Brian Pinto

Managing economic volatility and crises : a practitioner's guide

Contributors Acknowledgements Foreword Overview Joshua Aizenman and Brian Pinto Part I. What Is Volatility and Why Does It Matter?: 1. Volatility: definitions and consequences Holger Wolf 2. Volatility and growth Viktoria Hnatkovska and Norman Loayza 3. Volatility, income distribution, and poverty Thomas Laursen and Sandeep Mahajan Part II. Commodity Prices and Volatility: 4. Agricultural commodity price volatility Jan Dehn, Christopher Gilbert, and Panos Varangis 5. Managing oil booms and busts in developing countries Julia Devlin and Michael Lewin Part III. Finance and Volatility: 6. Finance and volatility Stijn Claessens 7. Evaluating pricing signals from the bond markets John J. Merrick, Jr Part IV. Managing Crises: 8. Managing macroeconomic crises: policy lessons Jeffrey Frankel and Shang-Jin Wei 9. Lessons from the Russian crisis of 1998 and recovery Brian Pinto, Evsey Gurvich, and Sergei Ulatov 10. Argentinas macroeconomic collapse: causes and lessons Luis Serven and Guillermo Perry 11. Default episodes in the 1980s and 1990s: what have we learned? Punam Chuhan and Federico Sturzenegger Technical appendix Viktoria Hnatkovska Index.

Exchange Rate Rules, Black Market Premia and Fiscal Deficits: The Bolivian Hyperinflation

With dual exchange rates, where a managed official exchange rate co-exists with a floating black market rate, a given budget deficit may be consistent with many different inflation rates rather than two, which is the normal result in closed economy systems. Further, all these inflation equilibria are saddle-point stable. A policy of adjusting the official exchange rate towards the black market rate may cause the economy to converge to a high-inflation, saddle-point stable equilibrium where money inflation elasticity exceeds unity. The analytics are motivated and illustrated by the Bolivian hyperinflation of 1984–1985.

Repeated games and the reciprocal dumping model of trade

Abstract A repeated game version of the basic Brander and Krugman (1983) model is analyzed. In the Brander-Krugman model, rivalry among oligopolistic firms gives rise to international trade. It is now shown that no trade, which is welfare-reducing when transportation costs are negligible, is a strong Nash equilibrium of the supergame. The threat strategies that support ‘no trade’, the discount rate, and the crucial role of transportation costs are discussed, extending the BranderKrugman analysis in a natural way.

Black markets for foreign exchange, real exchange rates and inflation

The black market foreign exchange premium is an important implicit tax on exports, creating a conflict between the fiscal goal of financing government spending with a limited menu of tax instruments and the allocative goal of stimulating exports. In this paper, the premium is solved for in a model that includes the portfolio balance approach to exchange rates, dual exchange markets, and seignorage for financing the fiscal deficit. The steady state and dynamic implications for inflation of floats as a vehicle for unifying official and black market rates are then analyzed. Inflation could rise substantially in the new steady state as the lost revenue from exports is replaced with a higher tax on money. Further, the conditions under which undershooting or overshooting occur are parameterized. The paper is motivated by and illustrated with recent examples from sub - Saharan Africa.

Give Macroeconomic Stability and Growth in Russia a Chance

This paper identifies and investigates conceptual and empirical links among Russias disappointing growth performance of the mid-1990s, its costly and eventually unsuccessful stabilization, the macroeconomic meltdown of 1998 and the spectacular rise of non-payments. Non-payments developed into a system that flourished in an atmosphere of fundamental inconsistency between a macroeconomic policy geared at sharp disinflation and a microeconomic policy of bailing-out enterprises through soft budget constraints. It embodies a large volume of untargeted, implicit subsidies in the order of 7-10 per cent of GDP, which has stifled growth, contributed to the 1998 meltdown through its impact on public debt and made at best a questionable contribution to equity. The overwhelming priority at this point is to dismantle this system, thereby promoting enterprise restructuring and growth, (by hardening budget constraints), and medium-term macroeconomic stability (by reducing the size of the subsidies).

