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Mr. Robert P Flood

In this issue, IMF Staff Papers begins an occasional section on data problems. We normally publish papers providing primarily analysis of preassembled data. With this special section we break with that tradition and indicate to researchers that we are interested in publishing papers on data construction, collection, and reporting as it applies to topics of research interest. We anticipate the work published in this section will include papers on both post-World War II data and historical data. Topics to be published will likely include data puzzles and

Ms. Hong Liang
A recent study by Grilli and Kaminsky (1991) argues that real exchange rate (RER) behavior is likely to be dependent on the particular historical period rather than on the nominal exchange rate arrangement itself. This paper reexamines RER behavior using alternative data sets, as well as different econometric methods, over the period 1880-1997. It finds strong evidence supporting the nonneutrality hypothesis of nominal exchange regime on RER volatility. Also, regime shifts play an important role in determining the persistence of shocks to the RER.
Ms. Jocelyn Horne
This paper assesses the usefulness of summary measures of fiscal sustainability for the purpose of multilateral surveillance. An overview of the main conceptual issues is first presented. Next, an assessment is made of the strengths and weaknesses of the summary measures in the context of their recent application to industrial countries by the OECD and the Fund. The measures are shown to highlight the inadequacy of using trends in public debt ratios to assess sustainability. However, the measures and their recent application are subject to a number of caveats, in particular in relation to their sensitivity to the discount rate, time paths of government expenditures and private sector behavior.
International Monetary Fund
This paper tests a version of Barro’s tax-smoothing model, which assumes intertemporal optimization by a government seeking to minimize the distortionary costs of taxation, using Pakistan and Sri Lankan data for 1956-95 and 1964-97, respectively. The empirical results indicate that Pakistan’s fiscal behavior is consistent with tax smoothing, but not Sri Lanka’s. Moreover, fiscal behavior in both countries was dominated by a stagnation of revenues, large tax-tilting-induced deficits, and the consequent accumulation of excessive public liabilities. Analysis of the time-series characteristics of tax-tilting behavior indicates that for both countries the stock of public liabilities is unsustainable under unchanged fiscal policies.
Ms. Ana L Fostel, Sandeep Kapur, and Mr. Luis Catão
We show that cross-country differences in the underlying volatility and persistence of macroeconomic shocks help explain two historical regularities in sovereign borrowing: the existence of "vicious" circles of borrowing-and-default ("default traps"), as well as the fact that recalcitrant sovereigns typically face higher interest spreads on future loans rather than outright market exclusion. We do so in a simple model where output persistence is coupled with asymmetric information between borrowers and lenders about the borrower's output process, implying that a decision to default reveals valuable information to lenders about the borrower's future output path. Using a broad cross-country database spanning over a century, we provide econometric evidence corroborating the model's main predictions-namely, that countries with higher output persistence and conditional volatility of transient shocks face higher spreads and thus fall into default traps more easily, whereas higher volatility of permanent output tends to dampen these effects.
Mr. Paul Cashin, Nilss Olekalns, and Ms. Ratna Sahay
India has a long history of running fiscal deficits. Two broad considerations motivate a government to run a deficit: tax smoothing and tax tilting. This paper tests a version of Barro’s tax-smoothing model, using Indian data for the period 1951-52 to 1996-97. The empirical results indicate that the central government of India has tax-smoothed, while the regional governments of India have not. The paper also finds evidence of tax tilting, reflected in financial repression, which has led to the accumulation of excessive public liabilities.
Mr. Jan-Peter Olters
Whereas the economics discipline possesses a highly refined theoretical apparatus to analyze the effects of government behaviour on the economy, it has not (yet) managed to fully develop a positively formulated "economic theory of politics" that would permit the integration of the decision-making processes of voters, parties and governments with those of consumers and firms. Considerable recent advances notwithstanding, the large and heterogeneous body of literature has (so far) remained outside the economic mainstrain. The paper surveys the main approaches used to endogenize democratic elements and assesses the underlying reasons for researchers' renewed interest in this field.
Mr. Subramanian S Sriram
A stable money demand forms the cornerstone in formulating and conducting monetary policy. Consequently, numerous theoretical and empirical studies have been conducted in both industrial and developing countries to evaluate the determinants and the stability of the money demand function. This paper briefly reviews the theoretical work, tracing the contributions of several researchers beginning from the classical economists, and explains relevant empirical issues in modeling and estimating money demand functions. Notably, it summarizes the salient features of a number of recent studies that applied cointegration/error-correction models in the 1990s, and it features a bibliography to aid in research on demand for money.
International Monetary Fund
This Selected Issues paper on Portugal reviews a set of issues of relevance to the regime change implied by European Monetary Union participation. It presents an empirical investigation of the business cycle in Portugal. The paper attempts to obtain a quantitative sense of the impact of monetary policy on the Portuguese economy, utilizing an unrestricted vector autoregression methodology to characterize the monetary transmission mechanism. It also examines some key forces at work in Portugal’s external sector from different vantage points.
International Monetary Fund. Research Dept.
This paper examines the macroeconomic effects of IMF-supported adjustment programs. The evidence is reviewed for such effects, and new estimates are provided of these effects for 69 developing countries with programs during 1973–88. The empirical analysis indicates that in the short term, programs have led to an improvement in the current account and the balance of payments, a lowering of inflation, and a decline in growth. In the longer term, the positive effects of programs on the external balance and inflation are strengthened, and the adverse growth effects reduced.