when is external debt sustainable the article empirically examines the determinants of debt distress defined as periods in which countries resort to any of three forms of exceptional finance significant arrears on external debt paris club rescheduling and non concessional international monetary fund lending probit regressions show that three factors explain a substantial fraction of the cross country and time series variation in the incidence of debt distress the debt burden the quality of policies and institutions and shocks the relative importance of these factors varies with the level of development these results are robust to a variety of alternative specifications and the core specifications have substantial out of sample predictive power the quantitative implications of these results are examined for the lending strategies of official creditors

adoption of an imf programme and debt rescheduling an empirical analysis the existence of an empirical relationship between the adoption of an imf programme and the concession of a debt rescheduling by commercial and official creditors is tested using a bivariate probit model if countries who have arrangements with the imf are more likely than others to obtain a rescheduling of their external debt we could conclude that the adoption of an imf programme could work as a sort of signal of a country s good willingness which is thus rewarded with the debt relief the results confirm the existence of a significant effect of the adoption of an imf programme on the subsequent concession of a debt rescheduling by creditors

real and monetary determinants of real exchange rate behavior theory and evidence from developing countries abstract this paper develops a dynamic model of real exchange rate rer behavior in developing countries a three goods economy exportables importables and non tradables is considered residents of this country hold domestic and foreign assets and there is a dual exchange rate regime there is a government that consumes importables and non tradables a distinction is made between equilibrium and disequilibrium movements of the rer the determinants of real exchange rate misalignment are studied with emphasis placed on the role of devaluations and balance of payments crises the implications of the model are tested using data for 12 developing countries the results obtained are generally favorable for the model the issue of rer stationarity is also analyzed

three approaches to predict the timing and quantity of ldc debt rescheduling the performance of three approaches to predict the timing and quantity of ldc debt rescheduling is examined the balance sheet approach the traditional macro approach and the structural approach results show that the balance sheet approach performs better

what makes growth sustained abstract we identify structural breaks in economic growth in 140 countries and use these to define growth spells periods of high growth preceded by an upbreak and ending either with a downbreak or with the end of the sample growth spells tend to be shorter in african and latin american countries than elsewhere we find evidence that growth duration is positively related to the degree of equality of the income distribution democratic institutions export orientation with higher propensities to export manufactures greater openness to fdi and avoidance of exchange rate overvaluation favorable for duration and macroeconomic stability

economic and political determinants of budget deficits in developing countries abstract the evidence from a large sample of developing countries tends to reject the empirical implications of optimizing models of the process of determination of fiscal deficits tax rates seigniorage and inflation the paper also presents some preliminary evidence that an important reason for the failure of the equilibrium approach to fiscal policy is that fiscal deficits are partly determined by political factors and that cross country differentials in budget deficits may depend on measures of political instability in particular as suggested by a number of recent theoretical approaches an increase in the degree of political instability appears to lead to greater budget deficits

estimating a cointegrating demand system abstract the set of variables in a time series demand model in the form of the almost ideal demand system are found to be i 1 with the demand equations forming a cointegrating system the parameters of the cointegrating equations are estimated and tested using a triangular error correction procedure the null hypothesis of homogeneity with respect to prices and nominal income in the system cannot be rejected

the political economy of inflation and stabilization in developing countries the traditional literature on inflation in developing countries has focused on three main determinants of inflationary pressures a money creation b fiscal imbalances and c cost push elements while the first two factors have been emphasized by authors of a monetarist persuasion cost factors have played a crucial role in the structuralist theories developed during the 1950s and 1960s however more recent analyses on inflation and stabilization have shifted their attention away from traditional direct economic causes of inflation such as money creation toward political and institutional determinants of inflationary forces this new literature which has come to be known as the political economy approach to macroeconomic policy has built on some important insights of game theory and the theory of public choice trying to explain why some governments decide to run large fiscal deficits and to rely heavily on the inflation tax typically in answering these questions this recent strand of the literature has emphasized the role of political instability credibility reputation and political cycles 2 in spite of providing some important new insights into the determinants of inflation this new literature is subject to two limitations first until recently most of the contributions have been theoretical without providing empirical tests on their most important implications and second the emphasis has been almost exclusively on the industrialized countries ignoring the developing nations the purpose of this article is to discuss selectively some of the most important insights of this new literature on policy making from the developing countries perspective i will emphasize the policy implications of this approach to inflationary analysis and discuss some of the limited empirical results

