The effects of regime-switching uncertainty on irreversible investment decisions

This paper focuses on how uncertainty about the sustainability of reform policies could affect the irreversible investment decisions of a tradable sector firm. Demand, costs and productivity are stochastic and are correlated with real exchange rate trends for the firm producing a tradable good. The firm's investment decisions are influenced by the variability of these business conditions processes, as well as by uncertainty about the timing of a large change in reform policies that dramatically alters the trend growth rates of these processes. Findings are that a firm that expects an unfavourable regime change is more hesitant to invest, reduces investment more in the face of ongoing variability of business conditions, and has a smaller investment response to favourable current trends. Ghana provides one example of a country where in the early stages of the Economic Recovery Program, entrepreneurs were uncertain about whether reform policies would be maintained.

Are Currency Crises Predictable? A Test

This paper evaluates three models for predicting currency crises that were proposed before 1997. The idea is to answer the question: if we had been using these models in late 1996, how well armed would we have been to predict the Asian crisis? The results are mixed. Two of the models fail to provide useful forecasts. One model provides forecasts that are somewhat informative though still not reliable. Plausible modifications to this model improve its performance, providing some hope that future models may do better. This exercise suggests, though, that while forecasting models may help indicate vulnerability to crisis, the predictive power of even the best of them may be limited. Copyright 1999, International Monetary Fund

Flight capital as a portfolio choice

The authors examine flight capital in the context of portfolio choice. They estimate the stock of flight capital held abroad and compare it with the stock of real (nonfinancial) capital held within each country. For 51 countries they construct estimates (as of 1990) of private domestic capital and flight capital - which combined add up to domestic wealth. There are large regional differences in the proportion of private wealth that is held abroad, ranging from 3 percent in South Asia to 39 percent in Africa. They explain differences in portfolio choice in terms of the capital to labor ratio, indebtedness, exchange rate distortions, and risk ratings - all proxies for differences in the risk-adjusted rate of return on capital. They then apply the results to four policy questions in which private portfolio choices are potentially important: the effect of the East Asian crisis on domestic capital outflows; spillovers; the effect of HIPC debt relief on capital repatriation; and why Africa has so much of its private wealth outside the continent. Their conclusions: 1) The four most severely affected East Asian countries will eventually lose about $250 billion in domestic wealth as a result of the deterioration in risk between March 1997 and September 1998. 2) They found some support for a spillover model. 3) The effect of the HIPC debt relief initiative on capital repatriation will vary massively between HIPC-eligible countries. 4) Africa has by far the lowest capital per worker, which makes massive capital flight from Africa all the more distinctive. Three variables explain capital flight in Africa: exchange rate overvaluation, adverse investor risk ratings, and high indebtedness.Capital Markets and Capital Flows,Economic Theory&Research,International Terrorism&Counterterrorism,Fiscal&Monetary Policy,Banks&Banking Reform,International Terrorism&Counterterrorism,Banks&Banking Reform,Settlement of Investment Disputes,Banking Law,Economic Theory&Research

Assessing Early Warning Systems: How Have They Worked in Practice?

Since 1999, IMF staff have been tracking several early warning system (EWS) models of currency crisis. The results have been mixed. One of the long-horizon models has performed well relative to pure guesswork and to available non-model-based forecasts, such as agency ratings and private analysts' currency crisis risk scores. The data do not speak clearly on the other long-horizon EWS model. The two short-horizon private sector models generally performed poorly. Copyright 2005, International Monetary Fund

The end of an era? The medium- and long-term effects of the global crisis on growth in low-income countries

This paper investigates the medium- and long-term growth effects of the global financial crises on Low-Income Countries (LICs). Using several methodological approaches, including impulse response function analysis, growth spells techniques and panel regressions, we show that external demand (ED) shocks are not historically associated with sharp declines in output growth. Given existing evidence that LICs were primarily impacted by such a shock in the global financial crisis, our analysis provides some optimism on the chances that LICs will avoid a protracted period of slow growth. However, we also show that there seem to be persistent output losses associated with ED shocks in the medium-run. In terms of policy implications, our analysis provides evidence that countries with lower deficits, lower debt, more flexible exchange rate regimes, and a higher stock of international reserves are more likely to dampen the effects of an ED shock on growth. --Global financial crisis,external shocks,low-income countries,medium- and long-term growth,impulse response functions,growth spells,panel growth regressions

Monetary Policy Rules for Managing Aid Surges in Africa

We examine the properties of alternative monetary policy rules in response to large aid surges in low-income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic stochastic general equilibrium model, we show that simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative to a range of conventional alternatives, including those involving heavy reliance on bond sterilization or a commitment to a pure exchange rate float. These simple rules, which are shown to be robust across a range of fiscal responses to aid inflows, appear to be consistent with actual responses to recent aid surges in a range of post-stabilization countries in Sub-Saharan Africa.monetary policy, currency substitution, aid, Africa, DSGE models

The end of an era? The medium- and long-term effects of the global crisis on growth in low-income countries

This paper investigates the medium- and long-term growth effects of the global financial crises on Low-Income Countries (LICs). Using several methodological approaches, including impulse response function analysis, growth spells techniques and panel regressions, we show that external demand (ED) shocks are not historically associated with sharp declines in output growth. Given existing evidence that LICs were primarily impacted by such a shock in the global financial crisis, our analysis provides some optimism on the chances that LICs will avoid a protracted period of slow growth. However, we also show that there seem to be persistent output losses associated with ED shocks in the medium-run. In terms of policy implications, our analysis provides evidence that countries with lower deficits, lower debt, more flexible exchange rate regimes, and a higher stock of international reserves are more likely to dampen the effects of an ED shock on growth

Do African Manufacturing Firms Learn from Exporting?

In this paper, we use firm-level panel data for the manufacturing sector in four African countries to estimate the effect of exporting on efficiency. Estimating simultaneously a production function and an export regression that control for unobserved firm effects, we find both significant efficiency gains from exporting, supporting the learning-byexporting hypothesis, and evidence for self-selection of more efficient firms into exporting. The evidence of learning-by-exporting suggests that Africa has much to gain from orientating its manufacturing sector towards exporting.

Do African manufacturing firms learn from exporting?

In this paper, we use firm-level panel data for the manufacturing sector in four African countries to estimate the effect of exporting on efficiency. Estimating simultaneously a production function and an export regression that control for unobserved firm effects, we find both significant efficiency gains from exporting, supporting the learning- byexporting hypothesis, and evidence for self-selection of more efficient firms into exporting. The evidence of learning-by-exporting suggests that Africa has much to gain from orientating its manufacturing sector towards exporting.