Papa N'Diaye

Is China’S Export-Oriented Growth Sustainable?

This paper assesses the sustainability of Chinas export-oriented growth over the medium to longer term. It shows that maintaining the current export-oriented growth would require significant gains in market share through lower prices in a range of industries. This, in turn, could be achieved through a combination of increases in productivity, lower profits, and higher implicit or explicit subsidies to industry. However, the evidence suggest that it will prove difficult to accommodate such price reductions within existing profit margins or through productivity gains. Moving up the value-added chain, shifting the composition of exports, diversifying the export base, and increasing domestic value added of exports could give room to further export expansion. However, experiences from Asian economies that had similar export-oriented growth suggest there are limits to the global market share a country can occupy. Rebalancing growth toward private consumption would provide a large impetus to output growth and reduce the need for gaining further market share.

Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy

This paper explores how prudential regulations can support monetary policy in reducing output fluctuations while maintaining financial stability. It uses a new framework that blends a standard model for monetary policy analysis with a contingent claims model of financial sector vulnerabilities. The results suggest that binding countercyclical prudential regulations can help reduce output fluctuations and lessen the risk of financial instability. More specifically, countercyclical rules such as countercyclical capital adequacy rules, can allow monetary authorities to achieve the same output and inflation objectives but with smaller adjustments in interest rates. The countercyclical rules can help stem swings in asset prices, lean against a financial accelerator process, and thereby help to lower risks of macroeconomic and financial instability. In economies with fixed exchange rates, where countercyclical monetary policy is not possible, prudential regulations can provide a useful mechanism for mitigating a run-up in asset prices and for promoting output stability.

A Multivariate Filter for Measuring Potential Output and the NAIRU: Application to the Czech Republic

This paper presents a multivariate (MV) methodology for obtaining measures of excess demand that can facilitate discussion of monetary policy issues and improve policy decisions. Using data for the Czech Republic, a growing economy undergoing major structural change, it shows how the use of more information to condition the paths of potential output and the non accelerating inflation rate of unemployment (NAIRU) improves on univariate methods as the Hodrick-Prescott (HP) filter.

Impact of Fed Tapering Announcements on Emerging Markets

This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.

Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?

China is on the eve of a demographic shift that will have profound consequences on its economic and social landscape. Within a few years the working age population will reach a historical peak, and then begin a precipitous decline. This fact, along with anecdotes of rapidly rising migrant wages and episodic labor shortages, has raised questions about whether China is poised to cross the Lewis Turning Point, a point at which it would move from a vast supply of low-cost workers to a labor shortage economy. Crossing this threshold will have far-reaching implications for both China and the rest of the world. This paper empirically assesses when the transition to a labor shortage economy is likely to occur. Our central result is that on current trends, the Lewis Turning Point will emerge between 2020 and 2025. Alternative scenarios-with higher fertility, greater labor participation rates, financial reform or higher productivity-may peripherally delay or accelerate the onset of the turning point, but demographics will be the dominant force driving the depletion of surplus labor.

International Transmission of Bank and Corporate Distress

The paper evaluates how increases in banks’ and nonfinancial corporates’ default risk are transmitted in the global economy, using in a vector autoregression model for 30 advanced and emerging economies for the period from January 1996 to December 2008. The results point to two-way causality between bank and corporate distress and to significant global macroeconomic and financial spillovers from either type of distress when it originates in a systemic economy. Corporate distress in advanced economies has a larger impact on economic growth in emerging economies than bank distress in advanced economies has. In contrast, activity in advanced economies is more vulnerable to bank distress than to corporate distress.

Monetary Policy Credibility and the Unemployment-Inflation Tradeoff; Some Evidence From 17 Industrial Countries

Using data on long-term interest rates for 17 industrial countries, this paper develops some simple measures of monetary policy credibility and then tests if such measures improve the out-of-sample forecasts of conventional models of the inflation-unemployment process. The results provide some evidence in favor of the Lucas critique by showing that the short-run unemployment-inflation trade-off tends to improve in countries that are successful in providing low and stable inflation.

The Domestic and Global Impact of Japan's Policies for Growth

Japan is facing a sizable fiscal imbalance against a backdrop of weak trend growth and growing external imbalances in the world economy. This paper examines the possible impact of fiscal adjustment and productivity-enhancing structural reforms on the Japanese and world economies. Simulation results indicate that these could reduce substantially Japans fiscal imbalance with only limited spillovers to the rest of the world. Specifically, faster productivity growth would help lower Japans debt and limit the tendency of fiscal consolidation to increase the external surplus. In fact, very rapid productivity growth could potentially lead to a decline in Japans external surplus and thereby have a positive effect on global imbalance. The modest extent of the spillovers to the rest of the world reflect the small size of the shocks and the diminished size of Japan in the world economy.

Determinants of Corporate Investment in China; Evidence From Cross-Country Firm Level Data

This paper analyzes the evolution of investment in China, its main features, and its key determinants. In recent years, manufacturing, real estate, and infrastructure have been the main drivers of investment. Investment remains largely concentrated in coastal areas, but there has been a shift to greater investments inland in recent years. The empirical analysis of the determinants of investment indicates that financial variables, such as interest rates, the exchange rate, and the depth of the domestic capital market are important determinants of corporate investment. The results suggest in particular that financial sector reform, including that which deregulates and raises real interest rates as well as appreciates the real effective exchange rate, would lower investment and help rebalance growth away from exports and investment toward private consumption.

Transforming China: Insights from the Japanese Experience of the 1980s

China is poised on the brink of a transition to a service-based economy. The Japanese experience of the 1980s provides several insights about the way to manage such a transition and the downsides to avoid. In particular Japan offers useful insights on (1) the limits to an export-oriented growth strategy; (2) the role of exchange rate, macroeconomic policies, and structural reforms in rebalancing the economy toward the nontradables sector; and (3) the risks associated with financial liberalization. The similarities between the Chinese economy today and the Japanese economy of the 1980s make these insights relevant for China. However, with the benefit of analyzing the Japanese experience and, given the important differences between the two economies, China should be able to successfully rebalance its growth pattern while avoiding the downsides encountered by Japan.