Allan Wright

Public Spending in Selected Caribbean Countries Testing Wagner’s Law and the Ratchet Hypothesis

This study examines the relationship between the ratio of government expenditure to gross domestic product and economic activity by investigating the empirical validity of Wagner’s law in selected Caribbean countries. Additionally, the study tests the ratchet hypothesis by searching for evidence of asymmetry in public spending over the business cycle. It narrows a gap in the Caribbean literature by (1) explicitly considering population structure in the empirical investigation of Wagner’s Law and (2) utilizing advanced econometrics techniques that incorporate nonlinearity in testing causality. The study finds no empirical support for Wagner’s Law, with and without population structure taken into account. However, the ratchet hypothesis is validated. The findings provide useful information for policy makers that can help broaden their understanding of the relationship between government spending and national income, which could aid policy formulation.

Macroeconomic Fluctuations Under Natural Disaster Shocks in Central America and the Caribbean

This paper examines the role of disaster shock in a one-sector, representative agent dynamic stochastic general equilibrium model (DSGE). First, it estimates a panel vector autoregresive (VAR) model for output, investment, trade balance, consumption, and country spread to capture the economic effects of output, country risk, and exogenous natural disaster shocks. The study determines the empirical dynamic responses of ten Caribbean countries and seven countries in Central America. Second, by taking into account rare events and trend shocks, this paper also provides a baseline framework of the dynamic interactions between the macroeconomic effects of rare events and financial friction for two specific countries: Barbados and Belize. Similar findings between empirical and general frameworks show that disaster shocks in Central America and the Caribbean have only a significative impact in the short-run regional business cycle. The findings show that Caribbean countries are better prepared for natural disaster shocks.

The Bahamas Fiscal Responsibility Bill 2018: Some Observations and Practical Guidance for Implementation Effectiveness

This Policy Brief examines The Bahamas’ Fiscal Responsibility Bill 2018, juxtaposing it against some standard principles that typically guide the formation of a fiscal responsibility framework. Key findings are that The Bahamas’ proposed framework as outlined in the bill are clear, sound, and accord with the typical objectives of a standard fiscal responsibility framework. The embedded fiscal rules appear to be well designed and meet the key requirement test because they will be enshrined in law with an independent oversight fiscal council to monitor and report on compliance and administrative sanctions in cases of breach. Importantly, The Bahamas’ proposed framework strikes a good balance between credibility and flexibility, with built-in escape clauses and mechanisms that support fiscal countercyclicality. Three key lessons are distilled from the experiences of Jamaica and Grenada (the two other independent CARICOM countries with fiscal responsibility laws) that might be useful for The Bahamas: (i) strong public financial management systems are integral for the smooth implementation of the legislation; (ii) public consultations are not only important prior to the design of the framework, but they are also important during its implementation; and (iii) it is important to embed contingency provisions in the framework given The Bahamas’ inherent vulnerability to natural hazards.

Macro-Critical Issues and Implications for the Financial Sector in CARICOM

Risks from climatic changes, advances in financial technology, de-risking activities by correspondent banks, and changing lifestyles and expectations of millennial customers are deemed to be macro-critical issues with the potential to trigger a creative disruption in the financial sector in CARICOM in the not-too-distant future. This Policy Brief examines these issues and discusses their implications for the region’s financial sector as we know it. The salient message from this Brief is that the financial sector in CARICOM must accept the inevitability of change and effectively position itself both strategically and operationally so as to remain relevant and to be fit for the future.