evaluating prior beliefs in a demand system the case of meat demand in canada an almost ideal demand system for meats is estimated using canadian data a bayesian approach is used to impose inequality restrictions on substitution elasticities via monte carlo integration and importance sampling in order to conform with prior beliefs about curvature and monotonicity restrictions and substitution relationships results are more consistent with the concavity and monotonicity restrictions from demand theory than with the added restriction that all meats are substitutes

income distribution political instability and investment abstract this paper successfully tests on a sample of 71 countries for the period 1960 85 the following hypotheses income inequality by fuelling social discontent increases sociopolitical instability the latter by creating uncertainty in the politico economic environment reduces investment as a consequence income inequality and investment are inversely related since investment is a primary engine of growth this paper identifies a channel for an inverse relationship between income inequality and growth we measure socio political instability with indices which capture the occurrence of more or less violent phenomena of political unrest and we test our hypotheses by estimating a two equation model in which the endogenous variables are investment and an index of socio political instability our results are robust to sensitivity analysis on the specification of the model and the measure of political instability and are unchanged when the model is estimated using robust regression techniques

adjustment policies in developing countries a reassessment this paper analyzes policy responses to external shocks of the 1973 76 and 1979 81 periods in developing economies grouped according to the level of industrialization and the policies applied it is shown that outward oriented economies relied largely on export promotion and import substitution to offset the balance of payments effects of external shocks in both periods inward oriented economies failed to apply such output increasing policies of adjustment rather they financed the balance of payments effects of external shocks by foreign loans in the 1974 76 period and had to take deflationary measures in 1979 81 when their increased indebtedness limited the possibilities for further borrowing the policies applied led to rates of economic growth substantially higher in outward oriented than in inward oriented economies with growth rates in 1983 averaging 5 percent in the first case and practically nil in the second

distributional implications of macroeconomic policy theory and applications to el salvador abstract this article offers a theoretical framework for designing macroeconomic strategy for el salvador that will both respect stabilization and structural adjustment needs and enhance social equity after outlining the largely negative distributional implications of the orthodox policies followed by el salvador in recent years we argue that stabilization and efficiency could actually be improved by increased equity and sketch out the elements of an alternative approach that would be distributionally sensitive and thereby help consolidate the peace

model selection and forecasting ability of theory constrained food demand systems out of sample forecasting of annual u s per capita food consumption applying data from 1923 to 1992 is used as a basis for model selection among the absolute price rotterdam model a first differenced linear approximate almost ideal demand system fdla alids model and a first differenced double log demand system conditional on price consumption forecasts derived from elasticities are determined to be superior to direct statistical model forecasts models with consumer theory imposed through parametric restrictions provide better forecasts than models with little theory imposition for these data a double log demand system is a superior forecaster to the rotterdam model which is superior to the fdla alids model

revisiting aggregate u s meat demand with a bayesian averaging of classical estimates approach do we need a more general theory although meat demand is one of the most studied issues in agricultural economics our understanding of this phenomenon has been hampered by valid concerns about model specification uncertainty this article revisits the need for more general theories of aggregate u s meat demand using a bayesian averaging of classical estimates approach we draw comprehensive inferences over 1 048 576 demand systems we find very little evidence supporting the need for more general theories that include demand determinants beyond prices and expenditures we find strong evidence in support of symmetry and negativity but strong evidence against homogeneity which is consistent with other research copyright 2008 oxford university press

redistribution and non consumption smoothing in an open economy this paper presents a model where income distribution and redistributive fiscal policy interact to affect the budget deficit and the pattern of net borrowing of a country according to the standard representative agent paradigm a small open economy should smooth consumption by borrowing from lending to the rest of the world when its income increases declines over time the simple model of this paper delivers exactly the same predictions in the absence of income dispersion when income distribution is not degenerate however the same model gives rise to a surprising wealth of results in particular poor economies with high inequality may exhibit completely counter intuitive patterns of fiscal policy and external borrowing the country s production path declines over time because the more mobile agents leave the country to escape taxation yet the country might end up having a budget deficit and borrowing from abroad thereby reinforcing rather than smoothing the asymmetry in consumption between the two periods an important feature of this outcome is that it is backed by both the poor and the rich who gain from the fiscal system at the expense of the middle class

