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Mr. Hamid R Davoodi, Mr. Benedict J. Clements, Mr. Jerald A Schiff, and Peter Debaere

.60) IMF program dummy × government spending-GDP ratio 1 79 *** 1.88 *** (3.72) (3.39) Number of observations 1740 1740 1740 1740 P -value 0.03 0.03 0.00 0.00 Note: Generalized Method of Moments (GMM) is the estimation technique, using demeaned data. Numbers in parentheses denote t -statistics, based on heteroskedastic, serial-correlation consistent standard errors. All variables are in logs except for dummy variables and the ratio of the current account to GDP, which takes on positive and negative values

Mr. Benedict J. Clements, Mr. Jerald A Schiff, Peter Debaere, and Mr. Hamid R Davoodi
The end of the Cold War has ushered in significant changes in worldwide military spending. This paper finds that the easing of (1) international tensions, (2) regional tensions, and (3) the existence of IMF-supported programs are related to lower military spending and a higher share of nonmilitary spending in total government outlays. These factors account for up to 66 percent, 26 percent, and 11 percent of the decline in military spending, respectively. Furthermore, fiscal adjustment has implied a larger cut in military spending of countries with IMF-supported programs.
International Monetary Fund
An important aim of this paper is to take shifts in the long-term anchor in the empirical specifications. The study examines exchange-rate pass-through and external adjustment in the euro area. The impact on third-country trade and investment is also discussed. A better understanding of the economic behavior underlying limited pass-through is an important consideration for investigating the implications of currency fluctuations and the pattern of external adjustment. The impulse-response patterns suggest a high degree of local currency pricing in import prices and producer currency pricing in export prices.
International Monetary Fund
This Selected Issues paper applies a range of methods to assess Italy’s competitiveness gap versus other euro area members. All indicators point to a clear erosion of competitiveness in recent years, with related market share losses. Nonetheless, the estimated competitiveness gap, while appreciable, still remains quantitatively contained. The results suggest that the unwinding of the competitiveness gap will require reforms that boost productivity growth and continued wage moderation, as well as an adjustment by export firms in Italy.
Fuad Hasanov and Reda Cherif
We study how macroeconomic shocks affect U.S. public debt dynamics using a VAR with debt feedback. Following a fiscal austerity shock, the debt ratio initially declines and then returns to its pre-shock path. Yet, the effect is not statistically significant. In a weak economic environment, the likelihood of a self-defeating austerity shock is much higher than in normal times. An inflation shock only slightly reduces the debt ratio for a few quarters. A positive growth shock unambiguously lowers debt. In our specification, the debt ratio is stationary, whereas a VAR excluding debt may imply an explosive debt path.
International Monetary Fund
The continuing weakness of activity in the euro area reflects an amalgam of cyclical and long-term forces that are likely to shape the outlook and to challenge policies. Financial conditions in the area have improved along with those in global markets, though financial fragilities may be impairing the transmission to firms. The aging of the population could entail significant declines in potential output growth and lower expected lifetime income resources. Forward-looking policies are needed to improve the quality and ensure long-term sustainability.