Monetary Policy and Economic Performance in Resource Dependent Economies - Bassem Kamar

Monetary Policy and Economic Performance in Resource Dependent Economies

Bassem Kamar, International University of MonacoRaimundo Soto, Universidad Católica de Chile

Economic Research Forum, RIAD Project #2013-035

Acknowledgements

“ERF is the conscience of the Arab region”

Ahmed Galal ERF 13th annual conference on “Oil - Impact on the Global Economy”, December 2006, Kuwait

Conference on “Understanding and Avoiding the Oil Curse in the Arab World”, January 2012, Kuwait

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Dream team

Dr. Ibrahim Elbadawi Raimundo Soto Russell Krueger Arto Kovanen Mohamed Goaied Damyana Bakardzhieva Moez Ben Tahar Hoda Selim

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Monetary objectives

Inflation Growth Unemployment BoP Financial stability

Monetary regimes

Fixed Intermediate FloatingIT

Institutional requirements

Creating units in the central banks

Training the staff (capacity building)

Educating the market

(communication)

Developing transmission mechanisms

…

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There is a difference between

DependentDependentAbundant

DependentDependenton Oil

and it Matters!

Abundant

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Growth Model Abundance◦ Resource rents positively related to growth (0.5pp in

dev. countries, 1.5pp in oil exporters)◦ Oil and mineral rents are positively related with

higher growth (effect is higher in oil)

Dependency◦ Oil dependency: large, negative, significant effect

of oil rents * exports concentration on growthEffect of oil abundance on growth is “wiped out” if exportedAlgeria: 95% oil and 22% rents, reduce growth by 1.6pp

◦ Mineral rents have positive effect on growth even if concentrated mineral rents * exports concentration

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Resource abundance

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Resource abundanceRelatively small

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Resource abundanceVery significant in LAC

SSA, and MENA

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Export concentration Herfindhal index of export concentration in value

(US$), year by year, by country.◦ Between 0 and 1, higher=more concentrated

Database: annual exports (value) from country “i” to country “j”, classified at 2-digit ISIC level◦ 196 countries, 1980-2013.◦ Number of countries changes (split and merge).

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Evidence for MENA countries

Total Resource Rents (% of GDP)

Herfindahl Index of Export Concentration

Algeria 22.2 0.949 Bahrein 31.9 0.533 Egypt 15.0 0.186 Iran 28.8 0.715 Iraq 54.4 NA Israel 0.4 0.152 Jordan 0.9 0.067 Kuwait 48.3 0.865 Lebanon 0.0 0.076 Libya 40.3 0.946 Morocco 2.4 0.079 Oman 45.7 0.633 Qatar 44.6 0.803 Saudi Arabia 43.1 0.777 Syria 17.2 0.349 Tunisia 7.2 0.124 UAE 26.3 0.345 Yemen 28.4 0.812

MENA Average 25.4 0.495 World Average 8.7 0.265

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Oil producers tendto be

highly concentrated

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Some have managedto diversify exports

Average 1970-2013 13

Research questions Does it matter if the country is resource Abundant or

Dependent on sustainable economic growth?

Does it matter for price instability?

Can the choice of a Monetary Regime influence growth and inflation in resource abundant and in resource dependent economies?

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GROWTH INFLATIONPanel GMM, 1970-2013

Number of countries=125Number of observations=778

Panel GMM, 1980-2013Number of countries=138

Number of observations=423Table 3

Econometric Results: Growth in per capita real GDP xplanatory Variable (1) (2) (3) (4) (5) ransitional Convergence

nitial GDP per capita n logs)

-3.899*** (0.357)

-3.815*** (0.355)

-3.922*** (0.371)

-3.940*** (0.356)

-4.002*** (0.352)

yclical reversion Initial output gap)

-2.796 (2.911)

-1.891 (2.917)

-1.789 (2.917)

-3.164 (2.902)

-1.497 (5.708)

tructural policies and institutions ducation secondary attainment, in logs)

3.231*** (0.778)

3.019*** (0.772)

3.340*** (0.784)

2.501*** (0.805)

2.900** (1.311)

rade Openness % of GDP, in logs)

3.927*** (0.519)

3.844*** (0.515)

4.139*** (0.516)

3.678*** (0.523)

4.088*** (0.672)

apital Account Openness Chinn and Ito index)

0.249** (0.133)

0.269** (0.133)

