Financial Sector Crisis and Restructuring: Lessons from Asia

https://www.imf.org/external/pubs/ft/op/opFinsec/op188.pd

Liquid Asset Ratios and Financial Sector Reform

As a monetary, selective credit, and government debt-management instrument, a liquid asset ratio is generally inefficient and may introduce serious distortions. However, it may play a limited role as a prudential instrument, particularly in less sophisticated banking systems or in the context of currency board arrangements. Recent trends in the use of this instrument have been to either abolish it altogether or to design it so as to minimize distortions. When necessary, these changes have been part of a broader effort to make financial intermediation more efficient by relying more on markets and less on regulations.

The Role of the Currency Board in Bulgaria's Stabilization

Currency boards;Stabilization measures;currency board, banking, central bank, banking sector, banking crisis, foreign exchange, bank profits, banking supervision, domestic currency, bank closures, banknotes, banking system, bank financing, banking sector problems, liquidity injections, reserve account, accounting framework, debt burden, government debt, domestic debt, balanced budget, liquidity crisis, bank reserves, repayments, banking systems, reserve holdings, bankrupt, banking sector assets, currency mismatches, national bank, long-term loans, imf purchases, bank runs, interbank market, liquidity injection, foreign loans, bank lending, systemic banking crisis, bank recapitalization, bank law, domestic debt burden, banking sector distress, state bank, reserve requirement, banking institutions, bank accounts, private banks, recapitalization, bank privatization, bank deposits, debt overhang

Sri Lanka

This paper examines the short-run impact of Sri Lanka’s recent structural adjustment program on the poorest segments of society. While the ultimate goal of all macroeconomic adjustment programs is to overcome structural rigidities and put the economy on a sustainable growth path, some of the measures implemented, such as the liberalization of food and energy prices, cuts in subsidies and other budgetary spending, and exchange rate changes, may cause significant increases in relative prices faced by the poor. On the other hand, there are offsetting income effects even in the short run, such as adjustments in wages and output prices and retargeting of subsidies.

Inflation and Income Distribution

This paper examines the effects of inflation and associated financial instability on income distribution. Using both panel and single-country time-series models, the level of inflation, inflation variability, and the variability of the nominal exchange rate are shown to increase overall income equality. Looking at disaggregate measures of income distribution, the issue as to whether inflation is a progressive or a regressive tax is found to be negatively correlated with the level of development and the sophistication of the financial structure. The paper argues that these results point toward financial variables as a partial way of rectifying the generally poor explanatory power of both cross-country, panel, and time-series models of income distribution.inflation; income distribution; Kuznets hypothesis

Aggregation of Economic Indicators Across Countries

Relative GDP shares are frequently used as weights in aggregations. In order to ensure that these weights reflect countries’ shares in real output, GDP data in national currencies should be converted into a common numeraire currency at purchasing power parity (PPP) rates. A review of the empirical evidence on the relationship between exchange rates and prices suggests that market (or official) exchange rates are generally poor proxies for PPP rates. The paper examines the PPP-based GDP data generated by the International Comparison Program and compares aggregations with PPP- and exchange rate-based GDP weights.Purchasing power parity;Economic indicators;Exchange rates;Gross domestic product;ppp, exchange rate, market exchange rates, market exchange rate, exchange rate determination, real exchange rates, alternative exchange rate, official exchange rate, average exchange rate, exchange rate dynamics, nominal exchange rate, overvalued exchange rate, exchange rate overshooting, real exchange rate movements, foreign exchange, civil service, exchange markets, foreign exchange markets, exchange rate regime, real exchange rate

Sticky Exchange Rates and Flexible Prices

Real exchange rate variability tends to be higher under flexible than under fixed exchange rates. The neokeynesian view attributes the higher variability to the combination of volatile nominal exchange rates with sticky prices. The neoclassical approach regards an increased incidence of real shocks as the culprit. We test the crucial assumptions underlying the two models for the interwar period. Prices and exchange rates are found to be equally flexible. We hence reject the neokeynesian sticky price view for our sample period. In contrast, our results are consistent with, while not constituting evidence for, the neoclassical equilibrium approach.