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International Monetary Fund. African Dept.
This Selected Issues paper aims at identifying some of the main channels of transmission through which political instability feeds and foster fragility and provide an estimate of the “fragility gap” that haunts the Bissau-Guinean society. This paper argued that, until today, due to chronic political instability, Guinea-Bissau has been in a costly fragility trap. This analytical piece argues that the major factor behind Guinea-Bissau’s fragility has been the chronic political instability. It also uncovers some of the main transmission channels from political instability to fragility and provides simple estimates about the cost of instability. Estimates based on reasonable assumptions reveal that, considering only Guinea-Bissau’s post-war period, without chronic political instability real GDP per capita could have been at least two thirds higher than its 2013 level. This assessment shows the crucial importance of the security sector reform. It also shows that the current estimated cost of the security sector reform is modest in comparison, since it puts into perspective its monetary costs—which are easy to calculate and mostly frontloaded—vis-à-vis its wide and deep benefits, which are not as explicit and accrue over time.
International Monetary Fund. African Dept.
This Selected Issues paper on West African Economic and Monetary Union presents external stability assessment report. The current account deficit declined in 2014. Although gross international reserve coverage has increased slightly, part of the current account deficit has been financed by a decline in commercial banks’ net foreign assets. Contingent on the implementation of government’s consolidation plans, and helped by a favorable oil price outlook, the current account deficit would further gradually decline and be matched by enough financial inflows in the medium term. According to various metrics, the real exchange rate appears to be broadly aligned with fundamentals. International reserve coverage should increase to provide stronger buffers against immediate short-term risks. Structural competitiveness and investment efficiency improvements will be essential to ensure that the planned large investment programs translate into growth and export gains as well as increased private inflows into the region.
International Monetary Fund. African Dept.

(EBA-lite), Guinea-Bissau’s real effective exchange rate (REER) appears to be broadly in line with the country’s fundamentals . 4. To assess the stance of the current account for Guinea-Bissau, this note uses the “EBA-lite” methodology ( Figure 3 ). The fitted values resulting from this exercise capture the current account deficit dynamics well, but there are substantial differences between the actual current account in percent of GDP compared to the levels implied by the regression. In the more recent years, the implied levels exceed the actual levels, implying

International Monetary Fund. African Dept.

current account deficit dynamics well, but consistently underestimate its size, suggesting that countries with similar characteristics, such as demographics, institutions and size of private and public transfers and fiscal stance, have, on average, experienced lower current account deficits over time. 4. Based on the EBA-lite approach, the WAEMU’s current account stance in 2013 can be decomposed as follows : A c t u a l     C A = C A   G a p + ( F i t t e d   C A − P o l i c y

Allan Dizioli and Jochen M. Schmittmann

performance of the model is strong. Forecasts capture the spikes in inflation in 2008 and 2011 and track output gap dynamics well. The forecasting performance confirms that the model matches Vietnam’s data well. Figure 4. In-Sample Forecasts D. Out-of-sample forecasts with U.S. Federal Reserve lift-off FPAS models can be very useful in the process of forecasting. While the model itself does not make the central forecast, it can serve to frame the discussion about the forecast, risks to the forecast, appropriate responses to a variety of shocks, and

Mr. Ashvin Ahuja, Kevin Wiseman, and Mr. Murtaza H Syed

stochastic analysis of debt issues in Garcia and Rigobon (2005). 14 Assuming no impact on potential GDP and no countervailing discretionary fscal action, the shock affects the fscal balance and debt-to-GDP ratios through automatic stabilizers and change in the GDP base. In countries with large debt-to-GDP ratios, the GDP base effects would explain the deterioration of debt dynamics well, while in countries with lower debt but relatively large expenditure ratios, automatic stabilizers would worsen the fscal balances, and in turn, debt. 15 This composite measure

Allan Dizioli and Jochen M. Schmittmann
The paper develops a small New-Keynesian FPAS model for Vietnam. The model closely matches actual data from 2000-2014. We derive an optimal monetary policy rule that minimizes variability of output, inflation, and the exchange rate. Compared to the baseline model, the optimal rule places a larger weight on output stabilization as the intermediate target to achieve inflation stability, while allowing greater exchange rate flexibility. We analyze the dynamics of key macro variables under various shocks including external and domestic demand shocks and a lift-off of U.S. interest rates. We find that the optimal monetary policy rule delivers greater macroeconomic stability for Vietnam under the shock scenarios.
Mr. Ashvin Ahuja, Kevin Wiseman, and Mr. Murtaza H Syed
Assessing country risk is a core component of surveillance at the IMF. It is conducted through a comprehensive architecture, covering both bilateral and multilateral dimensions. This note describes some of the approaches used internally by Fund staff to examine a wide array of systemic risks across advanced, emerging, and low-income economies. It provides a high-level view of the theory and methodologies employed, with an on-line companion guide providing more technical details of implementation. The guide will be updated as Fund staff’s methodologies for assessing country risk continue to evolve with experience and feedback. While the results of these approaches are not published by the IMF for market sensitivity reasons, they inform risk assessments featured in bilateral surveillance as well as in the IMF’s flagship publications on global surveillance.
Mr. Charles Adams and Mr. David T. Coe

tested down by the deletion of insignificant variables. 29 This relatively unrestricted estimation procedure captures the cyclical dynamics well, increasing the likelihood that the structural component of the unemployment rate will be correctly identified. A number of alternative equations are reported in Table 4 . Based on the standard criteria, the equations do a good job of explaining quarterly developments in the unemployment rate. There is no evidence of a systematic pattern in the errors or of instability, either of which would suggest the omission of

International Monetary Fund

unemployment rate is likely to react with a lag to changes in its determinants. For this reason the relationship of the unemployment rate to its cyclical and structural determinants was initially specified as a general autoregressive distributed lag model (of up to four quarters) and then tested down by dropping insignificant variables. 41/ This relatively unrestricted estimation procedure captures the cyclical dynamics well, increasing the likelihood that the structural component of the unemployment rate will be correctly identified. A number of alternative equations