CBR Withdrawals: Understanding the Uneven Occurrence Across the Caribbean

Multiple studies have highlighted the Caribbean as one of the geographic regions most severely impacted by the decline in correspondent banking relationships (CBRs). However, when examined at a disaggregated level, the Caribbean experience of de-risking is uneven across territories. Some countries have experienced sudden, widespread withdrawals of CBRs, which may appear concerted. Others have experienced some CBR losses and associated difficulties but over time have managed to find replacement relationships or reinforced existing CBRs, while still others have experienced very little to no loss of CBRs. For countries within a relatively small geographic region, the level of disparity as it relates to the loss of CBRs may appear counter-intuitive. The World Bank (2015) produced a report which may be regarded as one of the first multifaceted attempts at understanding the decline in CBRs globally. The utility of this study was the substantial effort by the World Bank to identify the motivating factors behind the decision to terminate CBRs. The authors identified the drivers of de-risking by surveying a cross section of interest groups, namely, large international banks providing correspondent banking services, local and regional banks with the capacity to act as both a respondent and a correspondent, and banking supervisors of both correspondent and respondent banks. The findings highlighted that while each financial institution and regulatory authority had its own unique mix of factors contributing to its own unique experience, the drivers could generally be grouped into two broad categories: Business-related causes, with the decision to terminate a CBR based solely on economic terms; and regulatory risk-related causes, with the decision to terminate CBRs based on the higher risk of money laundering/terrorist financing (ML/TF) and the potential for material loss. The authors also identified the fundamental linkage between the two categories, highlighting that in theory the inherent level of risk should influence the expected returns profile of the CBR for the correspondent bank. This suggests that the termination of CBRs by large international correspondent banks is a relatively complex decision incorporating multiple factors. Based on various discussion forums and constantly evolving analysis of global CBRs, some factors which may constitute key elements behind the de-risking decision include size of the economy and aggregate cross border flows, country and financial institution risk profile, and structure of the financial system. As the Caribbean region continues along the path of economic development, it is critical that regional economies maintain access to the global payments infrastructure. The purpose of this technical note is two-fold. It aims to better understand the inherent characteristics of the region which may have contributed to the varying degrees of CBR termination to date, and it aims to better understand the perceived shortfalls in the region. These insights are key for the development and implementation of any corrective measures to enhance the region’s appeal to correspondent banks and to ensure that this global phenomenon does not become a hindrance to the region’s growth and development.

Credit Risks and Monetary Policy within Caribbean Economies

Our paper addresses the issue on the interaction between monetary and macroprudential policies in small open economies for different exchange rate regimes. The need for macroprudential policy arises from exacerbated macroeconomic fluctuations due to frictions in the financial system as in Bernanke, Gertler and Gilchrist (1999). Understanding these dynamics in developing nations has been even more important after the most recent events of the Great Recession. Policy makers within the scrutinized economies will see the exact magnitude of shocks caused by changes in financial frictions, monetary andmacroprudential policy. Exchange rate considerations are also brought to the fore, by assessing the effects of these policies on two emerging economies from the Caribbean with differing monetary policy frameworks. Despite differences between flexible and fear of floating exchange rate regimes, macroprudential policies implementation help mitigate the effects of credit supply shocks affecting regional economies.

Estimation of Fiscal Multipliers in a Small Open Economy: The Case of Barbados

This paper explores the size and sign of exogenous fiscal shocks in Barbados using the structural vector autoregression (SVAR), Bayesian vector autoregression (BVAR) and dynamic stochastic general equilibrium (DSGE) models. Shocks to government spending are shown to have a positive impact on output across all models. Shocks to taxes are also shown to have a positive impact on output, possibly hinting that a tax increase is usually followed by a spending increase which offsets the effects of the tax increase. Thus, we recommend that Government focus on increasing operational efficiency while correcting structural deficiencies and practicing prudent management of debt levels.

Fiscal Sustainability and Debt in Small Open Economies: An Application to the Caribbean

The adverse impact of sovereign debt defaults on the international financial system has occasioned intense interest in methodologies for assessing sovereign debt risk. This is manifest in an outpouring of studies, research which has uncovered the fact that the riskiness of sovereign debt is determined in each case by a complex interaction of factors, including government tax, expenditure and financial policies over time, and the state of domestic and international financial markets. There is therefore a need to distinguish between fiscal strategies that are not sustainable - those that will fail or dissolve into crisis if continued - and those which should be altered in the interest of economic and social development. This study provides an objective measure for small open economies, of the risk that fiscal policy may render it impossible for government to fully service its debt obligations. This study is remarkable because it is a model for the future of Caribbean integration; contributors are from across the region, from Suriname in the east to Belize in the west, and from The Bahamas in the north to Trinidad and Tobago in the south.