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Steven Pennings and Mrs. Esther Perez Ruiz
Should fiscal consolidations be front-loaded or proceed at a more steady pace, and how does this affect growth? We make an attempt to address this question using a three-step methodology. First, we modify a standard regression of growth on consolidation size to allow speed to affect the multiplier. Second, using the narrative dataset of Devries and others (2011), we construct a new sample of multi-year consolidation episodes for 17 advanced economies over 1978-2009. Third, we develop a novel concept of speed to measure the pace of the consolidation episodes identified in the data. The main empirical finding is that fast episodes have higher multipliers than gradual consolidations. This provides some preliminary support for consolidating at a steady pace, market access and a credible adjustment plan permitting. However, as the sample size is small, identifying mechanisms and testing robustness is difficult, and so our findings should not be interpreted causally.
International Monetary Fund. Research Dept.
The Research Summaries in the March 2013 Research Bulletin discuss "Trade Finance and Its Role in the Great Trade Collapse" (JaeBin Ahn) and "Sovereign Debt: How to Track Who Is Buying and Selling It" (Serkan Arslanalp and Takahiro Tsuda). The Q&A looks at "Seven Questions on the Implications of Global Supply Chains for Real Effective Exchange Rates" (Rudolfs Bems). Readers can also find in this issue a listing of recent IMF Working Papers, Staff Discussion Notes, and Recommended Readings from IMF Publications. The Bulletin also includes a call for papers for a research conference and information on free access to the IMF Economic Review in April.
Mr. Daniel Leigh, Mr. Andrea Pescatori, and Mr. Jaime Guajardo
This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMFdocuments, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.
International Monetary Fund
This paper is one in a series of follow-up papers on The Fund’s Mandate—An Overview and The Fund’s Mandate—The Legal Framework discussed by the Executive Board on February 22, 2010. This paper proposes ideas to modernize the mandate and modalities of surveillance. It addresses how the Fund might increase the value of its surveillance by considering both the substance of surveillance (what it should do) and its modalities (how to do it). The main ideas focus on how the Fund can do more—and more sharply defined—multilateral surveillance, generate greater value and traction from bilateral surveillance, and integrate the two better. Options to buttress multilateral surveillance include doing more analysis of outward spillovers, holding multilateral consultations as needed on special topics to foster collaboration and collective action, and strengthening financial sector surveillance by mapping interconnectedness across borders and sectors and the transmission channels of macro-financial instability. The adoption of Multilateral Surveillance Decision could help support these ideas. Options to increase the value and traction of bilateral surveillance include promoting better cross-country understanding, with more thematic multi-country reports, producing more timely and topical reports, and increasing outreach and engagement with stakeholders.
International Monetary Fund
This Selected Issues paper estimates the gap between the real effective exchange rate (REER) and its equilibrium (medium-term) value. The paper explores certain features of fiscal policy in Iceland, and examines various aspects of fiscal frameworks in other European countries that are possibly worthy of emulation. It provides a detailed summary of the key issues affecting fiscal policy in Iceland. It argues that political economy factors lead to procyclical fiscal trends, and this is exacerbated by macroeconomic volatility. The paper also provides an overview of the structure of the banking sector of Iceland.
Mr. Hamid Faruqee
This paper examines the impact of European Economic and Monetary Union (EMU) on trade within the euro area. Using panel data for 22 industrial countries, the analysis estimates the effect of the euro's arrival on area-wide trade compared to bilateral trade flows between other industrial countries. Controlling for other influences according to the "gravity" model of trade, the panel analysis employs cointegration techniques to obtain reliable point estimates of EMU trade effects. Cross-country differences with respect to EMU trade gains and underlying factors accounting for these differences are also further explored.
Mr. Philip R. Lane and Mr. Gian M Milesi-Ferretti
In recent decades, the foreign assets and liabilities of advanced economies have grown rapidly relative to GDP, with the increase in gross cross-holdings far exceeding changes in the size of net positions. Moreover, the portfolio equity and FDI categories have grown in importance relative to international debt stocks. This paper describes the broad trends in international financial integration for a sample of industrial countries and seeks to explain the cross-country and time-series variation in the size of international balance sheets. It also examines the behavior of the rates of return on foreign assets and liabilities, relating them to "market" returns.
Mr. Robert P Flood

This paper tests for uncovered interest parity (UIP) using daily data for 23 developing and developed countries during the crisis–strewn 1990s. We find that UIP works better on average in the 1990s than in previous eras in the sense that the slope coefficient from a regression of exchange rate changes on interest differentials yields a positive coefficient (which is sometimes insignificantly different from unity). UIP works systematically worse for fixed and flexible exchange rate countries than for crisis countries, but we find no significant differences between rich and poor countries.