0.300** (0.134)

0.209 (0.134)

0.290 (0.202)

overnment Burden gov. consumption % of GDP, in logs)

-0.947* (0.541)

-0.849 (0.536)

-1.020* (0.534)

-0.941* (0.538)

-1.052 (1.176)

nfrastructure telephones per capita, in logs)

0.530** (0.293)

0.577** (0.292)

0.429 (0.302)

0.438 (0.294)

0.534 (0.433)

olitical Participation democracy index)

0.142** (0.059)

0.148** (0.059)

0.153** (0.059)

0.098* (0.060)

0.168** (0.083)

overnment Accountability checks and balances index)

0.007** (0.003)

0.007** (0.003)

0.006** (0.003)

0.010*** (0.003)

0.006* (0.003)

tabilization policies rice Instability CPI inflation rate)

-0.048 (0.031)

-0.048 (0.031)

-0.033 (0.031)

-0.067** (0.032)

-0.029 (0.200)

ystemic Banking Crisis frequency of years in crisis)

-2.376*** (0.469)

-2.389*** (0.466)

-2.320*** (0.465)

-2.441*** (0.468)

-2.312*** (0.526)

xternal Conditions erms of Trade Shocks growth rate of terms of trade )

5.320*** (1.498)

4.272*** (1.572)

4.460*** (1.590)

5.548*** (1.602)

4.697** (2.205)

dditional Controls atural Resource Rents

% of GDP) - 0.057** (0.022) - - -

il Resource Rents % of GDP) - - 0.065**

(0.031) - 0.137*** (0.050)

atural Gas Resource Rents % of GDP) - - -0.059

(0.057) - -0.059 (0.074)

oal Resource Rents % of GDP) - - 0.298*

(0.177) - 0.268* (0.164)

Mining Resource Rents % of GDP) - - 0.128***

(0.048) - 0.125*** (0.48)

orestry Resource Rents % of GDP) - - -0.078

(0.067) - -0.089 (0.0127)

il Exporter dummy) - - - -5.058***

(1.602) -

il Exporter*Oil Resource Rents nteraction term) - - - - -0.115*

(0.064)

onstant 30.840*** (3.006)

29.725*** (3.000)

28.518*** (3.041)

33.046*** (3.075)

32.149*** (5.966)

argan test erial correlation test of order 1 erial correlation test of order 2

118.09*** -5.06***

-0.52

124.69*** -5.19***

-0.64

136.59*** -5.01***

-0.52

109.06*** -5.00***

-0.52

137.64*** -4.96** -0.49

Table 5 Econometric Results: Normalized Inflation Rate

(1) (2) (3) (4) (5) Inflation Experience High Inflation 0.624***

(0.031) 0.650*** (0.032)

0.637*** (0.031)

0.637*** (0.031)

0.678*** (0.032)

Hyperinflation 0.829*** (0.045)

0.830*** (0.044)

0.841*** (0.044)

0.857*** (0.047)

0.801*** (0.044)

Lagged Dep. Variable 0.077*** (0.023)

0.076*** (0.024)

0.087*** (0.023)

0.076*** (0.023)

0.058** (0.023)

Development Levels Real per capita GDP -0.019***

(0.006) -0.011* (0.006)

-0.014** (0.006)

-0.017*** (0.007)

-0.011* (0.006)

Financial Development -0.013 (0.013)

-0.009 (0.007)

-0.012* (0.007)

-0.012 (0.008)

-0.012* (0.007)

Institutional Variables Trade Openness 0.014

(0.014) 0.016

(0.013) 0.009

(0.003) 0.006

(0.013) 0.019

(0.013) Capital Account Openness -0.013***

(0.003) -0.013*** (0.004)

-0.010*** (0.003)

-0.007*** (0.002)

-0.013*** (0.004)

Monetary Regimes Inflation Target -0.025**

(0.011) -0.028** (0.011)

-0.026** (0.012)

-0.026** (0.011)

-0.030** (0.011)

Fixed Exchange System -0.037*** (0.010)

-0.034*** (0.010)

-0.039*** (0.010)

-0.042*** (0.010)

-0.039*** (0.013)

Floating Exchange System 0.039*** (0.012)

0.031*** (0.012)

0.031*** (0.012)

0.029*** (0.012)

0.046*** (0.012)

Additional Controls Government Budget Balance 0.002***

(0.001) 0.002* (0.001)

