Karl Habermeier

Capital Inflows; The Role of Controls

With the global economy beginning to emerge from the financial crisis, capital is flowing back to emerging market countries (EMEs). These flows, and capital mobility more generally, allow countries with limited savings to attract financing for productive investment projects, foster the diversification of investment risk, promote intertemporal trade, and contribute to the development of financial markets. In this sense, the benefits from a free flow of capital across borders are similar to the benefits from free trade (see Reaping the Benefits of Financial Globalization, IMF Occasional Paper 264, 2008), and imposing restrictions on capital mobility means foregoing, at least in part, these benefits, owing to the distortions and resource misallocation that controls give rise to (see Edwards and Ostry, 1992, for an example of how capital controls interact with other distortions in the economy).

Capital Controls; Country Experiences with Their Use and Liberalization

This paper examines country experiences with the use and liberalization of capital controls to develop a deeper understanding of the role of capital controls in coping with volatile capital flows, as well as the issues surrounding their liberalization. Detailed analyses of country cases aim to shed light on the motivations to limit capital flows; the role the controls may have played in coping with particular situations, including in financial crises and in limiting short-term inflows; the nature and design of the controls; and their effectivenes and potential costs. The paper also examines the link between prudential policies and capital controls and illstrates the ways in which better prudential practices and accelerated financial reforms could address the risks in cross-border capital transactions.

Managing Capital Inflows : What Tools to Use?

Ostry, Jonathan David; Ghosh, Atish R.; Habermeier, Karl F; Chamon, Marcos d; Qureshi, Mahvash S; Kokenyne, Annamaria.April, 2011.Managing Capital Inflows,Reports,[Washington D.C.]IMF,Staff Discussion Notes/11/06,41

Securities Transaction Taxes and Financial Markets

We consider the impact of transaction taxes on financial markets in the context of four questions. How important is trading? What causes price volatility? How are prices formed? How valuable is the volume of transactions? Drawing on the literature on market microstructure, asset pricing, rational expectations, and international finance, we argue that securities transaction taxes “throw sand” not in the wheels, but into the engine of financial markets. We conclude that transaction taxes can have negative effects on price discovery, volatility, and liquidity and lead to a reduction in the informational efficiency of markets.

Inflation Pressures and Monetary Policy Options in Emerging and Developing Countries - A Cross Regional Perspective

This paper analyzes the monetary policy response to rising inflation in emerging and developing countries associated with the food and oil price shocks in 2007 and the first half of 2008. It reviews inflation developments in a sample of countries covering all regions and a broad range of monetary and exchange rate policy regimes; discusses the underlying causes of inflation; provides a synthesis of policy responses taken against the background of the conflicting objectives and trade-offs, the uncertainties regarding the nature of the shocks, and the additional challenges brought on by the global financial turmoil; and presents considerations for policy.

Product use and product improvement

Abstract This paper presents a conceptual framework for the analysis of product improvement. It begins by establishing that in the process by which products are improved, knowledge of user requirements, of product characteristics, of how to redesign products, and about the production process needs to be acquired. It then argues that user requirements and product characteristics can often be discovered only if the product is actually used, sometimes for a long period of time. Just as importantly, effective communication between users and producers typically plays a central role in acquiring the knowledge necessary to the improvement of products. The knowledge that has been generated through actual use and user-producer communication will guide producers in redesigning and improving the product. In the course of the discussion, the roles of systemic complexity, theoretical knowledge, accidents and testing are examined.

Structural Factors Affecting Exchange Rate Volatility: A Cross-Section Study

The paper examines factors affecting exchange rate volatility, with an emphasis on structural features of the foreign exchange regime. It draws for the first time on detailed survey data collected by the IMF on foreign exchange market organization and regulations. Key findings are that decentralized dealer markets, regulations on the use of domestic currency by nonresidents, acceptance of Article VIII obligations, and limits on banks` foreign exchange positions are associated with lower exchange rate volatility. The paper also provides support for earlier results on the influence of macroeconomic conditions and the choice of exchange rate regime on volatility.

Long-Run Exchange Rate Dynamics: A Panel Data Study

Long-run movements of real exchange rates are studied using a panel data set comprising 51 economies. The purchasing power parity hypothesis (PPP) is examined first using unit root tests. It is found that PPP does not hold for the full sample of countries, but it may hold for the advanced economies, as well as open and high-inflation economies. Using the recently developed mean group and pooled mean group estimators, the paper finds support for the Balassa-Samuelson hypothesis in both advanced and developing economies; and for the influence of shifts in the terms of trade.

Competing technologies, the learning curve, and rational expectations

Abstract The problem of choice between several variants of a technology subject to dynamic learning economies is examined in a rational expectations model with overlapping adopters. It is shown that even with rational expectations, the long-term market outcome depends sensitively on the pattern of early chance events, and that only one variant of the technology will come to dominate the market in the long run. This variant need not be the one which is socially optimal or most promising technically.

French Public Finances: Modeling Long-Term Prospects and Reform Options

Over the coming decades, demographic developments will lead to a significant increase in public outlays on pensions and health care, relative to national income. This study extends earlier work by considering the adverse effects of taxation on the determinants of economic growth -- in particular, investment, productivity growth, and labor force participation. Available empirical evidence suggests that these adverse effects could well be sizable, and that conventional estimates of the adverse effects of population aging probably severely underestimate their impact on the public finances and economic performance. The paper uses stochastic simulations to examine the robustness of the results to changes in parameter values. It also provides quantitative simulations of various reform options, including mainly an increase in the effective retirement age and flanking labor market measures.