Magda Kandil

IS THE ANNOUNCED MONETARY UNION IN GCC COUNTRIES FEASIBLE? A MULTIVARIATE STRUCTURAL VAR APPROACH

This paper tests the desirability and feasibility of the establishment of a monetary union in GCC countries using a multivariate structural VAR during the period 1980—2006. The paper builds on the earlier work, capitalizing on a methodology that captures supply and demand disturbances impinging on individual economies. Co-movements of shocks across countries are considered a crucial condition towards integration in a common currency area. Shocks are based on the estimation of a structural VAR model that comprises world real output, domestic output, real exchange rates, and the price level. Based on correlations using supply, demand, and nominal shocks, the paper establishes the following results: (i) countries of the region are still far from the necessary conditions to ensure the success of joining a currency union. Nevertheless, for a subset of countries (Saudi Arabia, the United Arab Emirates, and Qatar), conditions suggest higher potential to take the lead in endorsing and fostering a common currency zone, (ii) a higher degree of labor mobility, openness, and intra-regional mobility are still desired to accelerate regional integration and ensure a steady path towards the establishment of a currency union.

Financial flows to developing and advanced countries: determinants and implications

Purpose - The purpose of this paper is to establish a model to study the determinants of financial flows, portfolio and foreign direct investment (FDI) flows, and the impact of these determinants on economic variables in samples of developing and advanced countries. The analysis then turns to an evaluation of the effects of external flows on economic activity. Design/methodology/approach - To that end, the paper follows a two-step procedure. First, the paper estimates a series of reduced-form equations in differenced form, using annual data, for the current and the financial account balances as well as important underlying components, using a number of macroeconomic indicators reflecting the state of the business cycle as explanatory variables. These include not only a measure of economic growth, but also other factors that vary cyclically, such as the exchange rate and energy prices. In addition, the paper examines the effect of positive and negative shocks to these and other cyclical variables on components of the balance of payments. Second, the results are summarized in three directions. First, cross-country correlations evaluate time-series co-movements between the current account balance and external flows with respect to major determinants of cyclicality across the samples of advanced and developing countries. Second, time-series regressions evaluate the direct effects of financial flows on the current account balance within the samples of developing and advanced countries. Third, cross-country regressions evaluate the impact of movements in trend and variability of financial flows on major economic indicators across the samples of developing and advanced countries. Findings - The results are summarized in three directions. Across the samples of advanced and developing countries, the pervasive evidence highlights the negative correlation between the responses of the current account balance and the financial balance with respect to the various sources of cyclicality in the time-series model. Second, using time-series regressions the bulk of the evidence indicates that an increase in financial flows helps finance a widening current account deficit. Third, cross-country regressions evaluate the impact of movements in trend and variability of financial flows on major economic indicators across the samples of developing and advanced countries. While FDI flows appear significant in differentiating growth performance within and across developing countries, their effects appear to be limited on growth performance in advanced countries. Portfolio flows are more relevant, compared to FDI flows, to financing a wider current account deficit, both in developing and advanced countries. Originality/value - Overall, the evidence presented in this paper establishes the importance of financial flows to external balances and macroeconomic performance within and across the samples of developing and advanced countries. In light of this evidence, macroeconomic policies should target a combination of external balances that can be easily financed by external inflows and align domestic policies to achieve the desired cyclicality in external balances, available financing, and macroeconomic performance.

Variation in the fiscal multiplier with the method of financing: evidence across industrial countries

Government spending has often varied with the business cycle to stimulate the economy and to revive economic conditions. However, the state of public finances has often necessitated higher borrowing to finance widening fiscal deficits. Indeed, recent austerity packages around the globe have crystalized the importance of fiscal consolidation against the backdrop of rising public debt. To shed light on recent debates regarding fiscal multipliers, the article estimates variation in these multipliers with the method of financing, using annual data for a sample of industrial countries. There is a large variation in the effects of expansionary and contractinary government spending shocks on economic variables within and across countries. The significant effects of negative government spending shocks (fiscal contraction) appear more prevalent than those of expansionary shocks on real output growth, price inflation and nominal wage inflation. Consistent with theory’s predictions, the fiscal multiplier is more likely to be negative when government spending is financed by issuing debt and less likely in the case of monetization. The evidence confirms concerns about the negative effect of higher debt and more expensive financing on private activity, countering the effectiveness of fiscal policy.

