real Effective Exchange Rate and the Constant Elasticity of Substitution Assumption
Spilimbergo, Antonio; Vamvakidis, Athanasios

Working Paper No. 00/129
Can Fiscal Decentralization Strengthen Social Capital?
de Mello, Luiz

Working Paper No. 00/130
Evidence on the Fiscal and Macroeconomic Impact of Privatization
Barnett, Steven

Working Paper No. 00/131
The Currency Composition of Foreign Exchange Reserves: Retrospect and Prospect
Eichengreen, Barry J.; Mathieson, Donald J.

Working Paper No. 00/132
Corruption, Structural Reforms, and Economic Performance in the Transition Economies
Abed, George T.; Davoodi, Hamid

Working Paper No. 00/133
Fiscal Policy and Growth in the Context of European Integration
Masson, Paul R.

Working Paper No. 00/134
Exchange Rate Regime Transitions
Masson, Paul R.

Working Paper No. 00/135
The Breakdown of Credit Relations Under Conditions of a Banking Crisis: A Switching Regime Approach
Munoz, Sonia

Working Paper No. 00/136
What Should Macroeconomists Know About Health Care Policy: A Primer
Hsiao, William

Working Paper No. 00/137
Wage Flexibility and Economic Performance: Evidence Across Industrial Countries
Kandil, Magda

Working Paper No. 00/138
The Facts About Time-to-Build
Koeva, Petya

Working Paper No. 00/139
Reforming Pensions: Myths, Truths, and Policy Choices
Barr, Nicholas

Working Paper No. 00/140
Selected Issues Concerning Monetary Policy and Institutional Design for Central Banks: A Review of Theories
Beddies, Christian

Working Paper No. 00/141
The Impact of Monetary Policy on the Exchange Rate: Evidence from Three Small Open Economies
Zettelmeyer, Jeromin

Working Paper No. 00/142
Domestic Competition, Cyclical Fluctuations, and Long-Run Growth in Hong Kong SAR
Zitzewitz, Eric

Working Paper No. 00/143
Predictable Movements in Yen/DM Exchange Rates
Cottarelli, Carlo

Working Paper No. 00/144
Filtering the BEER: A Permanent and Transitory Decomposition
Clark, Peter B.; MacDonald, Ronald

Working Paper No. 00/145
Former Yugoslav Republic of Macedonia Banking Soundness and Recent Lessons
Drummond, Paulo

Working Paper No. 00/146
Determinants of Dollarization: The Banking Side
Terrones, Marco; Catao, Luis

Working Paper No. 00/147
The Benefits and Costs of Intervening in Banking Crises
Frydl, Edward; Quintyn, Marc

Working Paper No. 00/148
How Does U.S. Monetary Policy Influence Economic Conditions in Emerging Markets?
Arora, Vivek B.; Cerisola, Martin

Working Paper No. 00/149
The Case Against Harry Dexter White: Still Not Proven
Boughton, James M.

Working Paper No. 00/150
Should Subsidized Private Transfers Replace Government Social Insurance?
Chami, Ralph; Fullenkamp, Connel

Working Paper No. 00/151
Population Aging and Global Capital Flows in a Parallel Universe
Brooks, Robin

Working Paper No. 00/152
External Capital Structure: Theory and Evidence
Lane, Philip; Milesi-Ferretti, Gian Maria

Working Paper No. 00/153
Chile’s Rapid Growth in the 1990s: Good Policies, Good Luck, or Political Change?
Jadresic, Esteban; Zahler, Roberto

Working Paper No. 00/154
Capital Markets and External Current Accounts: What to Expect from the Euro
Decressin, Jörg; Disyatat, Piti

IMF Working Papers and other IMF publications can be downloaded in full-text format from the Research at the IMF website at http://www.imf.org/external/pubs/res/index.htm.

International Capital Markets Report, September 2000
summary by Charles Kramer, Jens Nystedt and Jorge Roldos

The annual report on International Capital Markets: Developments, Prospects, and Key Policy Issues is an integral element of the IMF’s surveillance of developments in international financial markets. This year’s report assesses recent developments in mature and emerging financial markets and analyzes key systemic issues affecting global financial markets. During 1999 and into the first half of 2000, global financial conditions generally improved in tandem with the strong rebound in the global economy. Starting in March 2000, however, participants in mature and emerging markets became less at ease with the uneven growth patterns among the major currency areas, signs of inflationary pressures, and increasing external imbalances. Against this background, the report also discusses the major risks in the period ahead.

