Greater Macroeconomic Stability Research Articles

Private sector participation in infrastructure in emerging market and developing economies: Evolution, constraints, and policies

AbstractThe private sector can play important roles in closing the infrastructure investment gaps in emerging market and developing economies. However, private participation in emerging market and developing economies' infrastructure has declined over the past decade, reflecting persistent structural challenges and risks in the business environment. The decline was broad‐based and gained momentum following the 2013 taper tantrum and the end of the commodity super cycle. Incentivizing greater private sector participation in infrastructure will require policies to improve access to long‐term finance and to derisk the business environment. This will require efforts to strengthen the banking sector regulation and supervision, to improve the legal and contractual environment, and to limit information asymmetries. Deepening local financial and bond markets can make it possible for infrastructure bonds to be issued in local currencies and minimize potential currency mismatches. Improvements in the broader business environment can benefit from greater macroeconomic stability and stronger institutional frameworks. Policies that improve the quality of projects at entry, address currency risk, relax capital controls, and enable cost recovery pricing can unlock private sector participation in infrastructure financing. Strong government support, including ensuring regulatory quality, and providing well‐targeted guarantees and subsidies, can play a critical role.

Trade Liberalisation and the Reduction of Poverty—A Revisit

The objective of this article is to revive the ongoing debate of whether trade liberalisation contributes to poverty reduction. This article considers case studies from East Asia and Latin America to demonstrate the varied effects of trade. Whilst structural instability and the Dutch disease phenomenon hindered trade liberalisation gains in Latin America, on the other hand, diversified economic structure and greater macro-economic stability allowed East Asia to reap the benefits of open trade, to its advantage. In effect, liberalisation does not have an overwhelming reduction in poverty. Although the long-term effects are positive and significant, there are many costs and factors that may hinder the success of liberalisation. A set of guidelines and the country’s readiness are required.

FDI inflows and economic growth in Arab region: The institutional quality channel

AbstractThis study empirically investigates the possible role of institutional quality in absorbing foreign direct investment (FDI) flows' spillovers for growth in a group of Arab countries. The analysis is performed by employing system GMM estimation in panel data comprising 11 Arab countries over the period 1988–2012. It develops overall indexes of doing business and economic freedom indicators using the principal components analysis (PCA) as weights. The study finds that the quality of institutions plays an important role in enhancing economic growth via indirect impact by absorbing spillovers of FDI inflows. On the one hand, the study reveals that greater macroeconomic stability and financial development have a positive influence on growth. The results of this study have several implications for policy makers.

Burma’s Economic Transition: Hopes and Hurdles

In 2011 Burma embarked upon a program of economic reform. Designed to accompany and support the new quasi-civilian government of President Thein Sein formed the same year, these reforms were also motivated to re-position Burma geo-politically. The economic reforms enacted thus far include measures to bring about greater macroeconomic stability, attract foreign investment, and deliver a degree of institutional change. Burma’s reforms are, however, components of a ‘top down’ process that as yet emphasizes state-direction over the assertion of economic rights and freedoms that, in the long-run, must be the true drivers of the country’s renaissance.

Economic Growth, Investment, Confidence and Poverty Reduction in Fiji: Semi-Rational Exuberance?

The Fijian economy seems to be have made a sustained recovery since 2011 after the impact of the economic fallout from the December 2006 coup. However, the recovery may not be as great as is being forecast by the Reserve Bank of Fiji. Higher growth rates have mostly remained elusive, despite the well-intended policies of the government post-2006. The positive growth rates of 2011, 2012 and 2013 seem to be showing signs of an economy maintaining a path toward sustaining positive growth in the short to medium term, but a lot hinges on the political situation leading-up to the national elections in 2014. Credible national elections and a stable political climate will be important for Fiji’s future economic performance and for sustaining growth in the long term. Of equal importance will be a significant improvement in the performance of the civil service, greater macroeconomic stability and an enhanced business environment. Finally, the government should continue with structural reforms and should not deviate from the overall thrust of its economic policy, which emphasizes an export-oriented growth strategy.

The Term Structure of the Welfare Cost of Business Cycles

The marginal cost of aggregate fluctuations has a term structure that is a simple transformation of the term structures of equity and interest rates. I extract evidence from index option markets to infer a downward-sloping, volatile and procyclical term structure of welfare costs. On average, the gains from greater macroeconomic stability are large, especially in the short run. I estimate that at the margin the elimination of one-year ahead consumption risk is worth around 12 percentage points of additional growth; this number compares to a marginal cost of lifetime uncertainty of 2-3 percentage points. Over time, the term structure of welfare costs varies substantially, predictably and with a volatility that decreases with maturity. These empirical properties of the term structure of welfare costs cannot be easily captured by today's leading dynamic equilibrium models and therefore represent a puzzling piece of evidence with potentially important welfare implications.

