Exchange Rate Regimes in the Americas: Is Dollarization the Solution?

The series of crises that have affected emerging markets in recent years have reopened the debate on the most appropriate exchange regime for an emergent economy. In particular, all countries that experienced severe crises in the 1990s had some sort of fixed exchange rate regime, the majority of them falling in the categories that Corden ( 2002) calls the fixed-but-adjustable exchange rate regime (FBAR) and in- between regimes of the pegged (including flexible and crawling pegs) and target zone types. As a result, in recent years countries have been emigrating to a corner solution: a credible fixed regime or a floating regime with a monetary anchor. Within the latter categories, the increasingly used monetary regime is the inflation targeting one. The paper discusses the advantages and disadvantages of alternative exchange rate regimes and ends with a discussion of the possibility of dollarization in the Americas.

Report on adjustment lending II : lessons forEastern Europe

The Bank introduced adjustment lending in 1979 to help member countries restructure their economies to create conditions conducive to equitable growth while maintaining a sustainable balance of payments. A review of the experience of other nations with adjustment problems may provide useful knowledge for Eastern Europe as the region attempts to make the transition to market economies and to integrate with the world economy. Reforms such as those that Eastern Europe is initiating now have little precedent in recent economic history. Evidence from other countries indicates that output levels are likely to suffer in the early years of massive economic restructuring. Governments must be aware of these adjustment costs, which represent an investment in a better economic system. Recent experience in other countries suggests several constructive steps that Eastern European countries can take to ease their transition to market economies. These include : 1) placing a high priority on dealing with high open or repressed inflation and other manifestations of severe macroeconomic imbalances; 2) removing restrictions on labor mobility and on the exit and entry of firms at the same pace as they liberalize trade; and 3) moving early to create markets for working capital financing - with appropriate mechanisms to assess credit risks - in order to encourage economic restructuring.Economic Stabilization,Environmental Economics&Policies,Country Strategy&Performance,Economic Theory&Research,Achieving Shared Growth

Exchange Rate Regimes in the Americas: Is Dollarization the Solution?

The series of crises, which have affected emerging markets in recent years, have reopened the debate on the most appropriate exchange regime for an emergent economy. In particular, all countries that experienced severe crises in the 1990s had some sort of fixed exchange rate regime, the majority of them falling in the categories that Corden (2002) calls fixed-but-adjustable exchange rate regime (FBAR) and in between regimes of the pegged (including flexible and crawling pegs) and target zone types. As a result, in recent years countries have been emigrating to a corner solution: a credible fixed regime or a floating regime with a monetary anchor. Within the latter categories, the increasingly used monetary regime is the inflation targeting one. The paper discusses the advantages and disadvantages of alternative exchange rate regimes and ends with a discussion of the possibility of dollarization in the Americas.Exchange rate systems, inflation targeting, dollarization

Reaching One-Digit Inflation: The Chilean Experience

The main purpose of this paper is to analyze the process by which Chile was able to reduce inflation during the 1990s. In this period inflation was gradually reduced from close to 30% per annum in 1990 to only 6% in 1997. The paper concludes that three factors were important in helping to accomplish this performance. First, the independent Central Bank and its tough actions early on -to convey the message that it was ready to stand behind its mandate (to reduce inflation)- helped to shape inflationary expectations and in the process it led to lower wage inflation and ultimately a lower path for core inflation. Second, a restrictive monetary policy, and the foreign exchange intervention policies associated with it, resulted in a trajectory of the nominal exchange rate much below what would have been observed under a PPP rule adjusted for differences in productivity. This result was reinforced by the low credibility of the band reflected in the effect of the location of the exchange rate within the band on the observed rate. Third, the higher rate of growth of labor productivity, given the wage equation, resulted in a lower rate of growth of unit labor cost than otherwise. From these three effects the first effect, the enhanced credibility of the new policy operating through the formation of inflation expectations, was found to be the most important factor behind the success in reducing inflation rate.