The International Capital Markets report examines three systemic issues. First, rapid growth and widespread use of over-the-counter (OTC) derivatives markets has accompanied, and in many ways driven, the globalization of finance. These markets are comprised of internationally active financial institutions, and are central to the functioning and efficiency of the major bond, equity, and foreign exchange markets. Accordingly, OTC derivatives instruments and markets have bestowed tremendous benefits on global financial markets. At the same time, recent episodes of turbulence have revealed that OTC derivatives instruments and markets can contribute to market instability. The report identifies sources of risks to market instability in OTC derivatives markets as well as imperfections in the underlying infrastructure. Progress in addressing some of these risks and imperfections has been limited, and the report points to areas where further efforts are required if risks to market stability are to be avoided in the future.

Second, the report discusses market views on the experience with initiatives to "involve" the private sector in preventing and resolving crises. The report notes that it is in the interest of both the private and public sectors to reduce potential inefficiencies and instabilities in the international financial system. Recent experience with involving the private sector in crisis resolution has revolved around two new instruments—the rollover of interbank lines and the restructuring of sovereign foreign currency bonds. Views about the success of these instruments are varied, but the report concludes that the official community needs to be more aware of how the private sector will react to official initiatives in order to enhance private sector involvement in the future.

Third, the report documents the growing presence of foreign-owned institutions in the emerging markets. In the second half of the 1990s, the share of assets under foreign control in several emerging markets in Central Europe and Latin America increased to more than half of total assets. Thus, foreign-owned banks have played an increasingly important role in emerging markets. The report analyzes the factors that have stimulated the rise in foreign participation, including those that drove global financial institutions to expand toward emerging markets, and the factors underlying the authorities’ decisions to remove existing barriers to entry. The arguments for and against foreign presence in the financial system and the main policy issues are also reviewed and assessed. The report finds that competitive pressures created by foreign bank entry have led to improvements in banking system efficiency. It notes that while there is only limited evidence on whether a greater foreign bank presence contributes to a more stable banking system and decreased volatility in the availability of credit, foreign banks could potentially add to the stability of the banking system. The report also suggests that the presence of foreign banks opens a new channel for transmitting disturbances from mature to emerging markets. Finally, the report points out that the main policy issues involved in foreign bank participation are the need to coordinate and upgrade prudential supervisory and regulatory policies across borders, and to be aware of concentrations of activity arising from large international bank mergers and of associated systemic issues.

The full text of the September 2000 International Capital Markets report is available on the IMF website at http://www.imf.org/external/pubs/ft/icm/2000/01/eng/index.htm.

Editor’s Note

The research summaries in this issue cover two areas that have been and continue to be subjects of active research within the IMF in recent years. Growth in Transition summarizes a large number of country-specific and cross-country studies that have tried to characterize and to understand the determinants of the growth experiences of the transition economies of Eastern Europe. The second research summary, Corruption, describes an area where research at the IMF has been driven not just by analytical considerations but also by its relevance for the operational work of the IMF.

Country/Area Studies is a new feature that is being introduced in this issue. These short notes will summarize research done at the IMF on a particular country, or a regional group of countries with common characteristics, and will highlight analytical work done in the IMF’s area departments.

This issue also contains a description of the International Capital Markets Report, an annual publication of the IMF. A brief article summarizes the main themes and provides a summary of the background material for the September 2000 report. —Eswar Prasad

Journal Description and Subscription Request

The IMF Research Bulletin (ISSN: 1020-8313) is a quarterly publication in English and is available free of cost. Material from the bulletin may be reprinted with proper attribution. Editorial correspondence may be addressed to The Editor, IMF Research Bulletin, IMF, Room 10-548, Washington, DC 20431 U.S.A. or e-mailed to resbulletin@imf.org. Subscription requests should be addressed to Publication Services, Box X2000, IMF, Washington, DC 20431 U.S.A.; e-mail: publications@imf.org.