labor market adjustment to political conflict changes in the labor market in el salvador during the 1980s abstract i use household survey data for the 1980s to examine changes in the labor market of el salvador the findings suggest that the labor market does adjust to conflict there have been significant effects of conflict on the regional distribution of employment on international migration on internal migration in the areas directly affected other indicators such as labor force participation and self employment rates show outcomes are lower in the areas that were affected by conflict but were lower even before the conflict began and for earnings the level of real hourly earnings has fallen substantially in all areas in the 1980s

assessing and managing external debt problems in nigeria abstract the paper addresses some of the major issues in external debt management from the point of view of a borrowing country it has been found that frequent occurrence of debt and debt servicing problems among less developed countries ldcs can be traced to poor debt management despite the awareness of the need to develop an effective debt management capability and formulate specific debt management policies formal debt models have yet to enjoy wide application in many african countries whereas there are many debt management systems which debtor countries can adopt most african countries are not using them because of several constraints an analytical framework which can be used to formulate sound debt management policies is proposed and applied using nigeria as a case study

social polarization industrialization and fiscal instability theory and evidence this paper is motivated by an important puzzle that arises from the contrasting macroeconomic experience across developing regions in the recent decades in sharp contrast to east asia the fiscal policies in much of latin america and sub saharan africa are characterized by large fiscal deficits and volatilities of fiscal outcomes in order to address both large deficits and volatile fiscal outcomes we develop a simple model of endogenous fiscal policy in which government spending is strategically determined by heterogeneous policymakers in a dynamic game in an economy that is highly polarized due to unequal income distribution a larger fiscal deficit results and the intertemporal fiscal policy path becomes more volatile it is because the polarization of preference leads a policymaker representing each sector to spend more for her favorite sector collectively contributing to large deficits this polarization effect implies that a shock to tax revenue is translated into a more than proportional change in spending econometric evidence provides support for these predictions countries that have suffered from the greatest fiscal instability are those with highly polarized economic societies as measured by indicators of income inequality

an empirical comparison of flexible demand system functional forms this paper compares the performance of eight frequently used flexible forms that are either 1 locally flexible 2 effectively globally regular or 3 asymptotically globally flexible results show that the functions with global properties generally perform better particularly those models having asymptotic properties results using us consumption data indicate substitutability among the components of consumption at most data points there is also some interesting substitution volatility around the time of recessions in the usa copyright 2001 john wiley sons ltd

external shocks politics and private investment some theory and empirical evidence abstract the manner in which the political system responds to external economic shocks in developing countries is a key determinant of the private investment response we look at a simple model of political economic equilibrium to make this intuition more precise and developed the idea of a political transmission mechanism even in the confines of this simple model we find that ambiguities abound domestic politics can magnify or dampen the effect of the external shock in our empirical work we find that a high level of urbanization magnifies the investment reduction in response to an external shock this is consistent with the supposition that high levels of urbanization are conductive to distributive politics with pernicious economic effects we also find that the provision of political rights is conductive to superior private investment behavior

polarization politics and property rights links between inequality and growth most efforts to trace the effects of income inequality on growth have focused on redistribution however empirical investigation has not substantiated either the positive association of income inequality with redistribution or the negative association of redistribution with economic growth the authors analyze the effects of inequality in the broader context of social polarization they argue that social polarization whether rooted in income inequality or in ethnic tension makes large changes in current policies including those guaranteeing the security of contract and property rights more likely under a wide range of institutional arrangements the resulting uncertainties in the policy and contractual environment hinder growth they find strong empirical support for both parts of this argument the policy implications of their argument are quite distinct from those of arguments that inequality reduces growth by increasing pressures for redistribution if redistributive policies per se were to blame for the low growth resulting from inequality governments that seek to mitigate income inequality must inevitably confront a tradeoff between equity and growth if on the other hand the insecurity of property rights slows growth in unequal or otherwise polarized societies governments that commit over the long run to particular redistributive policies incur less risk of slowing economic growth fiscal redistribution that reduces inequality may actually increase growth by reducing the risks of political uncertainty

