Large External Shocks Research Articles

Exogenous Shocks and Growth Crises in Low-Income Countries: A Vulnerability Index

This paper develops a new index which provides early warning signals of a growth crisis in the event of large external shocks in low-income countries. Multivariate regression analysis and a univariate signaling approach are used to map information from a parsimonious set of underlying policy, structural, and institutional indicators into a composite vulnerability index. The results show that vulnerabilities to a growth crisis in low-income countries declined significantly from their peaks in the early 1990s, but have risen in recent years as fiscal policy buffers were expended in the wake of the global financial crisis.

Monetary Policy in Economic Crises: A Simple Model of Policy with External Financial Constraints

The experience of economic crises in emerging market economies suggests that the operation of monetary policy in these economies is severely limited by the presence of financial constraints. This is seen in the tendency to follow contractionary monetary policy during crises, and the observation that these countries pursue much more stable exchange rates than do high income advanced economies, despite having a more volatile external environment. This paper analyzes the use of monetary policy in an open economy in which exchange rate sensitive collateral constraints may bind in some states of the world. The appeal of the model is that it allows for a complete analytical description of the effects of collateral constraints, and admits a full characterization of welfare-maximizing monetary policy rules. The model can explain two empirical features of emerging market monetary policy described above – in particular, that optimal monetary policy may be pro-cyclical under binding collateral constraints, and an economy with large external shocks may favor a fixed exchange rate, even though flexible exchange rates are preferred when external shocks are smaller.

Rebuilding Haiti: Lessons from Post‐Conflict Experiences

AbstractThe earthquake that struck Haiti in January 2010 tipped the country into a state of socioeconomic despair from which it will be difficult to escape without a fresh start, made not only by its own political and economic elites, but also by the international community. Making a fresh start will require an honest assessment of Haiti’s predicament and a bold vision of its future prospects. By this, lessons can usefully be drawn from the experiences of countries emerging from a period of conflict. From this perspective, Haiti needs to move beyond the neoliberal consensus which has dominated policy since the overthrow of the Duvalier regime and adopt a more integrated policy approach to creating jobs, boosting economic security, diversifying economic activity and repairing a dangerously frayed social contract. Such an approach critically depends on establishing a developmental state with an inclusive national agenda that can move Haiti out of an initial and unavoidable state of aid dependence to effective mobilization of domestic resources. For the international community, the Marshall Plan offers useful lessons in forging a more effective development partnership to support such a state‐building exercise and the efforts at recovery and rebuilding.Policy Implications State building is an integral part of development policy in countries adjusting to large external shocks. It is a mistake to privilege a set of predetermined policy instruments to be used to manage the adjustment to external shocks, regardless of actual circumstances. Mobilizing domestic resources is key to sustainable long‐term growth and development, including in countries recovering from crisis. Distributional issues are an integral part of successful strategies to improve domestic resource mobilization. Avoiding dual public sectors is essential for effective state building in countries receiving large aid inflows. The Marshall Plan continues to hold lessons for how the international community should behave towards countries recovering from large shocks and crises.

Improved safety mode considering external shock direction for near-field recording system using SIL

To increase the near-field coupling efficiency in a near-field recording (NFR) system, extremely small air gap (less than 100 nm) between the solid immersion lens (SIL) and media should be maintained. However, maintaining the air gap is very important and difficult. Despite various anti-shock control methods, there are physical limitations to controlling the air gap against external shock. A safety mode that moves the actuator to the initial position for large external shock is currently being used. The existing safety mode exhibits good performance for downward shocks of 6 G amplitude and 10 ms duration time, but some problems arise for upward shocks of 3 G amplitude and 10 ms duration time. To avoid collision for upward and downward shocks, we present an improved safety mode that considers the direction of the external shock for an SIL-based near-field recording system. We analyzed the upward and downward shock responses of the NFR system. The shape of the pulse input was designed to minimize the overshoot of the actuator. Through various experiments, the amplitude and duration time of the pulse input were optimized. Even with an upward shock with 8 G and 10 ms, no collision was observed between the actuator and the media by using the improved safety mode with the optimized pulse input.

Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefit Analysis

This paper develops a cost-benefit approach that helps to quantify the optimal level of international reserves in low-income countries, focusing on the role of reserves in preventing and mitigating absorption drops triggered by large external shocks. The approach is applied to a sample of 49 LICs over the period 1980-2008 to yield estimates of the likelihood and severity of a crisis. The calibration results suggest that the standard metric of three months of imports is inadequate for countries with fixed exchange rate regimes. The results also highlight the role of overall policy frameworks and availability of Fund-support in determining optimal reserve levels, raising questions about the uniform applicability of standard rules of thumb across countries.

Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefit Analysis

This paper develops a cost-benefit approach that helps to quantify the optimal level of international reserves in low-income countries, focusing on the role of reserves in preventing and mitigating absorption drops triggered by large external shocks. The approach is applied to a sample of 49 LICs over the period 1980-2008 to yield estimates of the likelihood and severity of a crisis. The calibration results suggest that the standard metric of three months of imports is inadequate for countries with fixed exchange rate regimes. The results also highlight the role of overall policy frameworks and availability of Fund-support in determining optimal reserve levels, raising questions about the uniform applicability of standard rules of thumb across countries.

Financial Intermediation, Capital Flow and Macro Economy: An Effective Demand Model for an Emerging Market Economy

This paper examines two issues that are central to the macroeconomic implications of large external shock for an emerging market economy. First, the paper examines how capital reversal and credit squeeze can reduce aggregate demand that lead to cascading contraction in employment. Secondly, the paper investigates alternative policy options, when an economy is in the depths of financial crisis. What we chose for analytical purpose is an effective model of Blinder-Bernanke type which is modified in several directions so as to examine how financial shocks produce macroeconomic outcomes in a large class of emerging market economies.

Testing for Balance Sheet Effects in Emerging Markets: A Non‐Crisis Setting*

AbstractThe literature has established that emerging market economies are better insulated from large external shocks during a financial crisis when they adopt a flexible exchange rate regime. Looking at the strength of firms' balance sheets, this paper shows that the opposite holds true in non‐crisis periods. The reason is that balance sheets and thus spending decisions are less affected by external shocks under fixed regimes. This result is obtained through several theoretical and empirical methodologies that are useful for identifying balance sheet effects in a non‐crisis setting. Simulations reveal a larger (smaller) output response under flexible regimes when these effects are included (excluded). Although the transmission of foreign interest rate shocks to domestic interest rates is stronger under fixed regimes, it appears the limited effects on balance sheets generate a more muted output response.

Unemployment in a Small Open Economy: Finland and New Zealand

Unemployment is now the key issue for economic policy in the OECD and Europe in particular. By examining data from the period 1962-1996 for two highly different small open OECD economies, Finland and New Zealand, in a VEC model this paper seeks to cast light on three questions: the degree to which unemployment has been the result of slow adjustment to large external shocks; the degree to which differences in labour market structures can lead to different responses to shocks; the importance of the exchange rate and the external sector in resolving the problem. The approach uses a fairly general model of the labour market that includes wages, unemployment, the capital stock and the terms of trade. It uses cointegration analysis to establish long-run relationships among the four variables. In the case of Finland we find that the short-run response of unemployment to shocks (to the long-run relationship) is large relative to the response of real wage and the terms of trade. In New Zealand on the other hand both real wages and the terms of trade, in particular, adjust more rapidly. As a result the burden of short-run adjustment in the New Zealand economy appears to fall more heavily on (relative) prices. Since the unemployment rate in both countries displays hysteresis, these results suggest that relative price adjustment in the New Zealand economy is more effective in preventing adverse aggregate shocks from becoming adverse unemployment shock.

Macroeconomic Volatility and Welfare in Developing Countries: An Introduction

Macroeconomic volatility, both a source and a reflection of underdevelopment, is a fundamental concern for developing countries. Their high aggregate instability results from a combination of large external shocks, volatile macroeconomic policies, microeconomic rigidities, and weak institutions. Volatility entails a direct welfare cost for risk-averse individuals, as well as an indirect one through its adverse effect on income growth and development. This article provides a brief overview of the recent literature on macroeconomic volatility in developing countries, highlighting its causes, consequences, and possible remedies. It then introduces the contributions of a recent conference on the subject, sponsored by the World Bank and Pompeu Fabra University, Barcelona.

Monetary Policy Rules for Financially Vulnerable Economies

One distinguishable characteristic of emerging market economies is that they are not financially robust. These economies are incapable of smoothing out large external shocks, as sudden capital outflows imply large and abrupt swings in the real exchange rate. Using a small open-economy model, this paper examines alternative monetary policy rules for economies with different degrees of liability dollarization. The paper answers the question of how efficient it is to use inflation targeting under high liability dollarization. Our findings suggest that it might be optimal to follow a nonlinear policy rule that defends the real exchange rate in a financially vulnerable economy.

