The ratio of trade to GDP is often used as a summary measure of a country's openness to the rest of the world. It is well‐known that the trade–GDP ratio is affected by relatively time‐invariant ...factors, such as country size and remoteness from trading partners, that can largely be controlled for in cross‐country panels by using country fixed effects. It is shown here that there are also other important, time‐varying influences on the trade‐GDP ratio that have been little investigated, such as the prices of commodity exports and imports, the real effective exchange rate, and the ratio of investment to GDP. These factors are shown to be significant, and not only in the short run, and need to be taken into account in estimating the long‐run effects of transport costs or trade policy on the trade/GDP ratio.
We provide new insights into the relationship between financial market tightness and real activity, using a new database of corporate bonds issued in eight European countries. Bond spreads have a ...significant negative relationship with four real activity variables at horizons 1–8 quarters ahead. The relationship is robust to adding measures of monetary policy tightness and leading indicators, providing strong support for models previously only evaluated on US data. A subset of northern European countries have similar sensitivity of real GDP to bond spreads, but others have greater sensitivity to bond spreads, revealing diverse responses in Europe to financial market tightness.
We investigate the risk spillover from euro area government bond spreads (relative to a safe German government bond of similar maturity) to nonfinancial corporate bonds in France, the Netherlands ...('hard' euro-area countries), and Italy, Portugal and Spain ('soft' euro-area countries). In addition to standard firm- and bond-specific determinants of corporate bonds (capturing liquidity and tax effects, and other euro area macroeconomic risks), we show that there is significant risk transfer from government bonds to the nonfinancial corporate sector. After decomposing the government bond spread into a default risk and a currency redenomination risk component, associated with a possible split in the euro, we find that redenomination risk has been a significant factor in the pricing of corporate bonds, particularly in the 'soft' euro-area countries.
A new and easily implemented regression method is proposed for generating an index of exchange rate flexibility, whilst simultaneously identifying anchors of pegged currencies. The method can ...distinguish floats from pegs, including those with occasional devaluations. An annual index is calculated that can be compared with other regime classification schemes or used directly in empirical research as a measure of exchange rate flexibility. Different categories in the International Monetary Fund's de facto classification, and also in the Reinhart–Rogoff classification, are associated with significantly different average values of the index. Further analysis of managed floats shows that they have a strong tendency to track the US dollar.
An extensive literature has examined the economic effects of non‐violent political instability events. Nonetheless, the issue of whether economies react differently over time to such events remains ...largely unexplored. Using synthetic control methodology, which constructs a counterfactual in the absence of political instability, we estimate the output effect of 38 regime crises in the period 1970–2011. A crucial factor is whether crises are accompanied by mass civil protest. In the crises accompanied by mass civil protest, there is typically an immediate fall in output which is never recovered in the subsequent five years. In crises unaccompanied by protest, there are usually no significant output effects. It is unclear, however, whether mass civil protest causes the greater fall in output or is simply an indicator of a more severe political crisis.
Abstract
An inflation-targeting regime has been in place in Ghana since 2007, but the inflation rate has remained persistently high. During the 2007–2017 period, inflation exceeded the announced ...target by four percentage points on average, despite the target never falling below a relatively unambitious 8% per annum. We investigate whether the poor conduct of monetary policy is responsible for this outcome, and find that it is not. Monetary policy reaction functions are similar to those estimated for countries with successful monetary policies, and interest rates respond in the theoretically recommended way to inflation shocks.
Should exchange rate regime classifications be based purely on some measure of exchange rate flexibility, or should such flexibility be judged in proportion to the degree of exchange market pressure ...(EMP), as reflected in the behaviour of international reserves? Some authors have claimed that the best approach to classifying exchange rate regimes is to estimate to what extent EMP is absorbed in reserve variability rather than exchange rate variability. Empirical evidence is presented on the variability of reserves and exchange rates for 193 countries from 1980 to 2019. Pegged regimes do not display any more reserve volatility than floats. In most regimes there is a small but statistically significant positive correlation between reserve accumulation and exchange rate appreciation in monthly data, but this effect is no stronger in less flexible regimes, where intervention is expected to be greater. A flexibility index is constructed, based on the ratio of exchange rate flexibility to reserve volatility, and is compared to one based solely on exchange rate flexibility by investigating its conformity with the IMF de facto classification. The flexibility index that takes reserves into account does not improve the identification of pegs, but it helps to a limited extent to distinguish free floats from managed floats.
This paper explores the impact of political instability on firms in the context of Tunisia, which experienced a surge in political instability events after the 2011 Jasmine revolution. Using a new ...dataset, we show that political instability was a major concern for small and exporting firms as well as those that were operating in the tourism sector, those that suffered from acts of vandalism or arson, and those that were located in the interior region of Tunisia. More importantly, we find strong evidence that political instability was the most damaging constraint to firm growth in Tunisia after the Arab Spring.
How much does the antiquity of states, and the sometimes arbitrary nature of colonial boundaries, explain the modern degree of theory of ethnic diversity and income disthnic diversity? It is shown ...that states with greater historical legitimacy (more continuity between the pre-colonial and post-colonial state) have less ethnic diversity. Historical legitimacy is more strongly correlated with ethnic diversity than are the antiquity of states, genetic diversity or the duration of human settlement. Although historical legitimacy is particularly pertinent to Africa, the correlation also holds outside Africa.
•States with greater historical legitimacy have less ethnic diversity.•Historical legitimacy is more strongly correlated with ethnic diversity than State Antiquity.•The correlation also holds outside sub-Saharan Africa.•Other factors lose their explanatory power if we omit sub-Saharan Africa.
This paper first examines some recent exchange rate classification schemes. There is little evidence of a trend towards greater agreement between schemes. There is a probability of between 16 and 28% ...that a peg in one classification scheme is coded as a float in a different scheme, or vice versa. This probability is much smaller for the tightest forms of peg and the most volatile floats. Continuous indices of exchange rate flexibility are analysed and shown to have significant potential, despite the lack of interest in them shown in previous research.
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