Christoph B. Rosenberg

A Balance Sheet Approach to Financial Crisis

The paper lays out an analytical framework for understanding crises in emerging markets based on examination of stock variables in the aggregate balance sheet of a country and the balance sheets of its main sectors (assets and liabilities). It focuses on the risks created by maturity, currency, and capital structure mismatches. This framework draws attention to the vulnerabilities created by debts among residents, particularly those denominated in foreign currency, and it helps to explain how problems in one sector can spill over into other sectors, eventually triggering an external balance of payments crisis. The paper also discusses the potential of macroeconomic policies and official intervention to mitigate the cost of such a crisis.

Adjustment Under a Currency Peg: Estonia, Latvia and Lithuania During the Global Financial Crisis 2008-09

The paper traces the Baltics’ adjustment strategy during the 2008-09 global financial crisis. The abrupt end to the externally-financed domestic demand boom triggered a severe output collapse, bringing per capita income levels back to 2005/06 levels. In response to this shock, the Baltics undertook an internal devaluation that relied on unprecedented fiscal and nominal wage adjustment, steps to preserve financial sector stability as well as complementary efforts to facilitate voluntary private debt restructuring. One-and-half years on, the strategy is making good progress but not yet complete. Confidence in the exchange rate was maintained, the banking system was supported by its parent banks, external imbalances and inflation have largely disappeared, competitiveness is improving, and fiscal deficits are gradually being brought back towards pre-crisis levels. However, amid record levels of unemployment, further reforms are needed to foster a return to more balanced growth, fiscal sustainability, and a healthier banking system.

How to Deal with Azerbaijan`s Oil Boom? Policy Strategies in a Resource-Rich Transition Economy

The petroleum-rich former Soviet republics around the Caspian Sea face the dual challenge of managing the transition to a market economy and a booming resource sector. This paper examines this challenge with particular reference to Azerbaijan. The standard “Dutch disease” model is modified to capture the special conditions of transition economies, with specific attention to the pattern of real exchange rate movement. “Transition factors” are found to add to the speed of real appreciation. Non-oil sectors may suffer, but less through the real appreciation than through transition-specific structural problems. The paper describes a medium-term policy strategy for Azerbaijan, relating its prospects to the experience in the 1970s of Ecuador, Indonesia, and Nigeria. The adverse effects of the Dutch disease may be avoided if Azerbaijan pursues policies to promote savings and open trade, and strengthens the supply side through structural policies.

Welfare Effects of Uzbekistan's Foreign Exchange Regime

In addition to transferring about 16 percent of GDP from exporters to importers, Uzbekistans quasi-fiscal multiple exchange rate regime generates identifiable welfare losses of 2-8 percent of GDP on import markets and up to 15 percent on export markets. These excess burdens have increased substantially with the growing difference among exchange rates. The welfare analysis allows some conclusions regarding the optimal reform strategy: (i) welfare losses will decline overproportionally as exchange rates unify, (ii) exchange rate unification should be supplemented by changing the explicit fiscal system; (iii) at a minimum, Uzbekistan would benefit from moving to an explicit fiscal regime.

Interpreting EU Funds Data for Macroeconomic Analysis in the New Member States

Drawing on a dataset suitable for macroeconomic analysis, the paper provides an overview of the magnitudes, purpose and institutional implications of EU-related transfers to and from the new member states. A rough analysis of accounting identities and first-round effects shows that EU funds may have led to a fiscal drag of up to 1 percent of GDP and an additional aggregate demand stimulus of up to 1 percent of GDP during the first years of membership. These effects are likely to increase as additional funding become available under the new financial perspective, pointing to the need to consider policy tradeoffs.

Debt-Related Vulnerabilities and Financial Crises

The analysis of currency and maturity mismatches in sectoral balance sheets has increasingly become a regular element in the IMF’s tool kit for surveillance in emerging market countries. This paper describes this so-called balance sheet approach and shows how it can be applied to detect vulnerabilities and shape policy advice. It also provides a broad-brushed overview of how balance sheet vulnerabilities have evolved over the past decade and cites a number of case studies.

Fiscal Policy Coordination in the WAEMU After the Devaluation

This paper examines the economic implications of fiscal policy coordination in the West African Economic and Monetary Union (WAEMU) in the light of the January 1994 devaluation of the CFA franc. Diverging tax, tariff, and budgetary politics are identified and it is argued that the resulting fiscal externalities have prevented the zone from reaping the full benefits of a monetary union. The paper shows that the devaluation makes it more desirable than ever to have a closer policy coordination to prevent such detrimental fiscal externalities. Recent efforts in this field are reviewed and evaluated. Finally, the paper offers some recommendations with respect to the optimal design of tax and tariff rate structures, and the choice of budgetary convergence criteria.

From Theory to Application: A Computable General Equilibrium Model

We are now equipped with some theoretical insights into the welfare effects of value-added taxes in open economies. We know that international income effects as well as domestic and international substitution effects matter and we have elaborated on the determinants of these effects. Theoretical reasoning alone, however, does not tell us much about the quantitative significance of these effects, which are exactly what we are interested in. Which countries realize welfare gains, and which suffer welfare losses, when the EU switches from one international taxation principle to another? Furthermore we want to know whether or not welfare changes are quantitatively significant, and what counts more for welfare changes, international income effects or efficiency considerations due to substitution effects? In Chapter I we argued that computable general equilibrium (CGE) models were the best way of answering these and related questions. Hence, the aim of the present chapter is to develop and describe our computable general equilibrium model in more detail.

Simulation Results and Economic Interpretations

This chapter contains our simulation results and explains them in economic terms. Starting with the data set for 1981, we used the fully specified CGE model from Chapter IV to compute a number of hypothetical (“counterfactual”) equilibria corresponding to different VAT reform options. Using summary statistics, the results are then compared with the original pre-change (“benchmark”) equilibrium. We then try to explain the numerical results in economic terms.

An Introduction to Value-added Taxation

The debate about the use of commodity taxation as a means of protectionism is as old as the taxation of commodities itself. There were plenty of quarrels about the alleged discrimination against foreign goods and the distribution of tax revenues between different regions in medieval Europe. In 1158 a quarrel over the salt tax between bishop Otto of Freising and Henry the Lion resulted in the foundation of the city of Munich. Emperor Friedrich Barbarossa, himself, had to decide on a mutually acceptable distribution of salt-tax revenues, preventing a bloody battle at the very last minute. Elsewhere such tax quarrels were not settled so peacefully. The Alcabala, an early form of a sales tax, which was levied in Spain and its dependencies, infuriated Spain’s trading partners to such an extent that Spanish tax collectors abroad were sometimes killed. Although the battle ground has largely moved to the conference table or the courts, tax discrimination between domestic and foreign goods draws just as much attention today as it did in the Middle Ages.