Business Cycles in Developing Countries: Are They Different?

This paper demonstrates that developing countries differ considerably from their developed counterparts when focus is on the nature and characteristics of short-run macroeconomic fluctuations. Cycles are generally shorter, and the stylized facts of business cycles across countries are more diverse than those of the rather uniform industrialized countries. Supply-side models are generally superior in explaining changes in output, but a “one-size fits all” approach in formulating policy is inappropriate. Our results also illustrate the critical importance of understanding business regularities as a stepping-stone in the process of designing appropriate stabilization policy and macroeconomic management in developing countries.     

Towards a sustainable growth path

For Japan’s economy, there were two tasks I embraced myself for: “how to return to a sustainable growth path” and “how to rebuild the financial system.” And for the Bank of Japan, there was also the important challenge of navigating our way on a new voyage in line with the principles of the new Bank of Japan Law, which came into effect at almost the same time as I became Governor.     

The “hidden” side of the “flying-geese” catch-up model: Japan’s dirigiste institutional setup and a deepening financial morass

Akamatsu’s original “flying geese” (FG) growth model is often used as a frame of reference for both further conceptual elaborations and empirical explorations. So far, only the positive results of FG development have been focused on and emphasized in connection with Asia’s phenomenal growth in the precrisis period. The Japanese economy, supposedly Asia’s lead goose, is in the eleventh consecutive year of stagnation. How has such a once successful lead goose come to be stricken by financial woes? This paper points out that Japan’s once miraculous FG growth was made possible because it established an effective dirigiste catch-up regime in the early postwar period but that Japan’s present financial predicament is paradoxically a path-dependent outcome of this FG strategy. The institutional, especially financial, dimension of FG strategy needs to be taken into account to explain why such a strategy once proved effective but later culminated in a deepening financial morass. The FG model should encompass not only the industrial dimension of catch-up but also its institutional, particularly financial, dimension.     

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.     

Stabilization, adjustment, and the poor

This paper attempts to survey the recent literature on the impact of stabilization and adjustment programs upon the poor and to consider some of the key issues in the context of a particular equity-oriented low-income country. Tanzania. After looking at some of the approaches of earlier studies, this paper analyzes the effects of restructuring policies, macroeconomic restraint, and strategic policy change. The author then reviews available evidence on the recent experience of Tanzania with external shock, efforts at stabilization, and relations with the IMF.In conclusion, the author argues that in order to better understand their impact on poverty we need more detailed analyses of specific countries' experience with different kinds of macroeconomic imbalance and different short- to medium-term policy responses. However, he does indicate with some certainty that when equivalent external blows impact upon very low-income countries, there must be a presumption that, other things being equal (including the distribution of income), the proportion of households and people pushed over the line into “absolute poverty” will be greater than in middle-income countries. The international community should provide external finance to aid these low-income countries in limiting the negative impact on the poorest.     

Openness and the Effects of Fiscal and Monetary Policy Shocks on Real Output in Nigeria (1960–2003)*

Abstract: This study investigates the effects of monetary and fiscal policies on the real output growth in a small open economy. It is a country‐specific, time series study that verifies the implication of increasing economic openness on the efficacy of monetary and fiscal policy. A modified GARCH model was used to estimate the anticipated and unanticipated shocks. Two measures of fiscal and monetary shocks were combined with openness and real oil price shocks in a VECM model to assess the effects of anticipated and unanticipated policy shocks on the output equations. The empirical results showed that anticipated and unanticipated fiscal and monetary shocks had no significant positive effects on real output. This suggests that the open macroeconomic version of the policy ineffectiveness proposition was valid for both monetary and fiscal policy shocks in Nigeria. This is in consonance with earlier works in this area. Furthermore, the degree of openness and oil price shocks had a negative implication on the efficacy of macroeconomic policy in Nigeria; also in agreement with the Dutch Disease Syndrome. Finally, the policy implication of this study therefore is that trade liberalization policy should be implemented cautiously. The Nigerian economy is weak to withstand the unwholesome consequences of full economic integration.     

中国商业银行信用风险宏观压力测试

本文用Logit模型将贷款损失率转化为金融稳定性综合指标,并以此作为被解释变量,以CPI、GDP和利率等宏观经济因素作为被解释变量进行回归分析,并做出各宏观经济因素的预测模型。在此基础上,对下一期的相应经济数据进行预测,并对下一期经济分别受各项宏观经济变量极端可信冲击下进行压力测试。研究结果显示,以上三种宏观经济因素对贷款损失率影响显著,其系数的经济意义也与现实相符。此外,根据模型的回归结果显示,关于利率的研究部分准确验证了我国利率的产出经济效应和货币政策的时滞期。本文为政府降低贷款损失率,提高金融稳定性而进行系统的宏观经济调控提供定性和定量的参考建议。     