Private Capital Inflows and the Role of Economic Fundamentals

Private capital flows returned to the developing countries in the late 1980s, only a few years after the debt crisis. Underlying this surge in inflows there is a decrease in interest rates and a slowdown in economic activity in the developed countries, and an improvement in economic prospects and creditworthiness in the recipient countries. The latter is due, in part, to the implementation of structural reforms comprising the deregulation of financial and labor markets, the dismantling of barriers to trade, and the reduction of restrictions on capital movements.

Chile's experience with stabilization, revisited

This paper evaluates Chile's stabilization policies since the early 1970s. Four episodes are examined: (a) the high inflation at the beginning of the military regime when inflation was close to 1000 percent per year; (b) the orthodox stabilization program of 1975; (c) the exchange rate-based stabilization of February 1978-June 1982; and (d) the post-1984 adjustment period with a large real devaluation and low inflation. Finally an overall evaluation of the post-1973 experience with stabilization is provided.Economic Theory&Research,Economic Stabilization,Environmental Economics&Policies,Macroeconomic Management,Access to Markets

World Bank-supported adjustment programs : country performance and effectiveness

Simple comparisons of growth rates in countries that have had at least two structural adjustment loans (SALs) or at least three adjustment loans show that their growth has improved more than that of other countries. But simple comparisons of the performance of groups of countries are poor estimators of the effectiveness of adjustment programs because the performance of an adjusting country is the result of: (a) the policies that would have been in place even without adjustment loans from the Bank; (b) world economic conditions; (c) the effects of the Bank-supported program; and (d) internal shocks to the economy. After explicitly controlling for external shocks and nonprogram determinants of performance, the authors find that adjustment lending programs have usually increased the growth rate of GDP and the ratio of exports to GDP, and have increased the saving-to-GDP ratio over early 1980s levels. But the average ratio of investment to GDP has fallen below 1970s levels. For countries that have reduced most of their policy inefficiencies, achieving a sustainable growth rate in the 1990s will require higher investment rates than those achieved in the 1980s.Economic Theory&Research,Economic Stabilization,Poverty Impact Evaluation,Environmental Economics&Policies,Achieving Shared Growth

Production Technology Differences Between Canadian-Owned and Foreign-Owned Firms Using Translog-Production Functions

The discussion of foreign ownership in Canada frequently refers to a conventional view that foreign-owned firms are larger, more capital-intensive, pay higher wages and are more efficient. Evidence for these characterizations has unfortunately come from comparisons of partial productivity measures of labor or measures of average capital-intensity, with all the uncertainty that this entails. It is the object of this paper to compare the technology characteristics of Canadian and US-owned establishments in Canada by means of a translog production function estimate, utilizing micro level data. While we find strong evidence for the view that the two groups operate with different technologies, and that US-owned establishments are larger, we do not find support for the conventional view that US-owned establishments are more capital-intensive, have higher labor productivity, or lower costs of production.

Adjustment programs and Bank support : rationale and main results

This paper reviews the rationale for programs and then evaluates the design, implementation, and effectiveness of Bank-supported adjustment programs anddiscusses lessons that have emerged from the analysis of adjustment problems and programs. In countries that are experiencing acute macroeconomic imbalances manifested in the form of high fiscal deficits, balance of payments crisis and high open or repressed inflation, adjustment should start with policy and institutional reforms to deal wtih the ultimate causes of the macroeconomic crisis. Once enough progress has been achieved in reducing inflation and the fiscal and balance of payments deficits, other structural reforms aimed at improving resource allocation and achieving sustainable and equitable growth should be attempted. Among the latter reforms, the most common are: public sector reforms, trade/domestic competition reforms and financial sector reforms. Labour market reforms are not as common as they should be. The Bank can assist the adjustment process by providing both finance and policy advice. Furthermore, the Bank helps countries in mobilizing other sources of finance. The ultimate success of the adjustment programs depends not only on getting the right policies in place but also on increasing investment -- including efficient public investment, saving and growth.Banks&Banking Reform,Environmental Economics&Policies,Economic Theory&Research,Achieving Shared Growth,Economic Stabilization