Financial Innovation, Macroeconomic Stability and Systemic Crises

We present a general equilibrium model of intermediation designed to capture some of the key features of the modern financial system. The model incorporates financial constraints and state-contingent contracts, and captures the spillovers associated with asset fire sales during periods of stress. If a sufficiently severe shock occurs during a credit expansion, these spillovers can potentially generate a systemic financial crisis that may be self-fulfilling. Our model suggests that financial innovation and greater macroeconomic stability may have made financial crises in developed countries less likely than in the past, but potentially more severe.

Financial Innovation, Macroeconomic Stability and Systemic Crises

We present a general equilibrium model of intermediation designed to capture some of the key features of the modernnancial system. The model incorporatesnan- cial constraints and state-contingent contracts, and contains a clearly dened pe- cuniary externality associated with assetre sales during periods of stress. If a sufciently severe shock occurs during a credit expansion, this externality is capa- ble of generating a systemicnancial crisis that may be self-fullling. Our model suggests thatnancial innovation and greater macroeconomic stability may have madenancial crises in developed countries less likely than in the past, but poten- tially more severe.

Systemic risk in modern financial systems: analytics and policy design

PurposeIn recent years, the financial system has been changing rapidly. At the same time, macroeconomic volatility has fallen in developed countries. The purpose of this paper is to examine how these developments may have affected the nature of systemic crises. The paper also aims to discuss how central banks and other financial regulators might respond to these developments with a clearer, more rigorous, operational framework for their systemic financial stability work.Design/methodology/approachThe paper describes analytical models developed at the Bank of England to assess how recent developments may have affected the probability and potential impact of systemic financial crises. The results from these models help to shape the practical framework for the Bank's financial stability work.FindingsThe models suggest that financial innovation and integration, coupled with greater macroeconomic stability, have served to make systemic crises in developed countries less likely than in the past, but potentially more severe. Implementing a practical framework for financial stability work in response to this raises many formidable challenges.Practical implicationsIf individuals are risk‐averse, the recent change in the profile of crises could lower welfare and would suggest that policymakers should place a higher premium on actions to monitor and mitigate systemic risk. The analysis also highlights the importance of differentiating the probability of risks from their potential impact.Originality/valueThe paper will be of interest to academics interested in systemic risk, central bankers, financial regulators, and financial market participants.

Gender and its Relevance to Macroeconomic Policy: A Survey

This survey examines the implications of gender differences in economic behavior for macroeconomic policy. It finds that reducing gender inequality and improving the status of women may contribute to higher rates of economic growth and greater macroeconomic stability. Women's relative lack of opportunities in developing countries inhibits economic growth, while, at the same time, economic growth leads to a reduction in their disadvantaged condition. Equality of opportunity in labor and financial markets is critical to enabling women to take full advantage of improved macroeconomic conditions. Macroeconomic policies should take into account the benefits of reducing gender inequalities, especially in the lowest-income countries where these differences are most pronounced, and should consider the potentially harsher short-term effects of economic austerity measures on women to avoid exacerbating gender inequalities.

Nominal Disturbances, Wage Flexibility and Shifting Resources in a Two Sector Economy

The recent behaviour of European unemployment rates has sparked considerable interest in the connection between wage flexibility and unemployment (see for example, Bruno and Sachs (i985) and the papers in the I986 Supplement to Economica). Much of the empirical work finds that economies adjust more rapidly and with less inflation when wages and prices are very responsive to unemployment. This finding supports the belief that greater wage and price flexibility leads to greater macroeconomic stability. In fact, one can view Martin Weitzman's (i 983), (i 984), and (i 985) share system as an institutional change aimed at providing sufficient wage and price flexibility to avoid unemployment.' It is hard to imagine how wage and price flexibility could increase in all sectors of the economy simultaneously. Instead, greater aggregate wage and price flexibility is likely to result from increased wage and price flexibility at particular firms in particular sectors. As a result, realistic proposals for share systems involve some time (perhaps forever) when share firms and wage firms would coexist. During this period, an increase in aggregate flexibility will be associated with an increase in the difference in wage and price flexibility between sectors. This paper analyses allocational issues raised by such an uneven increase in aggregate wage and price flexibility. The analysis is done explicitly in terms of a short-run, two sector model where the first sector is a fixed-wage sector and the second sector is a 'share' sector. The model is short run because both the number of firms in each sector and the pay parameters at all firms are fixed. While the explicit analysis is done in terms of share firms in the second sector, the model is more general. The second sector can be thought of as the 'flexible' sector where wage and price flexibility maintain full employment. An important new phenomenon occurs in the mixed system relative prices change in response to nominal disturbances. In particular, the relative price of the flexible sector falls in response to a decrease in nominal aggregate demand. As a result of the change in relative prices, both the utilisation of labour and the mix of consumption shift to the more flexible sector. In addition, the opposite shifting of resources and consumption occurs in response to an increase