Although the economic growth literature has come a long way since the Solow-Swan model of the fifties, there is still considerable debate on the "real'' or "deep" determinants of growth. This paper revisits the question of what is really important for strong long-term growth by using a Binary Classification Tree approach, a nonparametric statistical technique that is not commonly used in the growth literature. A key strength of the method is that it recognizes that a combination of conditions can be instrumental in leading to a particular outcome, in this case strong growth. The paper finds that strong growth is a result of a complex set of interacting factors, rather than a particular set of variables such as institutions or geography, as is often cited in the literature. In particular, geographical luck and a favorable external environment, combined with trade openness and strong human capital are conducive to growth.
After the large exchange rate depreciations following the 1997 East Asian crisis, export volumes from East Asian countries responded with a notable lag. Two main explanations for this lag have been proposed: that the policy of high interest rates limited access to domestic credit and hence limited the supply of exports; and that “competitive depreciation” neutralized the effects on demand for exports. This paper considers the plausibility of these two mechanisms using a new monthly database on exports of selected industries. We find evidence that “competitive depreciation” did play a fundamental role in the propagation of the East Asian crisis through the trade channel, even at a monthly frequency.
A growing number of countries are adopting flexible exchange rate regimes because flexibility offers more protection against external shocks and greater monetary independence. Other countries have made the transition under disorderly conditions, with the sharp depreciation of their currency during a crisis. Regardless of the reason for adopting a flexible exchange rate, a successful transition depends on the effective management of a number of institutional and operational issues. The authors of this Economic Issue describe the necessary ingredients for moving to a flexible regime, as well as the optimal pace and sequencing under different conditions.
This paper identifies the institutional and operational requisites for transitions to floating exchange rate regimes. In particular, it explores key issues underlying the transition, including developing a deep and liquid foreign exchange market, formulating intervention policies consistent with the new regime, establishing an alternative nominal anchor in the context of a new monetary policy framework, and building the capacity of market participants to manage exchange rate risks and of supervisory authorities to regulate and monitor them. It also assesses the factors that influence the pace of exit and the appropriate sequencing of exchange rate flexibility and capital account liberalization.
Using countries'' de facto exchange rate regimes during 1985-2002, this paper analyzes the determinants of exits from pegged regimes, where exits involve shifts to more or less flexible regimes, or adjustments within the existing regime. Distinguishing episodes characterized by "exchange market pressure" from orderly exits, the estimated probabilities of alternative exit episodes indicate that crises are preceded by a deterioration of economic conditions. In contrast, orderly exits to less flexible regimes are preceded by long regime duration, a decline in financial liabilities of the banking system, and an increase in official reserves. Exits to more flexible regimes are associated with both emerging market and other developing countries, and an increase in trade openness and government borrowing from banks. The results are robust to alternative sensitivity analyses and have reasonable predictive performance, confirming that economic and financial conditions and regime duration play important roles in determining the future course of exchange rate regimes.
Growth takeoffs in developing economies have rebounded in the past two decades. Although recent takeoffs have lasted longer than takeoffs before the 1990s, a key question is whether they could unravel like some did in the past. This paper finds that recent takeoffs are associated with stronger economic conditions, such as lower post-takeoff debt and inflation levels; more competitive real exchange rates; and better structural reforms and institutions. The chances of starting a takeoff in the 2000s was triple that before the 1990s, with domestic conditions accounting for most of the increase. The findings suggest that if today’s dynamic developing economies sustain their improved policies; they are more likely to stay on course compared to many of their predecessors.
This paper builds a Bayesian VAR estimation model of growth for Canada, by focusing specifically on the role of external and domestic financial indicators, including credit conditions. A variance decomposition shows that financial conditions explain one-third of the total variability in Canada''s real GDP growth, although changes in U.S. real GDP growth still account for a larger share of volatility in Canadian growth. A macro-financial conditions index built from the VAR''s impulse responses shows that U.S. real GDP growth and lending standards will increasingly bear on Canada''s growth, implying that a normalization of the U.S. economic and financial conditions is key for a sustained recovery in Canada.
Has the unprecedented financial globalization of recent years changed the behavior of capital flows across countries? Using a newly constructed database of gross and net capital flows since 1980 for a sample of nearly 150 countries, this paper finds that private capital flows are typically volatile for all countries, advanced or emerging, across all points in time. This holds true across most types of flows, including bank, portfolio debt, and equity flows. Advanced economies enjoy a greater substitutability between types of inflows, and complementarity between gross inflows and outflows, than do emerging markets, which reduces the volatility of their total net inflows despite higher volatility of the components. Capital flows also exhibit low persistence, across all economies and across most types of flows. Inflows tend to rise temporarily when global financing conditions are relatively easy. These findings suggest that fickle capital flows are an unavoidable fact of life to which policymakers across all countries need to continue to manage and adapt.
The Eastern Caribbean Currency Union (ECCU) countries share a common currency, the EC dollar, which has been pegged to the U.S. dollar at the same rate for more than three decades. This paper examines the influence of the peg on ECCU price stability, and analyzes whether absolute Purchasing Power Parity (PPP) holds within the currency union. It shows that U.S. price stability has helped anchor price movement in the ECCU. As the same time, inflation in the ECCU is not entirely imported from the U.S., and has some domestic policy content. In addition, deviation from PPP within the ECCU can be attributed to persistent price dispersion of nontradables.
Incorporating intermediate inputs into a small-union general-equilibrium model, this paper first develops the welfare economics of preferential trading under the rules of origin (ROO) and then demonstrates that the ROO could improve the political viability of Free Trade Agreements (FTAs). Two interesting outcomes are derived. First, a welfare reducing FTA that was rejected in the absence of the ROO becomes feasible in the presence of these rules. Second, a welfare improving FTA that was rejected in the absence of the ROO is endorsed in their presence, but upon endorsement it becomes welfare inferior relative to the status quo.
This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT identifies key indicators and their threshold values at which vulnerability to banking crisis increases. The three conditions identified as crisis-prone-(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity, and (iii) low bank profitability-highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are key vulnerabilities triggering banking crises. The main results survive under alternative robustness checks, confirming the importance of the BCT approach for monitoring banking system vulnerabilities.