Macroeconomic Regimes, Policies, and Outcomes in the World

This paper summarizes a research project focused on the empirical determinants of and interrelations between macroeconomic regimes, policies, and performance in the world. The project’s hypotheses are structured into three related themes. The first aim is analyzing the determinants of the likelihood of adoption of macroeconomic policy regimes. The second project theme focuses on cyclicality of macroeconomic policies and accuracy in attaining inflation targets. Finally, the project tests for the behavior of two key macroeconomic variables - economic growth and inflation – focusing on their sensitivity to different macroeconomic regimes and policies. A large world database was assembled for this project from both publicly available and private databases. Data coverage extends to more than 100 countries, with annual time series extending from 1970 to 2008. A wide spectrum of frontier estimation techniques is applied to the country panel data series, appropriate for discrete-choice and continuous variable estimation. The key research results are the following. Country choice of macroeconomic policy regimes (exchange-rate regimes, money-based targeting, inflation targeting, and rule-based fiscal regimes) is explained by countries’ structural and institutional features, macroeconomic performance, financial development, and international integration. The cyclical behavior of fiscal policy reflects the quality of country institutions, financial openness, and financial development. Central bank accuracy in meeting inflation targets is also a result of domestic institutional strength and macroeconomic credibility. Long-term growth is significantly shaped by the quality of policies, financial development, foreign aid, and exchange-rate misalignment, in addition to standard growth determinants. Growth volatility is a result of domestic macroeconomic policy volatility, external shocks, international integration, and financial development. Country inflation rates are determined by international factors and domestic determinants, including fiscal policy, institutional development, monetary and exchangerate regimes, and financial depth and integration.Macroeconomic regimes, macroeconomic policies, inflation, growth

Private investment under macroeconomic adjustment in Morocco

A significant domestic counterpart of Morocco's vigorous external adjustment in the eighties was a decline in fixed capital formation, of which the private sector bore a sizable share. The authors focus on the causes of declining private investment and on the policiesrequired to reverse this trend. Using an eclectic framework, they econometrically determine the main determinants of private investment in Morocco. They conclude that the main causes of the decline in the eighties were great uncertainty about policy (proxied by foreign debt), a rapid rise in the cost of capital, a more stringent credit policy, and reduced public capital. They further conclude that fiscal stabilization, a consistent foreign debt policy, more investment in public infrastructure, and a reform of investment codes would increase private investment and growth in Morocco. Moreover, reform of the financial sector could significantly improve the efficiency of financial intermediation and therefore the quality of investment in Morocco.Financial Intermediation,Economic Theory&Research,Environmental Economics&Policies,Trade and Regional Integration,International Terrorism&Counterterrorism

Choosing an Exchange Rate Regime

Choosing an exchange rate regime is one of the most important decisions in macroeconomic policymaking. Some countries may peg their currency to gain credibility and control domestic inflation, while others may be more prone to float due to the larger incidence of real shocks. In spite of the abundant literature on the determinants of the exchange rate regime choice, the empirical literature has been unable to produce robust results on how countries select their exchange rate arrangements. Some argue that the problems of the empirical literature may rely on: (a) the failure of traditional measures of exchange rate regimes in capturing information of the regime in force (deeds) rather than the announced regime that is self-reported by countries (words). (b) The modeling of the dependent variable: whether the issue is to model the adoption of pegs (vis-à-vis floating) or choose within a wider array of regimes. (c) The use of a comprehensive set of determinants of exchange rate regime choice that takes into account factors associated to theories of choice determination (optimum currency area theory, financial approach, among others). This paper attempts to address the issues mentioned above using a sample of 110 countries with annual information over the period 1975-2005 using de facto exchange rate regime classifications and a comprehensive set of explanatory variables. We find the following stylized facts. First, factors associated with the optimum currency area approach are good predictors of adopting pegs: countries that are smaller in size and with stronger trade linkages are more likely to peg their currencies. Second, factors related to the financial approach are consistent with the impossible trinity: countries with higher openness and higher financial development are more likely to adopt floating regimes. Finally, we find that countries with high inflation and larger external and fiscal imbalances are more prone to adopt pegs.

Fiscal policy in classical and Keynesian open economies

The authors analyze the impact of fiscal policy changes in openeconomies, using a rational expectation framework that nests two prototype economies: a neoclassical full-employment benchmark economy, with intertemporally optimizing consumers and firms and instant clearing of asset, goods, and factor markets; and a Keynesian economy, with liquidity constraints and wage rigidity, which results in transitory deviations from full employment. The model is forward-looking in that the economy's short-run equilibrium depends on current and anticipated future values of all exogenous variables, and displays hysteresis (that is, its long-run equilibrium is path-dependent). Using parameters for a representative open economy, the model is simulated to compare the dynamic effects of increases in public spending financed by taxation, debt, and money. The results illustrate four points. Both permanent and transitory disturbances cause changes in long-run output and capacity. Transitory and permanent shocks may have opposite effects on the current account. Liquidity constraints and wage rigidities tend to amplify the cyclical adjustment to fiscal policy changes. The Keynesian economy's response to fiscal shocks depends critically on the way the budget is financed: money-financed fiscal expansion causes real depreciation; non-money-financed fiscal expansion causes appreciation.Environmental Economics&Policies,Economic Stabilization,Banks&Banking Reform,Macroeconomic Management,Economic Theory&Research

The International Crisis and Latin America: Growth Effects and Development Strategies

Latin America has been strongly affected by the international crisis and recession since late 2008. In comparison to historical experience, how has Latin America coped with the global crisis, which has been the role of different transmission mechanisms, and how have the region’s structural and policy conditions affected its sensitivity to foreign shocks? Moreover, what policies can protect the region better from world crises and shocks, and to which extent should it rely on a strategy of close trade and financial integration into a world economy punctuated by shocks and crises? This paper addresses the latter questions in three steps. First, by assessing empirically the sensitivity of growth in the region’s seven major economies during 1990-2009 to large number of structural and cyclical factors, based on high-frequency panel-data estimations. Second, by using the latter results to decompose the amplitude of GDP reductions in both recessions according to the individual and combined contribution of the different growth factors. Third, to derive the main implications of the results for the choice of macroeconomic regimes and development strategies.Growth, Macroeconomic adjustment, Latin America