0.001 (0.0007)

0.001* (0.001)

Terms of Trade Shocks 0.002*** (0.001)

0.002*** (0.001)

0.001 (0.001)

0.002*** (0.0005)

0.001 (0.001)

Oil exporter -0.200* (0.116) -0.161

(0.114) Resource Rents 0.003***

(0.001)

Oil Rent 0.003*** (0.001)

Natural Gas rent 0.003*** (0.001)

Mining rent 0.000 (0.001)

Coal rent -0.003 (0.003)

Forestry rent 0.002 (0.001)

Oil exporter * Fixed exchange 0.012 (0.021)

Oil Exporter * Floating Exchange -0.085*** (0.030)

Constant 0.246*** (0.051)

0.190*** (0.051)

0.189*** (0.052)

0.211*** (0.057)

0.191*** (0.050)

Sargan Test Serial correlation test of order 1 Serial correlation test of order 2

32.98 -2.49***

-1.50

29.21 -2.41***

-0.82

31.61 -2.20** -0.87

32.59 -2.36***

-0.84

29.09 -2.36***

-1.09

Thanks Diaa Nooreldin 15

Growth Model Convergence ◦ Initial level of per capita GDP

Cyclical reversion◦ Output gap at period start

Stabilization policies◦ Price instability (inflation)

◦ Systemic banking crises

External conditions ◦ Terms-of-trade shocks

◦ Period-specific shift

Integration with the world economy◦ Trade openness

◦ Capital account openness

Structural policies and institutions◦ Human capital

◦ Government burden

◦ Infrastructure

◦ Political participation

◦ Government accountability.

Natural resources◦ Resource abundance

◦ Resource dependency

Monetary regimes◦ Fixed exchange regime

◦ Floating exchange regime

Interactions

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Inflation Model

Inflation experience ◦ Inflation inertia

◦ Episodes of hyperinflation

External conditions ◦ Terms-of-trade shocks

Integration with the world economy◦ Trade openness

◦ Capital account openness

Institutional variables◦ Government accountability

◦ Government quality

◦ Development level

◦ Financial development

Natural resources◦ Resource abundance

◦ Resource dependency

Monetary policy ◦ Inflation targeting

◦ Exchange rate regimes

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GCC Inflation

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

1980-1984 1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2014

INFLATION COMPARISON

BHR KWT OMN QAT SAU ARE LIC MIC HIC

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Populous countries’ inflation

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

1980-1984 1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2014

INFLATION COMPARISON

LIC MIC HIC DZA SDN YEM

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Summary of monetary resultsMonetary targets /Monetary regimes

GROWTH INFLATION

Flexible vsIntermediate ER

Lower Higher

Fixed vs Intermediate ER

Slightly higher(because it cancels the

negative impact of inflation on growth)

Lower

IT vs Intermediate ER Lower

OIL-DEPENDENT EXPORTERS ONLY

Flexible vsIntermediate ER

Higher Slightly higher(but less than for other

countries)

Fixed vs Intermediate ER

IT vs Intermediate ER

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Overall summary of the results

Floating regimes are inferior both in terms of growth and inflation

Oil dependency lowers growth No alternative monetary regime is

clearly superior to intermediate regimes for dependent countries

Our comprehensive models allow us to test many other relations to flesh out the role of oil dependency

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Monetary objective

GrowthNon-oil Growth

Non-oil Export Growth

Diversification (less

dependency)IMF 2013, 2014, 2015

Targeting competitiveness22

Targeting competitiveness

Inflation Exchange rate

Operational target = Real effective exchange rate

Monetary Regime

Equilibrium based on Fundamentals

IT Frameworks ER Interventions

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Theoretical foundation of competitiveness targeting John Williamson – Basket, Band, Crawl

(1999, 2000, 2007)

Morris Goldstein - Managed Floating Plus (2002)

Dani Rodrick - Second Best Institutions (2008)

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Institutional requirements 2 detailed case studies – GCC and populous

countries GCC – perfect timing before implementing

the union and after the currency is implemented

Populous – including detailed methodologies for the estimations in order to implement the monetary regime (Sudan and Yemen later when the conflicts settle down); Algeria is a perfect case now

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Technical questions – Raimundo Soto –all glory for the paper should go to him

Thank you

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Government & Nonprofit

Monetary Policy and Economic Performance in Resource Dependent Economies - Bassem Kamar