The Effects of Exchange Rate Fluctuationson Output and Prices; Evidence From Developing Countries

The paper examines the effects of exchange rate fluctuations on real output and the price level in a sample of 33 developing countries. The theoretical model decomposes movements in the exchange rate into anticipated and unanticipated components. Unanticipated currency fluctuations help to determine aggregate demand through exports, imports, and the demand for domestic currency, and aggregate supply through the cost of imported intermediate goods. Anticipated exchange rate depreciation, through the supply channel, has limited effects on output growth and inflation. Unanticipated currency fluctuations appear more significant, with varying effects on output growth and price inflation across developing countries.

What does Egypt's Revolution Reveal about its Economy?

ABSTRACT On the third anniversary of the Egyptian revolution and against the backdrop of lingering political instability and deteriorating economic conditions, we diagnose the constraints to sectoral growth in Egypt using the 2011 Egyptian revolution as a natural experiment. We combine quantile regressions to study sector outliers with a difference in difference methodology to capture sectoral behavior before and after revolution. We find that the revolutions effect has been adverse, on average, but heterogeneous across sectors. We identify and characterize sectors most and least impacted. Results reveal that Egypts fastest growing sectors before Revolution have been the most vulnerable after Revolution. This evidence is supported by our diagnosis approach that shows that faster growing sectors are constrained by continuous increases in prices that threaten export competitiveness (as they erode the benefits accrued to nominal depreciation of currency). Such sectors also benefited from higher monetary growth and fewer constraints on credit availability that have mitigated somewhat the speed of deterioration in the aftermath of the revolution. Our results, which hold under several robustness checks, inform policy priorities as to how to revive investors’ confidence, boost competitiveness, and design priorities in industrial policy to ease structural impediments and align sectoral growth with macro priorities.

Fiscal Stimulus and Credibility in Emerging Countries

Across a sample of thirty four emerging countries, the evidence shows the frequent existence of a pro-cyclical fiscal impulse. However, the scope for countercyclical policy increases with the availability of international reserves as it enhances credibility and mitigates concerns about the effect of expansionary fiscal policy on the cost of borrowing and debt service. The paper also examines the effectiveness of the fiscal policy in emerging countries in the short- and long-run and its underlying conditions, which does not appear to be uniform. In some cases, contractionary fiscal policy could stimulate growth in the short-run, if fiscal tightness lowers the cost of borrowing and debt service, and mitigates concerns about debt sustainability. However, an increase in international reserves is evident to mitigate these concerns. On the other hand, high inflation increases concerns about the impact of fiscal spending on inflationary expectations and the cost of borrowing, countering the effectiveness of the fiscal stimulus on output growth in the short-run. Where the debt burden is high, fiscal expansion has a longlasting negative effect on real growth.

Consumption, Credit, and Macroeconomic Policies: Theory and Evidence from the United States

Abstract The paper examines determinants of private consumption in the USA. The empirical model includes disposable income, the University of Michigan consumer sentiment index, the interest rate, and the real effective exchange rate. Anticipated movements in these determinants are likely to affect planned consumption, while unanticipated changes determine cyclical consumption. Fluctuations in private consumption are mostly cyclical with respect to changes in disposable income and the consumers’ sentiment index. In contrast, an increase in the interest rate decreases both planned and cyclical consumption. Fiscal policy has a direct negative effect on cyclical consumption, which is not dependent on the interest rate. Monetary growth, in contrast, increases liquidity to finance both planned and cyclical private consumption.

Determinants of Inflation in GCC

Inflationary pressures have heightened in the oil-rich Gulf Cooperation Council (GCC) since 2003. This paper studies determinants of inflation in GCC, using an empirical model that includes domestic and external factors. Inflation in major trading partners appears to be the most relevant foreign factor. In addition, oil revenues have reinforced inflationary pressures through growth of credit and aggregate spending. In the short-run, binding capacity constraints also explain higher inflation given increased government spending. Nonetheless, by targeting supply-side bottlenecks, the increase in government spending is easing capacity constraints and will ultimately help to moderate price inflation.