Economic Growth with Constraints on Tax Revenues and Public Debt: Implications for Fiscal Policy and Cross-Country Differences

This paper evaluates optimal public investment and fiscal policy for countries characterized by limited tax and debt capacities. We study a non stochastic CRS endogenous growth model where public expenditure is an input in the production process, in countries where distortions and limited enforceability result in limited fiscal capacities, as captured by a maximal effective tax rate. We show how persistent differences in growth rates across countries could stem from differential public finance constraints, and differentiate between the case where the public expenditure finances the flow of recurring spending (such as law enforcement), versus the stock of tangible public infrastructure. Although the flow of public expenditure raises productivity, the government should not borrow to finance it as the resulting increase in public debt would lower welfare and the growth rate. With outstanding public debt, the optimal fiscal policy should keep the debt-to-GDP ratio constant in the economy with or without a binding constraint on tax revenues as a share of GDP - current non-durable public goods should be financed only from current revenue. With investment in the stock of public infrastructure, public sector borrowing to finance the accumulation of public capital goods may allow the economy to reach a long-run optimal growth path faster. With a binding tax capacity constraint, if the ratio of the initial public/private sector stock of capital is smaller than the sustainable balanced growth ratio, the optimal policy for the government is to purchase public capital, financed by debt, to immediately attain the sustainable ratio of public capital to private capital. The sustainable steady-state ratio is endogenous to the initial public-to-private capital ratio, the tax capacity and any exogenous debt limit (say, due to sovereign risk). With capital stock adjustment costs, these statements apply to a transition of finite duration rather than an instantaneous stock jump. With either a binding exogenous debt limit or solvency constrained borrowing, a more patient country will have a higher steady-state growth rate but a lower steady-state public-to-private capital ratio.

Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute

We examine how financial expansion and contraction cycles affect the broader economy through their impact on real economic sectors in a panel of countries over 1960-2005. Periods of accelerated growth of the financial sector are more likely to be followed by abrupt financial contractions than are periods of slower financial sector growth. Sharp fluctuations in the financial sector have strongly asymmetric effects, with the majority of real sectors adversely affected by contractions, but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively through the financial openness channel, with precautionary foreign exchange reserve holdings serving as a key buffer.

Managing Volatility and Crises: A Practitioner's Guide Overview

This overview introduces and summarizes the findings of a practical volume on managing volatility and crises. The interest in these topics stems from the growing recognition that non-linearities tend to magnify the impact of economic volatility leading to large output and economic growth costs, especially in poor countries. In these circumstances, good times do not offset the negative impact of bad times, leading to permanent negative effects. Such asymmetry is often reinforced by incomplete markets, sovereign risk, divisive politics, inefficient taxation, procyclical fiscal policy and weak financial market institutions factors that are more problematic in developing countries. The same fundamental phenomena that make it difficult to cope with volatility also drive crises. Hence, the volume also focuses on the prevention and management of crises. It is a user-friendly compilation of empirical and policy results aimed at development policy practitioners divided into three modules: (i) the basics of volatility and its impact on growth and poverty; (ii) managing volatility along thematic lines, including financial sector and commodity price volatility; and (iii) management and prevention of macroeconomic crises, including a cross-country study, lessons from the debt defaults of the 1980s and 1990s and case studies on Argentina and Russia.

Managing Economic Volatility and Crises

Economic volatility has come into its own after being treated for decades as a secondary phenomenon in the business cycle literature. This evolution has been driven by the recognition that non-linearities, long buried by the economists penchant for linearity, magnify the negative effects of volatility on long-run growth and inequality, especially in poor countries. This collection organizes empirical and policy results for economists and development policy practitioners into four parts: basic features, including the impact of volatility on growth and poverty; commodity price volatility; the financial sectors dual role as an absorber and amplifier of shocks; and the management and prevention of macroeconomic crises. The latter section includes a cross-country study, case studies on Argentina and Russia, and lessons from the debt default episodes of the 1980s and 1990s.

Managing Financial Integration and Capital Mobility — Policy Lessons from the Past Two Decades

The accumulated experience of emerging markets over the last two decades has laid bare thetenuous links between external financial integration and faster growth on the one hand and theproclivity of such integration to fuel costly crises on the other. These crises have not gonewithout learning. During the 1990s and 2000s, emerging markets converged to the middleground of the policy space defined by the macroeconomic trilemma, with growing financialintegration, controlled exchange rate flexibility and proactive monetary policy. The OECDcountries moved much faster towards financial integration, embracing financial liberalization,opting for a common currency in Europe, and for flexible exchange rates in other OECDcountries. Following their crises of 1997-2001, emerging markets added financial stability as agoal, self-insured by building up international reserves and adopted a public finance approach tofinancial integration. The global crisis of 2008-09, which originated in the financial sector ofadvanced economies, meant that the OECD “overshot” the optimal degree of financialderegulation while the remarkable resilience of the emerging markets validated their publicfinance approach to financial integration. The story is not over: with capital flowing in droves toemerging markets once again, history could repeat itself without dynamic measures to managecapital mobility as part of a comprehensive prudential regulation effort.