IMF-Supported Adjustment Programs: Welfare Implications and the Catalytic Effect

The author studies the welfare implications of adjustment programs supported by the International Monetary Fund (IMF). He uses a model where an endogenous borrowing constraint, set up by international lenders who will never lend more than a debt ceiling, forces the borrowing economy to always choose repayment over default. The immediate potential welfare cost of joining a program is driven by IMF conditionality: to be able to borrow from the IMF, the country has to submit to limits on the consumption of public goods. The benefits derive from the additional borrowing from the IMF (at a lower interest rate) and/or through a "catalytic effect" on private loans, which facilitates consumption smoothing over time. Simulations of the dynamic model in two institutional environments -- with and without the IMF -- are compared. Results indicate that when conditionality forces the country to save more, at a cost that does not prevent it from joining an IMF program, the resulting lower probability of default can induce private lenders to relax their borrowing constraints. Based on a calibration of the model for the Brazilian economy, the overall welfare gains associated with IMF programs are relatively small.International topics

Endogenous Borrowing Constraints and Consumption Volatility in a Small Open Economy

Consumption volatility relative to output volatility is consistently higher in emerging economies than in developed economies. One natural explanation is that emerging economies are more likely to face borrowing constraints and, as a consequence, find it more difficult to use international capital markets to smooth consumption. The author investigates how much this mechanism alone can account for the relative consumption volatility differential between emerging and developed economies. His theoretical approach relies on a standard dynamic general-equilibrium model of a small open endowment economy that is subject to an endogenous borrowing constraint. The borrowing constraint makes the small economy exactly indifferent between two options: (i) repaying its external debt, or (ii) defaulting and having to live in financial autarky in the future. The model for the constrained economy is calibrated to match Brazilian data during the period 1980-2001. The author's findings suggest that the model is capable of accounting for more than half of the observed relative consumption volatility differential.International topics

Cross-Country Estimates of the Degree of Fiscal Dominance and Central Bank Independence

This paper studies the interdependence between fiscal and monetary policies, and their joint role in the determination of the price level ...Central bank research; Fiscal policy; Inflation: costs and benefits

The Welfare Implications of Fiscal Dominance

This paper studies the interdependence between fiscal and monetary policy in a DSGE model with sticky prices and non-zero trend inflation. We characterize the fiscal and monetary policies by a rule whereby a given fraction k of the government debt must be backed by the discounted value of current and future primary surpluses. The remaining fraction of debt is backed by seigniorage revenues. When k = 1, there is no fiscal dominance, since the fiscal authority backs all debt and accommodates (independent) monetary policy, by adjusting current or future primary surpluses to satisfy the government’s intertemporal budget constraint. If k = 0, all debt is backed by the monetary authority and there is complete fiscal dominance. A continuum of possibilities lies between these two polar cases. We numerically show that: 1) the degree of fiscal dominance, as measured by (1 - k), is positively related to trend inflation, and 2) when prices are sticky, k has significant effects on the business cycle dynamics. The model is estimated using Bayesian techniques. Estimates of k imply a high degree of fiscal dominance in both Mexico and South Korea, but almost no fiscal dominance in Canada and the U.S. The country-specific estimates of the structural parameters are used in a second-order approximation of the equilibrium around the deterministic steady-state to evaluate the welfare costs of fiscal dominance. Results suggest significant welfare losses for countries with high degrees of fiscal dominance.Economic models; Fiscal policy; Inflation: costs and benefits; Monetary policy framework

The BoC-GEM-Fin: Banking in the Global Economy

This article describes the Bank of Canada’s version of the Global Economy Model structured to incorporate an active banking system that features an interbank market and cross-border lending. After describing the new model, the authors use it to examine the responses of selected U.S. and Canadian macroeconomic variables to a “credit crunch” in the United States and also to study the impact of changes in the regulatory limits to bank leverage in Canada. They also discuss the relative merits of a monetary policy framework based on inflation targeting and one based on price-level targeting in the presence of shocks to the U.S. and Canadian banking sectors.

A Principal-Agent Model for Investigating Traceability Systems Incentives on Food Safety

This article investigates the effects of contingent payments and a traceability system's expected traceback rate of success on the food safety effort exerted by raw material suppliers. This sheds light on when contingent payments and the reliability of a traceability system are substitutes and complements to each other in terms of inducing raw material suppliers to exert higher food safety effort. In addition, the effect of higher penalties and costs of food safety crisis on the effort to be induced by buyers (principal) on suppliers (agents) is investigated under a symmetric information setting. Finally, the asymmetric information setting is formalized as a principal-agent model and left to be explored in a future work. Some numerical exercises are carried out to illustrate main findings. It has been found that more reliable traceability systems might induce higher food safety efforts by suppliers. However, this same effect could be accomplished either with higher payments whenever no food safety crisis occurs or with lower payments whenever a food safety crisis occur both assuming the traceability system works. Finally, it is shown that without a traceability system in place no incentive scheme could be implemented.Information Asymmetry, Identity Preservation, Food Traceability, Supply Chain Management., Food Consumption/Nutrition/Food Safety, D82, D86, C61,