The growing importance of sovereign wealth funds and the diffusion of inflation targeting have impacted the adjustment of Latin American Countries to terms of trade and financial shocks. This column shows that sovereign welfare funds provide another margin of stabilisation. This role is of greater relevance for inflation targeting countries and during periods of heightened volatility. Inflation targeting regimes relegate the goal of real exchange rate stabilisation and counter-cyclical fiscal policy to its sovereign wealth fund via a fiscal rule.
The effectiveness of official development aid is the subject of heated debate. This column argues that aid affects recipient economies in extremely complex ways and through multiple and changing channels. Moreover, this is a two-way relationship – realities in recipient countries affect the actions of aid agencies. This relationship is so intricate and time-dependent that it is not amenable to being captured by cross-country or panel regressions. Even sophisticated specifications with multiple breakpoints and nonlinearities are unlikely to explain the inner workings of the aid–performance connection.
A major concern with multinationals is that they can cause disemployment (also called job offshoring). However, FDI could offset or even exceed such a negative effect. This column examines to what extent disemployment in Japan is related to FDI. The results suggest that disemployment in Japan is driven by substitution between capital and labour, rather than the reallocation of labour caused by FDI.
The post-Crisis G7 economies have suffered weak business investment despite record low interest rates and the favourable financial positions of corporates. Some consider this the ‘new normal’ arising from secular, supply-side forces that have contributed to declining potential growth rates. This column argues that structural factors alone are not sufficient to explain the current weakness in investment rates. There is thus room for positive surprise if companies realise the pent-up investment demand.
To reduce the risk of international commerce banks offer specific trade finance products, the most prominent being letters of credit. This column employs US banking data to show that reductions in the supply of such trade finance have considerable effects on the levels and patterns of exports, especially to small and poor countries and during times of financial distress.
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