Wednesday, August 13, 2008

Which Nominal Anchor for Commodity Exporting Countries?

One of the big economic challenges facing major commodity exporters (mainly small developing countries) is the management of risks from random fluctuations in their export prices. Usually these prices are denominated in one of the major currencies, such as the US dollar and the Euro, and so frequent movements in exchange rates alone (such as the depreciation of the dollar against the Euro seen in recent years) can also be problematic.

In CEPR Policy Insight No. 25, Jeffrey Frankel (Harvard Uni.) proposes a solution: pegging the domestic currency only to the export price.
For e.g., for a gold exporting country, the proposal would be that, when the dollar price of gold increases in the world market, the domestic currency should appreciate against the dollar (that is, monetary policy should be tighter) and vice versa. Commodities may be viewed as assets (like physical capital), thus in a sense, Frankel favors monetary policy that responds to asset prices, an issue that is still under debate in the academic and policy arenas. Moreover, the proposal is in sharp contrast to the strategy of inflation targeting (IT) adopted by many advanced and emerging-market economies. As a nominal anchor, IT involves setting an inflation target based on the consumer price index (one component of which is import prices). For a defense of the IT strategy, see Lars Svensson's (Princeton Uni.) comment on Frankel's proposal.



Sunday, June 15, 2008

Is There a Recipe for Growth and Development?

According to the report by the Commission on Growth and Development (aka the Spence report), there is no single recipe for all countries. This conclusion is in mark contrast to what Dani Rodrick calls the "old" Washington Consensus---liberalisation, deregulation, privatization, and free markets.

But what can developing countries make of the Spence report? Perhaps not much. The report does not provide any novel solutions apart from iterating that each country should find out its mix of ingredients for development. However, the Spence report will surely tilt the balance in the intellectual battle within the development profession, as well as lower the leverage of World Bank/IMF on future development strategies and policies of developing countries.

Sunday, April 6, 2008

Should Countries be Like Open Clubs?

Should existing residents of a country have a right to control who joins them or should countries be like open clubs? Martin Wolf, a columnist, and Willem Buiter, a blogger, both from the Financial Times, present two opposing views, raising both positive and normative issues related to immigration policy. Although prompted by a recent report of the House of Lords select committee on Economic Affairs on the impact of immigration on the UK economy, their discussion is broad enough to be of interest to any reader.

Tuesday, April 1, 2008

On Food Prices and Food Aid

Do poor developing countries benefit from low or high food prices? The answer depends on who is buying and who is selling. Years back when food prices where low, farmers from poor countries were the losers while non-farmers (e.g. city dwellers) were the gainers. The recent increases in food prices will likely have the opposite effect. In any case, in aggregate, these countries are still dependent on food aid. A column from the March 29th issue of The Economist discusses the issue of famine and food aid amid the hiking of food prices all over the world. The column focuses on supply of food and its distribution. However, equally important is the fact that the recent improvements in the balance of payments from soaring prices of commodities, such as oil and metals, have boosted incomes of commodity exporters, which are mainly poor developing countries. Certainly, the higher income from commodities will increase their importing power and lower the need for food aid.

Friday, March 21, 2008

On Gender-based Taxation

What is the economic rationale for taxing incomes of women less than those of men? Does it improves overall welfare or is it just an income redistribution scheme? For an overview of the arguments for and against gender-based taxation, visit the Vox forum; see, in particular, the opposing views contained in the recent articles by Alberto Alesina (and his co-authors) and Gilles Saint-Paul.