monetary policy delegation and polarisation there is by now a comprehensive literature beginning with rogoff 1985 arguing that a government should delegate monetary policy to a central banker who is independent and more conservative than the government itself this will reduce the inflationary bias typically at the cost of stabilisation for a democratic society this result would suggest that the median voter should prefer that monetary policy is delegated to an independent central banker who is more conservative than herself typically the central banker is chosen by the government and the government is chosen by the electorate thus there is some albeit perhaps a weak link between the preferences of the electorate and the central banker although the central banker presumably should be chosen for a long period of time waller and walsh 1996 he has to be chosen at some point in time this paper contains a political economy model where the central issue in politics is the choice of central banker and

the political economy of sovereign defaults abstract how do income distribution and the tax system affect sovereign borrowing and default decisions are these effects shaped by the political constraints that governments face when raising revenues to repay the debt to address these questions we incorporate agent heterogeneity in terms of income distribution and tax burden and a political support constraint into a standard dsge model of sovereign default the results show that income inequality and regressive taxes make defaults more likely for a given level of debt while they reduce sovereign borrowing in equilibrium tighter political support requirements reinforce these effects

public opinion and market reforms the limits of economic voting the broadly held view that promarket reforms are good for most people is in conflict with the equally broadly held view that in democracies reforms will generate widespread resistance resistance is expected because reforms typically produce economic downturns at least over the short term under normal circumstances we expect citizens to withdraw support from governments during periods of economic decline if citizens withdraw support then governments worried about the next election may abandon reforms but our expectations should be different of new democracies pursuing promarket reforms citizens may believe governments when they claim that things have to get worse before they get better or that economic stagnation is the fault of the past model research in poland peru and mexico reported in this special issue supports these expectations hence under democracy there is more scope for support of painful reforms than frequently acknowledged

normalized quadratic systems of consumer demand functions empirically estimated demand systems frequently fail to satisfy the appropriate theoretical curvature conditions we propose and estimate two demand systems for which these conditions can be imposed globally the first is derived from a normalized quadratic reciprocal indirect utility function and the second is derived from a normalized quadratic expenditure function the former is flexible if there are no restrictions on its free parameters but loses flexibility if the curvature conditions need to be imposed the latter is flexible in the class of functions satisfying local money metric scaling even if the curvature conditions need to be imposed

the role of theoretical restrictions in forecasting with inverse demand models in recent years the theoretical restrictions of consumer demand have been examined in post sample forecasting exercises however this work has uniformly ignored the concavity restrictions of consumer demand in this paper we evaluate a series of normalized quadratic inverse demand system nqids specifications using rolling windows and generating one to four step ahead forecasts to estimate the models eleven categories of south atlantic fish are used from 1980 through 2001 in addition to the nqids we also examine the forecasting performance of a purely time series model we find that the best predictions are achieved using a composite forecast

learning to forecast the exchange rate two competing approaches this paper compares two competing approaches to model foreign exchange market participants behavior statistical learning and fitness learning these learning mechanisms are applied to a set of predictors chartist and fundamentalist rules we examine which of the learning approaches is best in terms of replicating the exchange rate dynamics within the framework of a standard asset pricing model we find that both learning methods reveal the fundamental value of the exchange rate in the equilibrium but only fitness learning creates the disconnection phenomenon and only statistical learning replicates volatility clustering none of the mechanisms is able to produce a unit root process but both of them generate non normally distributed returns

structural adjustment policies in developing economies this paper examines structural adjustment policies in ldcs defined as policy responses to external or internal shocks that are carried out with the objective of regaining the pre shock growth path the introductory section of the paper reports on policy experience that indicates that countries applying an outward oriented development strategy were better able to cope with external shocks than economies following an inward oriented strategy it is further shown that the adoption of realistic exchange rates and interest rates the avoidance of large budget deficits and the productive use of the proceeds of foreign borrowing eased the process of adjustment the paper examines in detail the elements of a policy package that may be applied in response to external or internal shocks in the case prevalent in developing economies when optimal policies are not applied thus the recommendations simultaneously aim at responding to shocks and undertaking incentives incentives to save and to invest the choice of public investments sectoral policies in energy and agriculture budgetary policies and monetary policies in the conclusions the interdependence of the various policy measures is indicated with further attention given to foreign borrowing

