Etienne B. Yehoue

Real Exchange Rate Misalignment: A Panel Co-Integration and Common Factor Analysis

We combine some newly developed panel co-integration techniques and common factor analysis to analyze the behavior of the real exchange rate (RER) in a sample of 64 developing countries. We study the dynamic of the RER with its economic fundamentals: productivity, the terms of trade, openness, and government spending. We derive a number of common factors that explain the dynamic of the RER in our sample. We find that while some fundamentals such as productivity, terms of trade, and openness are strongly related to these common factors in low-income countries, no such link is found for the middle-income countries. We also derive the misalignment indices, which seem to reproduce recent episodes of overvaluation and undervaluation in a number of countries.

Unconventional Central Bank Measures for Emerging Economies

Unconventional central bank measures are playing a key policy role for many advanced economies in the 2007-09 global crisis. Are they playing a similar role for emerging economies? Emerging economies have widely used unconventional foreign exchange and domestic short-term liquidity easing measures. Their use of credit easing and quantitative easing measures has been much more limited. Thus, unconventional measures are much less important for emerging economies compared to advanced economies in achieving broader macroeconomic objectives. The difference can be attributed to the relatively limited financial stress in emerging economies, their external vulnerabilities and their limited scope for quasifiscal activities.

On the Pattern of Currency Blocs in Africa

This paper seeks to elucidate the debate over currency union in Africa. The paper examines whether natural currency blocs gradually emerge from an empirical investigation. Based on the historical data on inflation, trade, and the comovements of prices and outputs, I argue that the emergence of large- scale currency blocs in Africa will follow a gradual path and that this dynamic does not lead to the emergence of a single continental currency at this time. Rather, the pattern which emerges seems to suggest three blocs: one in West Africa, a second around South Africa, and a third in Central Africa. Although little evidence is found supporting the emergence of a single African currency at this time, the emergence of an African currency union is not necessarily precluded, since the ultimate decision to surrender a nations monetary policy to a supranational institution is not made based solely on economic consid- erations. I then address the issue of a possible anchor for the union, were it to emerge and opt for an anchorage. I find-based on the trade criterion-that the euro seems to be a good choice.

Emerging Economy Responses to the Global Financial Crisis of 2007-09 - An Empirical Analysis of the Liquidity Easing Measures

This paper draws on a unique data set on the nontraditional systemic liquidity easing measures recently undertaken by many emerging market economies. It offers an empirical analysis of the key determinants affecting the decision to undertake these measures over the period September 2008-March 2009. The paper finds that economy size, access to international credit markets, CDS spreads, currency depreciation, and current account balances are among the key factors influencing the adoption of these measures. It provides a rationale for the differences in central bank policy responses, which reflect differences in economic structures rather than conflicting views on fundamental principles. The paper also provides a preliminary assessment of the effectiveness of these measures and points out that despite their positive impacts, they have not fully shielded the real economy from the recent financial meltdown.

Clusters as a Driving Engine for FDI

This paper develops a model that highlights the importance of clusters for attracting foreign direct investment. It shows from a game theoretical perspective how the combination of setting up a cluster and implementing policy reforms will be a key engine for attracting FDI. Based on agglomeration externalities, the paper shows that the very emergence of clusters can make investment so profitable that investors can even afford to tolerate more policyinduced distortions than otherwise. With perfect information, it shows the existence of multiple equilibria, in which some countries attract FDI while other do not. An extension to the context of imperfect information refines the analysis to a unique equilibrium, in which some investors respond to reforms. The paper presents case studies to support the findings.

The CFA Arrangements - More than Just an Aid Substitute?

The CFA franc zone has had one of the longest experiences with a fixed exchange rate for a convertible currency and regional integration of any group of developing countries. France, the anchor country, provides aid to support the zone. This paper asks whether the arrangements are more than just an aid substitute. The paper addresses this issue by evaluating the overall performance of the zone over the period 1960-2004. The analysis reveals that when the zone is hit by a negative shock, France increases its aid, thereby acting as a shock absorber. However, it also finds that the zone displays strong performance in two areas—price stability and fiscal policy. Thus the paper concludes that the arrangements are not an aid substitute; they have real macroeconomic value for the zone and complement aid.

Islamic Finance in Sub-Saharan Africa; Status and Prospects

Islamic finance is a fast growing activity in world markets. This paper provides a survey on Islamic Finance in SSA. Ongoing activities include Islamic banking, sukuk issuances (to finance infrastructure projects), Takaful (insurance), and microfinance. While not yet significant in most Sub-Saharan countries, several features make Islamic finance instruments relevant to the region, in particular the ability to foster SMEs and micro-credit activtities. As a first step, policy makers could introduce Islamic financing windows within the conventional system and facilitate sukuk issuance to tap foreign investors. The entrance of full-fleged Islamic banks require addressing systemic issues, and adapting the crisis management and resolution frameworks. The IMF can play a role by sharing international experiences and providing advice on supervisory and regulatory frameworks as needed.

Currency Bloc Formation as a Dynamic Process Based on Trade Network Externalities

The recent experience of the European Economic and Monetary Union (EMU) has stimulated the debate over currency union and reinforced the incentive for the emergence of currency blocs in other regions of the world. This paper builds a dynamic stochastic model-based on network externalities operating through trade channels-to explain the emergence of currency blocs, and specifically, why some countries join a currency union earlier than others. The paper develops and formalizes the intuition that currency bloc formation is path dependent, and that countries join currency blocs sooner the more they trade with the bloc member countries, with each additional member serving in a dynamic way to attract more members into the bloc. Evidence from the current pattern of EMU expansion supports the model, which is later used to elaborate on the pattern of further expansion of the union.

Corruption and Technology-Induced Private Sector Development

This paper asks whether corruption might be the outcome of a lack of outside options for public officials or civil servants. We propose an occupational choice model embedded in an agency framework to address the issue. We show that technology-induced private sector expansion leads to a decline in publicly supplied corruption as it provides outside options to public officials who might otherwise engage in corruption. We provide empirical evidence that strongly shows that technology-induced private sector development is associated with a decline in aggregate corruption. This suggests that the decline in publicly supplied corruption outweighs the potential increase in privately supplied corruption that could result from private sector expansion.

The culture of entrepreneurship

We study the cultural process through which a society inculcates an entrepreneurial spirit. People work for a guaranteed wage or operate a firm whose risky return depends on business expertise. The latter is culturally acquired, within the family or outside, and people may choose an occupation different from the one they were socialized into. A cultural bias towards safer occupations from colonial and post-colonial policies leads to stagnation where entrepreneurs do not upgrade technology because of their proficiency with existing methods. An aggregate productivity shock can tip this economy towards growth led by established businesses. A human capital shock where existing business expertise is less useful is more disruptive; growth occurs through the emergence of a new class of entrepreneurs. We conclude that culture is not destiny: it adapts even when some cultural traits do not.