Magnus Saxegaard

Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa

This paper examines the pattern of excess liquidity in sub-Saharan Africa and its consequences for the effectiveness of monetary policy. The paper argues that understanding the consequences of excess liquidity requires quantifying the extent to which commercial bank holdings of excess liquidity exceed levels required for precautionary purposes. It proposes a methodology for measuring this quantity and uses it to estimate a nonlinear structural VAR model for the CEMAC region, Nigeria and Uganda. The study suggests that excess liquidity weakens the monetary policy transmission mechanism and thus the ability of monetary authorities to influence demand conditions in the economy.

An Estimated DSGE Model for Monetary Policy Analysis in Low-Income Countries

This paper evaluates monetary policy-tradeoffs in low-income countries using a dynamic stochastic general equilibrium (DSGE) model estimated on data for Mozambique taking into account the sources of major exogenous shocks, and level of financial development. To our knowledge this is a first attempt at estimating a DSGE model for Sub-Saharan Africa excluding South Africa. Our simulations suggests that a exchange rate peg is significantly less successful than inflation targeting at stabilizing the real economy due to higher interest rate volatility, as in the literature for industrial countries and emerging markets.

Estimation of Equilibrium Exchange Rates in the WAEMU : A Robustness Analysis

Using the FEER approach we investigate the long-run equilibrium paths of the real effective exchange rates (REERs) of countries in the West African Economic and Monetary Union (WAEMU). In an attempt to address econometric estimation uncertainty, we employ both single-country (Johansen and ARDL) and panel-data (FMOLS and PMG) cointegration techniques. We find that (i) much of the long-run behavior of REERs in WAEMU countries can be explained by fluctuations in terms of trade, government consumption, investment, and productivity; (ii) the use of different econometric techniques suggests that there is significant uncertainty about the path of the underlying equilibrium REERs and the degree of exchange rate misalignment, which underscores the need for robustness analyses in exchange rate modeling; and (iii) results from panel-data cointegration may sometimes be useful, but should always be complemented with single-country estimations to ensure that the results take into account country-specific characteristics.

The Consequences of Policy Uncertainty; Disconnects and Dilutions in the South African Real Effective Exchange Rate-Export Relationship

In recent years, the link between the real effective exchange rate (REER) and exports in South Africa has weakened. While exports still rise in response to REER depreciations, the REER-export elasticity is below historical estimates. The literature has put forward a number of possible explanations, from multi-national supply-chains to muted exchange rate pass-through. This research explores the role of policy uncertainty in reducing the responsiveness of exports to relative price changes. We construct a novel “news chatter” measure of policy uncertainty and examine how it, paired with other supply-side constraints, can improve our understanding of export performance. We find that increased policy uncertainty diminishes the responsiveness of exports to the REER and has short and long-run level effects on export performance. Finally, we show that a measure of competitiveness that adjusts for uncertainty and supply-side constraints greatly outperforms the REER in tracking exports performance.

An Estimated Model with Macrofinancial Linkages for India

This paper develops a small open economy dynamic stochastic general-equilibrium model with macrofinancial linkages. The model includes a financial accelerator--entrepreneurs are assumed to partially finance investment using domestic and foreign currency debt--to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks. We use Bayesian estimation techniques to estimate the model using India data. The model is used to assess the importance of the financial accelerator in India and the optimality of monetary policy.

Measures of Underlying Inflation in Sri Lanka

During the first half of 2008, Sri Lanka witnessed significantly higher inflation than most other emerging Asian countries. Inflation has since declined amid declining world commodity prices and tight monetary policy. Given the sensitivity to global commodity prices, a core inflation measure could be useful for monetary policy. The purpose of this paper is to compare the performance of Sri Lankas existing official measure of core inflation against alternative measures. Our findings suggest that the existing measure does contain information about the future path of headline information, but may be inadequate as a communication tool for the Central Bank.

Corporate and Household Debt Distress in Latvia : Strengthening the Incentives for Market-Based Approach to Debt Resolution

This paper reviews Latvia’s efforts to manage the increase in debt distress resulting from the unwinding of the 2000-07 credit boom and spillovers from the global financial crisis. The authorities have designed a strategy that strengthens incentives for marked-based debt resolution by improving the legal framework for credit enforcement, introducing tax incentives for debt write-downs, and strengthening financial sector supervision. These measures have started to yield results, but further steps are needed to speed up bankruptcy procedures and reduce credit enforcement costs. Latvia’s experience with market-based debt resolution may provide insights on managing debt distress in other countries with limited fiscal resources.

Safe Debt and Uncertainty in Emerging Markets: An Application to South Africa

This paper develops a methodology for estimating a safe public debt level that would allow countries to remain below a maximum sustainable debt limit, taking into account the impact of uncertainty. Our analysis implies that fiscal policy should target a debt level well below the debt ceiling to allow space to absorb shocks that are likely to hit the economy. To illustrate our findings we apply the methodology to estimate a safe debt level for South Africa. Our results suggest that South Africa’s debt ceiling is around 60 percent of GDP, although uncertainty is high. Simulations suggest targeting a debt-to-GDP ratio of 40 percent of GDP would allow South Africa to remain below this debt ceiling over the medium-term with a high degree of confidence.

Estimation of Equilibrium Exchange Rates in the WAEMU

Using the FEER approach we investigate the long-run equilibrium paths of the real effective exchange rates (REERs) of countries in the West African Economic and Monetary Union (WAEMU). In an attempt to address econometric estimation uncertainty, we employ both single-country (Johansen and ARDL) and panel-data (FMOLS and PMG) cointegration techniques. We find that (i) much of the long-run behavior of REERs in WAEMU countries can be explained by fluctuations in terms of trade, government consumption, investment, and productivity; (ii) the use of different econometric techniques suggests that there is significant uncertainty about the path of the underlying equilibrium REERs and the degree of exchange rate misalignment, which underscores the need for robustness analyses in exchange rate modeling; and (iii) results from panel-data cointegration may sometimes be useful, but should always be complemented with single-country estimations to ensure that the results take into account country-specific characteristics.