Monetary policy rules for financially vulnerable economies

One distinguishable characteristic of emerging market economies is that they are not financially robust. These economies are incapable of smoothing out large external shocks, as sudden capital outflows imply abrupt swings in the real exchange rate. Using a small open-economy model, this paper examines alternative monetary policy rules for economies with different degrees of liability dollarization. The paper answers the question of how efficient it is to use inflation targeting (IT) under high liability dollarization. Our findings suggest that it might be optimal to follow a nonlinear policy rule that defends the real exchange rate in a financially vulnerable economy.

Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa

During the 1990s a number of African central banks succeeded in bringing inflation to relatively low levels while maintaining a market-determined exchange rate. These central banks were generally reluctant to fully subordinate exchange rate targets to monetary targets, however, particularly in the face of large external shocks. We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net flows, in the presence of currency substitution by the domestic private sector. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and the role of temporary sterilization? We analyze these and related issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government's seigniorage requirement. This creates a strong link between official aid flows and private capital flows, giving rise to tradeoffs reminiscent of the literature on private capital inflows in emerging markets. When the credibility of policymakers' commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach.

Monetary Policy Rules, Asset Prices, and Exchange Rates

During the 1990s a number of African central banks succeeded in bringing inflation to relatively low levels while maintaining a market-determined exchange rate. These central banks were generally reluctant to fully subordinate exchange rate targets to monetary targets, however, particularly in the face of large external shocks. We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net flows, in the presence of currency substitution by the domestic private sector. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and the role of temporary sterilization? We analyze these and related issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government's seigniorage requirement. This creates a strong link between official aid flows and private capital flows, giving rise to tradeoffs reminiscent of the literature on private capital inflows in emerging markets. When the credibility of policymakers' commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach.

Monetary Policy Rules for Financially Vulnerable Economies

One distinguishable characteristic of emerging market economies is that they are not financially robust. These economies are incapable of smoothing out large external shocks, as sudden capital outflows imply large and abrupt swings in the real exchange rate. Using a small open-economy model, this paper examines alternative monetary policy rules for economies with different degrees of liability dollarization. The paper answers the question of how efficient it is to use inflation targeting under high liability dollarization. Our findings suggest that it might be optimal to follow a nonlinear policy rule that defends the real exchange rate in a financially vulnerable economy.

Emergent Properties of Scale in Global Environmental Modeling - Are There Any?

This essay argues that much of the concern over issues of scale in the modeling of complex human-environment systems – of which integrated assessment models are a special case – tends to be preoccupied with bottom-up aggregation and top-down disaggregation. Deep analysis of the underlying explanation of scale is missing. One of the intriguing propositions of complex systems theory is the emergence of new structures at a high level of scale that are difficult if not impossible to predict from constituent parts. Emergent properties are not the mysterious creation of ‘‘new material’’ in the system, but rather the placement of the components of the system into their logical contexts (scales) so that the observer=modeler can see structures arise from them for the first time. The stochastic interaction among low-level elements that gives rise to emergent properties may be part of a larger process of self-organization in hierarchical systems. Self-organization and attendant emergent properties constrain low-level elements through a network of downwardly propagating positive feedbacks. Those feedbacks not only tend to hold the system in a temporary stable state, but they also render it vulnerable to radical reorganization by rapid external forcing. The vulnerability of the USA agricultural production system to climate change is given as an example of how a self-organizing, hierarchical system paradoxically may become susceptible to large external shocks as a result of the emergence of high-level structures that seek to protect its low-level components from shortterm variability. Simulations of changes in Honduran maize production in the aftermath of Hurricane Mitch using the CLUE land use model demonstrate the influence of multi-scale complexity on the resilience of land use after disturbance. Finally, it is argued that improved understanding of emergent properties of scale may give fundamental insight into the conditions of surprise.

Why Did the Ruble Collapse in August 1998?

The factors that led to the collapse of the ruble are analyzed. It is argued that it resulted from exogenous factors (closely related to the unanticipated Asian financial crisis) interacting with inherited weaknesses in fundamentals (of fiscal policy) that made the Russian economy, while progressively being brought to macroeconomic stability, nonetheless vulnerable to a large external shock. It is contended that, instead of the policy mistake of August 1998 requiring a default of domestic debt and moratorium on payment of foreign commercial debt, a decision by Russian authorities to offer temporary exchange controls, sanctioned by the IMF and the U.S. Treasury as an emergency measure, would have been a better alternative, obviating the de facto partial and unilateral resort to controls that the moratorium and default implied.

