Luca Bandiera

Monetary Policy, Monetary Areas, and Financial Development with Electronic Money

Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy.

The "How to" of Fiscal Sustainability : A Technical Manual for Using the Fiscal Sustainability Tool

Fiscal sustainability analysis (FSA) is an important component of macroeconomic analysis for many developing countries. To further enhance understanding of fiscal policy and the constraints faced by policymakers, the authors develop a toolkit for FSA in middle-income countries which builds on previous work in this area and on new developments in dealing with uncertainty. The FSA toolkit includes an Excel-based FSA tool and a technical manual accompanying it. The FSA tool is standardized and simple, but at the same time flexible enough to allow for user-defined country-specifics. This manual provides step-by-step technical instructions for running the FSA tool and includes mathematical appendices and a glossary.

Debt Sustainability Framework in Hipcs: A Critical Assessment and Suggested Improvements

This paper presents an assessment of the external debt literature related to the IMF-World Bank HIPC Initiative and proposes to extend the present debt sustainability framework. We argue that a comprehensive debt sustainability analysis requires a fully-fledged government budget constraint, which includes not only the external position, but also public domestic debt and the feedback effects of the choices on deficit financing. We also suggest to consider uncertainty and the risk of default, to carefully evaluate the resource required to finance poverty reduction policies, and to develop a legal framework to deal with private creditors. As a result, debt relief should be tailored on specific country needs and it should be part of a more comprehensive development policy, aimed at reducing poverty, built on the fully-fledged government budget constraint and designed for providing a permanent exit from debt dependence and an incentive to strengthen institutions and policies.

Public Debt and its Determinants in Low Income Countries - Results from 7 Country Case Studies

This paper examines the determinants of public debt dynamics in Low Income Countries (LICs) over the period 1990-2003. Debt dynamics in LICs are influenced not only by macroeconomic variables but also by the composition of debt and the provision of debt relief over time. The study considers a sample of 17 LICs from Africa, Asia and Latin America and reports detailed case studies for 7 LICs, which consider not only the debt dynamics, but also the specific episodes of marked policy change or structural factors that contributed to the accumulation or reduction of total public debt. Debt dynamics over that last 13 years show a high degree of heterogeneity across low income countries, which underscores the importance of country-specific factors. These include the fiscal stance, the structure of the economy, the exchange rate systems, the composition and structure of the debt and debt management policies.

Kenya's Quest for Growth Stabilization and Reforms - But Political Stability?

Kenya has long had a reputation of being politically risky, manifested in corruption, uncertainty about policies, and the importance of political connections in doing business. Kenya began its economic liberalization in 1993. Reform picked up speed after a tightening of aid by donors on governance grounds and an attempt to re-establish credibility following the costly Goldenberg scandal uncovered in 1992. But tangible results in the shape of favorable government debt dynamics and a pick up in growth took a decade to materialize. The paper argues that the peaceful presidential election and transfer of power in December 2002 was central to the economic upswing after 2002. The subsequent decline in political risk was singled out by the private sector as an important development. The paper draws on an analysis of debt dynamics, the evolution of domestic interest rates, and the latest Investment Climate Assessment to present evidence on the criticality of low political risk in facilitating good economic outcomes after 2003. The December 2007 elections have highlighted other aspects of political risk - ethnic and social tensions with roots in inequality. The findings of this paper underline the importance of establishing a foundation for long-term political stability and social cohesion in view of the disruptions following the December 2007 elections. This process is likely to be at least as difficult and lengthy as fundamental economic policy and institutional reform.

'How To' of Fiscal Sustainability in Oil-Rich Countries: The Case of Azerbaijan

Assessing fiscal sustainability – i.e. considering whether or not a country can maintain its current fiscal policies without running into solvency problems and possible default – requires projections on a government’s future revenue stream, expenditures and contingent liabilities within a macroeconomic framework. Such an exercise is always subject to uncertainty. In commodity-rich countries dependent upon resource revenues, this is intensified by unpredictable and volatile commodity prices. We apply the Framework for Fiscal Sustainability and Managing Uncertainty to Azerbaijan: we explore the link between non-oil primary deficit and Oil Fund allocation rules and assess their impact on fiscal sustainability in Azerbaijan and allow for explicit analysis of the effects of uncertainty through scenario analysis and full stochastic analysis allowing Value-at-Risk assessments.