Market supplanting versus market fostering interventions: China, East Asia and other developing countries

The paper investigates the relationship between growth and different types of government intervention by distinguishing “market supplanting” regimes from “market fostering” interventions. A lesson from the East Asian miracle was not that governments necessarily intervened less, but they intervened efficiently in a relatively transparent and flexible way that kept overall distortions in check. China's reforms can be considered a transition from a “market supplanting” regime where market signals are distorted over long periods, to “market fostering” interventions in which government acts like a gardener. Alternative measures of government interventions were used to construct two composite policy indexes. Preliminary analysis suggests that “market fostering” interventions seem to have facilitated growth in productivity, although the result is inconclusive due to data limitations. Compared with the East Asian NIEs, China still has a long way to go in reforming the role of government in the economy.     

泡沫经济的成因及治理对策研究

文章通过对虚拟经济、羊群效应和资金流动性过剩这三种经济现象的分析，揭示了泡沫经济的生成机理及危害，并提出对泡沫经济的防范、治理要采取宏观政策调控和微观心理引导双管齐下的策略，防范金融风险，保持宏观经济的健康、稳定发展。     

Inflationary shocks and real output growth in nine Muslim-majority countries: Implications for Islamic banking and finance

Low and stable inflation is important for maintaining the viability of Islamic banking and finance within a dual banking system. Inflationary shocks when transmitted to real output growth cause a shift of investment to fixed return products as a hedge against the uncertainty of returns on equity investment under Islamic profit-loss sharing contracts. This study examines the transmission of inflationary shocks to the real economy for nine Muslim-majority countries (Bahrain, Bangladesh, Egypt, Indonesia, Iran, Malaysia, Pakistan, Saudi Arabia, and Turkey) that have introduced Islamic banking, all except Iran within dual-banking systems. A structural vector autoregressive (SVAR) framework is deployed to understand macroeconomic relationships using annual data from the late 1970s to 2014. The key finding is that inflationary shocks affect real interest and exchange rates which in turn impact real output growth. The paper argues that the absorption of inflationary shocks in real interest and exchange rates is the outcome of rigidities in nominal interest and exchange rates within repressed financial systems. Policy regimes that allow for greater adjustment in nominal interest and exchange rates under a deregulated financial system would offer better shock absorption capacity which would lead to less volatility in inflation, real interest and exchange rates, and real output growth. The resulting more stable macroeconomic environment would be more conducive to the development of an Islamic financial sector that would promote economic growth.     

中国城市群金融一体化的宏观经济效应分析

城市群经济是我国目前区域经济发展的主要方式,而城市群金融一体化则是区域经济发展的基础。本文主要从经济增长、通货膨胀和就业三个方面分析了城市群金融一体化的宏观经济效应。从理论层面来看,城市群金融一体化对城市群经济增长和就业问题具有明显的正面效应,而对通货膨胀问题的解决则可能带来不利的影响。     

IMF conditionality: Conceptual problems and policy alternatives

This paper argues that the main issue damaging relations between developing countries and the International Monetary Fund is the latter's position that external disequilibria are always a consequence of excess aggregate domestic demand, caused by excessive credit expansion. As a result, Fund sponsored stabilization programs center on demand contraction through a credit crunch and may establish stricter domestic performance criteria than necessary to attain the balance-of-payments objectives. The author suggests that the IMF establish a two-tier conditionality system, which he calls the “hands-off” approach, with one tier composed exclusively of balance-of-payments or foreign exchange denominated variables, and the other of domestic currency denominated variables. The two-tier system would allow more flexibility in compliance assessment and might reduce substantially the number of breakdowns of Fund programs.A revised “hands-on” approach for the Fund is also suggested. The author critiques the recessive biases of the currently used financial analytical exercises and makes specific proposals to introduce “growth exercises” to establish the foreign credit requirements of a growth-oriented stabilization program and thus to introduce performance criteria for creditor countries and banks — a form of “reciprocal conditionality.”     

Can IT be Japan's savior?

This paper constructs a multi-sector model to take explicit account of the very sharp change in the relative price between non-IT and IT goods. The model is calibrated to the Japanese economy, and its solution path from 1990 on is compared to Japan's macroeconomic performance in the 1990s. Compared to the one-sector analysis of Japan in the 1990s [Hayashi, F., Prescott, E.C., 2002. The 1990s in Japan: A lost decade. Rev. Econ. Dynam. 5, 206–235], our model does slightly better or just as well in accounting for Japan's output slump and does worse in accounting for the capital–output ratio. We also show that, to revive a 2% long-term growth in per capita GDP, Japan needs to direct 10% of private total hours to the IT sector. J. Japanese Int. Economies 19 (4) (2005) 543–567.     