debt arrears in latin america do political variables matter political instability and debt problems characterise latin america in the last two decades this article estimated a logit model of debt arrears including economic as well as political variables our results suggested that both economic and political indicators affected debt repayment in latin america during 1971 86 we also cast a shadow on the viewpoint that authoritarian and military regimes have an advantage over democratically elected governments with regard to debt related issues

the semiflexible almost ideal demand system abstract the concept of a semiflexible functional form is applied to the almost ideal ai demand system this yields a demand model that is more parsimonious than standard ones while preserving a degree of flexibility that satisfies the curvature property of concavity of the underlying expenditure function at least locally and that preserves the desirable properties of the ai model aggregation across consumers and nonlinearity of the engel curves the model is illustrated with an application to a relatively large demand system emphasizing food consumption

external and budget deficits in some developing countries abstract this paper documents and explains the positive comovement between the external and budget deficits of developing countries for which post 1960 time series data are available first the estimates indicate that the empirical covariance between these deficits is always positive and is statistically significant for many cases second the empirical covariance is close to that predicted from a tractable small open economy overlapping generation model with heterogeneous goods capturing the joint behavior of the external and budget deficits also the predicted covariance is induced by shocks which are closely related to internal conditions such as domestic resources and fiscal policies and to a much lesser extent to external conditions such as the world interest rate real exchange rate and terms of trade

the debt crisis structural explanations of country performance abstract this paper develops a cross country statistical model of debt rescheduling and the secondary market valuation of ldc debt which links these variables to key structural characteristics of developing countries such as the trade regime the degree of income inequality and the share of agriculture in gnp our most striking finding is that higher income inequality is a significant predictor of a higher probability of debt rescheduling in a cross section of middle income countries we attribute this correlation to various difficulties of political management in economies with extreme inequality we also find that outward orientation of the trade regime is a significant predictor of a reduced probability of debt rescheduling

testing for homogeneity in demand systems when the regressors are nonstationary an implication of optimizing theory is that demand functions are homogeneous of degree zero in prices and nominal income evidence based on estimations of demand systems has repeatedly found this restriction to be rejected by the data however the hypothesis is often formulated in terms of regressors that are non stationary this paper re examines the evidence for homogeneity in light of recent developments in time series econometrics with special emphasis on the treatment of trends we find the demand system to be stochastically but not deterministically cointegrated using techniques developed for estimating cointegrating vectors in the presence of deterministic trends we re estimate the demand system and find that homogeneity holds in many cases

testing restrictions in a flexible dynamic demand system an application to consumers expenditure in canada traditionally restrictions on systems of demand equations have been tested using static models whilst being estimated with time series data this paper develops a vector time series model of expenditure shares in the context of a singular dynamic demand system the model allows for non symmetric and non homogeneous short run behaviour the homogeneity and symmetry restrictions are only examined in the long run structure results based on canadian time series data are presented and reject the current practise of static modelling while restrictions suggested by economic theory are not rejected when imposed on the long run structure

the debt crisis lessons of the 1980s for the 1990s abstract one of the salient characteristics of the 1980s is the growth collapse of the latin american debtor countries the debt overhang literature claims that the debt crisis is the main reason for the growth collapse however previous empirical work has failed to support this hypothesis we re examined this hypothesis further using simulation and econometric methods we found that once we account for the effects of social inequality on government policy and consumption the burden of servicing the debt becomes an important factor in explaining the collapse in investment and output growth in latin america we draw some conclusions for the 1990s

private investment and democracy in latin america abstract this paper argues that the deterioration of latin american private investment in the 1980s may have been largely due to debt difficulties and not the concurrent wave of democratization after reviewing why more political systems may actually be conducive to investment we test an investment function for seven countries over 1973 1986 that includes traditional economic factors two debt measures and several political variables including measures of democracy worker power international monetary fund support and risk the results are quite congenial for our hypothesis under several reasonable alternative specifications for the economic determinants our democracy measure is positively signed and significant

simultaneity and structural change in u s meat demand an inverse of the almost ideal demand system the iaids is developed in order to test the endogeneity of prices and quantities in the u s meat demand system the iaids has all the desirable theoretical properties of the aids except aggregation from the micro to the market level using annual data both prices and quantities appear to be endogenous within the entire meat market including livestock production costs and technical change indicators as instruments eliminates evidence of a mid 1970s demand change