Rina Bhattacharya

External Debt, Public Investment, and Growth in Low-Income Countries

This paper examines the channels through which external debt affects growth in low-income countries. Our results suggest that the substantial reduction in the stock of external debt projected for highly indebted poor countries (HIPCs) would directly increase per capita income growth by about 1 percentage point per annum. Reductions in external debt service could also provide an indirect boost to growth through their effects on public investment. If half of all debt-service relief were channeled for such purposes without increasing the budget deficit, then growth could accelerate in some HIPCs by an additional 0.5 percentage point per annum.

Fiscal Consequences of Armed Conflict and Terrorism in Low- and Middle-Income Countries

Abstract The paper examines the fiscal effects of armed conflict and terrorism on low- and middle-income countries using two approaches. First, an analysis of 22 conflict episodes shows that armed conflict is associated with lower growth and higher inflation, and has adverse effects on tax revenues and investment. It also leads to higher government spending on defense, but this tends to be at the expense of macroeconomic stability rather than at the cost of lower spending on education and health. Second, econometric estimates provide some support for the hypothesis that conflict and terrorism have a significant negative impact on growth through changes in the composition of government spending. There is also some evidence that armed conflict has a direct, significant impact on growth, independent of its impact on government spending. Thus, there is potential for a sizable “peace dividend” for countries that are able to resolve conflict and terrorism.

Demographic Transition in the Middle East: Implications for Growth, Employment, and Housing

The working age population is expected to grow faster in the Middle East than in any other region in the world between now and 2015 - rising annually by 2.7 percent, or 10 million people. This demographic explosion presents the region with a major challenge in terms of providing jobs, incomes, and housing for the growing population, but the expanding labor force can also be seen as an opportunity to generate higher per capita income growth on a sustainable basis. The paper concludes by emphasizing the importance of market-friendly institutions in turning the challenge into opportunity.

Capital flight under uncertainty about domestic taxation and trade liberalization

Abstract This paper analyses in a simple general equilibrium framework how uncertainty regarding the future level of (domestic) taxes on factor incomes, and regarding trade liberalization in an economy contemplating tariff reforms, affects the overall volume of domestic investment and capital flight. It is a variation of the Alesina–Tabellini model [Alesina, A., Tabellini, G., 1989. External debt, capital flight and political risk. Journal of International Economics 27], and brings out the importance of income effects (in addition to substitution effects) in determining how the volume of capital flight responds to changes in key policy uncertainty parameters.

Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies

In this paper we empirically examine the operation of the traditional Keynesian interest rate channel of the monetary policy transmission mechanism in five potential inflation targeting economies in the MENA region and compare it with fourteen inflation targeting (IT) emerging market economies (EMEs) using panel data analysis. Contrary to some existing studies, our empirical results suggest that private consumption and investment in both groups of countries are sensitive to movements in real interest rates. Moreover, we find that the adoption of IT did not significantly alter the operation of the interest rate channel in IT EMEs. Also, the interest rate elasticities of private consumption and private investment vary with the level of development of the domestic financial market. Finally, capital account liberalization have opposite effects on private consumption and private investment in the two groups of countries.

Private Sector Consumption Behavior and Non-Keynesian Effects of Fiscal Policy

This paper explores the hypothesis that the propensity to consume out of income is not constant but varies, perhaps in a nonlinear fashion, with fiscal variables. It examines whether there is any empirical evidence to support the hypothesis that households move from non-Ricardian to Ricardian behavior as government debt reaches high levels and as uncertainty about future taxes increases. The paper also examines the possibility of a relationship (along the lines of the Bertola-Drazen model) between the propensity to consume out of income and the government consumption-to-GDP ratio.

Inflation Dynamics and Monetary Policy Transmission in Vietnam and Emerging Asia

This paper provides an overview of inflation developments in Vietnam in the years following the doi moi reforms, and uses empirical analysis to answer two key questions: (i) what are the key drivers of inflation in Vietnam, and what role does monetary policy play? and (ii) why has inflation in Vietnam been persistently higher than in most other emerging market economies in the region? It focuses on understanding the monetary policy transmission mechanism in Vietnam, and in understanding the extent to which monetary policy can explain why inflation in Vietnam has been higher than in other Asian emerging markets over the past decade.

Oil and Growth in the Republic of Congo

This paper investigates the linkages between oil and growth in Congo, where there appears to be no evidence of direct spillover effects. The empirical results suggest however that political instability has a negative effect on non-oil growth, and that the presence of oil could have fueled political instability by being associated with weakening institutions. The results also show that fiscal discipline is beneficial for growth. In addition, there are strong linkages between world oil prices and the real effective exchange rate, with movements in the latter having important indirect repercussions for growth.

The shocking nature of output fluctuations in some EU countries

Recent literature on optimum currency areas has emphasized the importance of analysing the nature of the shocks facing the economy when deciding among alternative exchange rate regimes. In this paper we use a structural VAR to model the joint behaviour of real output, nominal interest rates, real interest rates and real money balances in response to four exogenous disturbances. Identifying restrictions are used so that these disturbances can be interpreted as supply, money supply, IS and money demand shocks. The analysis is performed on five major European countries. The principal objective is to investigate both the relative importance of these shocks in explaining the variance of output at different time horizons, and the dynamic response of these economies to each type of shock. Evidence presented in this paper indicates that the five economies under study have faced very different types of economic shocks over the recent past. The implication is that these countries are unlikely to meet the criteria for an optimum currency area. Unless a convincing case can be made that there are likely to be substantial economic benefits to offset this loss of a policy tool, there is a strong economic case for proceeding with monetary union with extreme caution.

Exchange Rate Regime Considerations for Jordan and Lebanon

This paper addresses the issue of the appropriate exchange rate regimes for Jordan and Lebanon in the context of the literature on optimum currency areas and the arguments concerning the use of the exchange rate as a nominal anchor for the economy. It presents some empirical results on the nature of output shocks in Jordan and Lebanon in the recent past, on the price sensitivity of exports from Jordan, and on currency and asset substitution in both countries. It does not directly address the issue of whether the current exchange rate in either country is overvalued or not, nor does it discuss the issue of an appropriate exit strategy from the current peg.