Financial Openness and Macroeconomic Instability in Emerging Market Economies

This paper shows how the macroeconomic instability that affects more financially open emerging economies can be explained in terms of imperfect international financial integration. The analytic tool used is a stochastic dynamic equilibrium model. The model, based on a small open economy, is calibrated to Malaysia. International financial relations are characterized by the presence of a borrowing constraint, that amplifies the volatility of exogenous shocks. Impulse response and simulation analyses are conducted. Main result is that, in presence of international financial frictions, greater access to international liquidity can cause high short-run macroeconomic instability.     

Stability and Growth Pact: issues and lessons from political economy

The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. Following a literature survey, the paper stresses the importance of appropriate incentives for rule compliance in an environment where national fiscal sovereignty precludes the option of centralised enforcement. In addition, the paper stresses the importance of clear and simple rules and in particular the 3% deficit limit in anchoring expectations of fiscal discipline and facilitating public and market monitoring of public finances. This, in turn, strengthens incentive for rule compliance. Moreover, the paper discusses the interests of the most important players in European fiscal rule formation and the importance of choosing the appropriate time for initiating a reform debate.Non-technical summary The EU fiscal framework as laid down in the Maastricht Treaty and the Stability and Growth Pact (SGP, the Pact) aims to preserve fiscal sustainability while allowing room for automatic fiscal stabilisation. These two objectives are also at the heart of the ECB’s interest in the EU fiscal framework because their attainment facilitates monetary policy making in the short and long run.The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. The literature review of the first part reveals that fiscal rules can help solve deficit/debt biases and time inconsistency problems by constraining the behavior of policy makers. But rules can also mitigate biases if they facilitate financial market and public scrutiny of fiscal policies.Thereafter, the paper analyses the institutional environment in which EU fiscal rules are applied. It argues that EU rules reflect a “contract” amongst countries that retain sovereignty on fiscal policies. Enforcement, therefore, ultimately has to be undertaken by the contracting parties. Due to this constraint, the rules can also be characterised as “soft” law (with the 3% limit being nevertheless a much “harder” constraint than the other elements). But this does not necessarily imply that the rules are ineffective (or “dead”). Soft law reduces political transaction costs (by improving transparency and providing a forum for peer pressure). Moreover, if well-designed, such law can boost incentives towards making the rules “self-enforcing”. Evidence speaks in favour of this view: while EU fiscal rules were bent in a number of cases and compliance is undeniably of concern, major and rapid fiscal balance deteriorations have been largely prevented since the start of EMU.The paper also looks at potential trade-offs between “complex” rules where a “fine-tuned” economic rationale may boost acceptance of the rules versus simple and clear rules that allow easy monitoring. It is argued that clarity and simplicity of rules are important especially when formal enforcement is limited (“soft law”) and public monitoring becomes more important. By facilitating public and market monitoring of compliance, clear and simple rules are also more costly to breach.The benefits of “complexity”, and in particular the use of administrative discretion to fine tune the rules to country situations have limits, in particular when it comes to the excessive deficit procedure (EDP). It is argued that the 3% deficit limit and the time frame for correcting excessive deficits already provide some room to accommodate economic circumstances. The 3% limit must be clear, simple and strictly implemented to anchor expectations of fiscal discipline and to facilitate public and market monitoring. Further discretion and relaxation would conflict with this need. From this angle, other risks (e.g., efforts not materializing, structural reforms producing surprise costs etc) are hard to justify as a reason for extending deadlines to correct excessive deficits.The preventive arm of the Pact with its requirement of close-to-balance-or-in-surplus budgetary positions defines sound medium term budget positions and adjustment paths. This may be appropriately fine-tuned to address concerns about the Pact’s underlying economic rationale. For example, a symmetric application in good and bad times and less time inconsistency would be desirable.Finally, the timing of a debate on fiscal rules needs to be carefully chosen. In the EU context (and perhaps in other contexts as well), there seems to be much inherent pressure to make the rules more “complex”. Moreover, for the debate initiated in summer 2004, there was also no willingness by countries to give up sovereignty nor was there a sense of urgency to strengthen public finances via tighter rule implementation and enforcement. In such an environment, it is likely that changes to fiscal rules make them more complicated, discretionary and, thereby, potentially less enforceable.The views expressed are those of the author and not of the ECB. Comments by Vitor Gaspar, Mark Hallerberg, Steven Keuning, Jose Marin, Richard Morris, Gilles Noblet, Hedwig Ongena, Luca Onorante, Rolf Strauch, Juergen von Hagen, an anonymous referee and valuable assistance by Anna Foden are much appreciated.     