Shock-resistant flextensional transducer

An underwater sonar projection includes a one piece hollow shell of elliptical cross section having a number of transducer stacks positioned within the shell and compressively prestressed by the shell to vibrate along the major axis thereof which causes the broad surfaces between the small radius ends to vibrate in and out. To resist large external shocks the shell is made somewhat heavier than usual, a center support member or beam is placed along the minor axis of the shell and an adjustable support rod is carried in the beam which is adjusted to a length just sufficient to clear the vibrating surfaces of the projector in normal operation but which functions to limit the inward movement of the shell if exposed to an explosion. The transducer stacks include a number of columns of piezoelectric disks on each side of the support beam which are bonded together, each stack having a tail member fastened to said center support beam and a head member between the disks and the end of the shell. To minimize damage to the disks, the stacks are wrapped with glass fiber cloth. Two or more such projector units may be fastened together and the ends closed by endplates.

The structure of incomes and social protection during the transition: The case of Bulgaria

BULGARIA IS A LOWER-MIDDLE INCOME COUNTRY with a population of about 8.5 million. In late 1989 it began introducing radical political and economic changes aimed at transforming the country into a pluralistic, market-based democracy. Up to that point, practically all segments of economic activity were controlled by the state, with the exception of small family plots in agriculture and most private housing. Like most economies in transition, Bulgaria had a comprehensive social safety net, including a commitment to and virtual achievement of full employment, comprehensive retirement and disability pensions, and free health and education services. No unemployment benefits existed and social assistance was virtually non-existent, as full employment and social insurance rendered them unnecessary. Furthermore, explicit income inequality was very low, compared with market economies, as the explicit wage scale was highly compressed. However, some elements of society had greater access to in-kind income, to rationed commodities, to Western goods, and to better quality medical services, indicating that implicit income inequality was higher than measured inequality, as was typical for former communist societies. The economic outcome of the transition in Central and Eastern Europe so far has been a dramatic decline in output, a sharp drop in real wages, and a rapid rise in the level of unemployment. In this respect Bulgaria is no exception. These pose difficult problems for social policy, not least of which is the issue of how effective the existing social safety net is in reaching the poor. The objective of this article is to analyse the sources of income, income inequality, the characteristics of lower income groups and their implications for the social safety net in Bulgaria, in the midst of the transition. Bulgaria is a good case study for several reasons. First, Bulgaria suffered a large external demand shock as a result of the transition-possibly the largest in Eastern and Central Europe-owing to its trade dependence on Council of Mutual Economic Assistance (CMEA) economies and other countries (Libya, Iraq, the Federal Republic of Yugoslavia) affected by UN sanctions. As a result, it has endured one of the largest drops in output and incomes in the former CMEA countries. After experiencing a massive contraction in output between 1989 and 1993 (cumulative decline in GDP of about one-third) the Bulgarian economy grew by 1.4% in 1994. This improvement in the real economy seems to have been maintained in 1995.

External shocks and structural adjustments in east Asian newly industrializing economies

AbstractThe two oil price increases and the subsequent recessions in the industrial countries in the 1970s constituted large external shocks for the trade‐dependent East Asian newly industrializing economies (NIEs). The effects of these external shocks on their balance of payments were two‐fold. First, the higher price of oil meant deteriorations of terms of trade and hence increases in import bills. The second impact was recession‐induced declines in the volume of exports. The recession also added to the protectionist pressures, especially against labour‐intensive exports of the NIEs. Therefore, there was a secondary decline in the demand for the NIE's exports. Unlike many other developing countries, however, the East Asian NIEs have coped with such large external shocks quite remarkably. In less than a decade they have been able to turn their current account deficits into surpluses. By using a framework developed by Salter and Corden, this paper seeks to examine the nature of the East Asian NIEs adjustment experience. The East Asian NIEs responded to external shocks with a policy package which included downward adjustments in exchange rates and reductions in absorption, especially public consumption. In the short run the depreciation of their currencies improved competitiveness and discouraged imports. It also switched expenditure away from tradables freeing goods for exports. While these short‐run adjustments improved their current accounts, the long‐run adjustments were crucial in sustaining these improvements and eventually producing surpluses in current accounts. In the longer run, depreciations of their currencies switched the production structure of Korea — and to some extent that of Taiwan — towards tradables. Hong Kong and Singapore were relatively less successful in restructuring their economy towards the traded sector. In the case of Singapore it was perhaps due to an excessive emphasis on the home‐ownership scheme. In Hong Kong the tying of Hong Kong dollar to that of the US led to a substantial appreciation of the currency when the US dollar rose in the early 1980s. Nevertheless, they were relatively more successful than most other developing countries. This paper suggests that this was due to their ability to regulate the labour market which, in turn, enhanced the switching effect of devaluation.