South Korea's economic reform and its aftermath

This paper analyzes the process of Korea's recovery from the 1997 financial crisis with several policy implications. The driving force behind the better‐than‐expected economic recovery was the reform measures introduced by the Korean government in four major areas such as the financial, corporate, labor and public sectors. Also, Korea's strong export performance helped by the booming U.S. economy provided a favorable external condition for recoveiy. Internally, surging investment in the IT and venture industries, which was deliberately fostered by the government, along with the revived consumption level, enabled the rapid recovery. However, as the U.S. economy slowed and the technology bubble burst in 2000, the Korean economy went through a mild recession in 2001. Based on the experiences of crisis and recovery, the implication of macroeconomic fundamentals is re‐examined. Even though the strong macroeconomic fundamentals were misleading in preventing the crisis, they later facilitated the Korean economy's recoveiy. As a result of various reform measures, the Korean economy as of today is in a different environment First, the low investment rate along with the decreased saving rate will marie the end of the high growth era. Second, the substantial deterioration of income distribution will be the major task to be tackled with in the future. Third, the Korean economy is now fully liberalized both in the commodity and capital markets with some side effects and merits. Fourth, the loan and deposit structure of the financial sector is significantly altered. Lastly, more fiscal burden is placed on the shoulders of the government due to the heavy debt service burden of public funds and the generous expansion of social welfare programs.     

Estimating the economic cost of China's new desulfur policy during her gradual accession to WTO: The case of industrial SO2 emission

To understand the potential impacts of China's accession to WTO on her new desulphur policy (gradual reduction of 10% of annual SO₂ emission by 2005 with respect to that of 2000), we construct a CGE model in which SO₂ emission is directly linked to energy input consumption in production. The model equally considers the substitution possibility between energies of different SO₂ effluent ratios by including energy as labor and capital in the constant elasticity of transformation production function. The positive externality of trade in China's economy is also included. This model is then calibrated into a 55-sector Chinese SAM for the year 1997. Four policy simulations (Business as Usual, Openness policy only, desulfur policy only, and the combination of openness and desulfur policy) are made for the period from 1997 to 2005. The results show that the environmental impact of trade, though proven to be “negative”, stays rather modest. This is owing to the industrial composition transformation that deviates the specialization of the Chinese economy towards labor-intensive sectors under the new trade liberalization process. We do not find evidence for the “pollution haven” hypothesis. Seemingly ambitious, the new desulphur policy will only bring small economic growth loss. The pollution reduction objective will be realized mainly by substitution between polluting and less or non-polluting energies. The combination of trade liberalization and pollution control policy seems to give China more flexibility in adapting her economy to the new desulphur objective. Considering these different aspects together, the total economic loss due to the new desulphur policy will be limited to only − 0.26% under the presence of trade liberalization.     

The Categorization of Small Open Economies and the Response to Foreign Interest Rate Shocks: Based on Financial Integration and Net External Credit

To analyze precisely effects of foreign interest rate hike shocks, this paper categorizes small open economies into four kinds of types based on the net external credit (or debt) level and the financial integration level. The empirical result shows that responses of macroeconomic variables tend to differ substantially depending on the type of a small open economy. These findings imply that we need to consider the net external credit (or debt) level and the financial integration level of a small open economy when we predict the effect of a foreign interest rate hike shock.     

Macroeconomic interdependence in East Asia

This paper analyzes macroeconomic interdependence among 10 Asian economies. In this connection, we decompose their macroeconomic activities (real GDP) into common and country-specific components using the Bai–Ng method (2004). Our results suggest first that both components are non-stationary and have permanent effects on their overall economy. Second, we find the relative importance of common factors in all countries in terms of their contribution to variations in real GDP. But evidence is also obtained for country-specific effects becoming increasingly important in countries like China in recent years. Therefore, if, for example, China is expected to grow at a fast pace in future, our findings imply that creation of a regional monetary union of these 10 countries needs to be held back until the Chinese economy has become more dominant in the region.     

Budgetary Consolidation in Europe: Quality, Economic Conditions, and Persistence

In this article we study the importance of the quality of fiscal adjustments and macroeconomic conditions for the persistence of budgetary consolidations. In contrast to previous work in this area, we do not arbitrarily predefine a measure of persistence to evaluate consolidation “success.” By employing duration analysis techniques, the length of a consolidation spell is rather determined endogenously. Our results based on a sample of industrialised OECD countries show that “consolidation fatigue” and the quality of fiscal consolidations are indeed important determinants of their longevity. Moreover, high debt–GDP ratio and fiscal tightening in other OECD countries raise the likelihood of consolidations to persist. Applying our results to European countries in the 1990s provides only weak evidence suggesting that the Maastricht process contributed much to the fiscal consolidations observed in Europe during the 1990s. J. Japan. Int. Econ., December 2002, 16(4), pp. 512–535. ZEI, University of Bonn, Bonn, Germany, Indiana University, Bloomington, Indiana; and CEPR; Strathclyde University, Glasgow, Scotland; and CEPR; and ECB, Kaiserstrasse 29, D-60311 Frankfurt a.M., Germany; and ZEI. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E61, E62, E65.