The Choice of Nominal Targets in an Open Economy

Monetary anchors play a central role in the practice of monetary policy in LFDCs. Not all LFDCs have an explicit monetary anchor, but if so they rely on three alternative frameworks: exchange rate targeting, monetary targeting, and inflation targeting. This chapter discusses, for each nominal anchor, the advantages, drawbacks, and prerequisites for adopting it, the modalities of implementing it, strictly or flexibly, and the various challenges it raises. The presentation combines theoretical arguments, discussions of empirical evidence, and analysis of selected experiences of LFDCs. The special case of anchors in dollarized economies is examined in depth. The chapter contains two appendices. The first deals with international reserves and their international borrowing arrangements. The second is a case study of monetary unions in sub-Saharan Africa.

Welfare Effects of Capital Controls

This paper studies the effect of capital controls on misallocation and welfare in an economy with financial constraints. We build a general equilibrium model with heterogeneous firms, financial constraints and international trade and calibrate it to the Chilean economy. Since high-productivity and exporting firms need to borrow more to reach their optimal scale, capital controls that tax international borrowing hit them harder. As a result, misallocation increases relatively more for this group of firms, and for young firms that are still trying to reach their optimal scale. In terms of welfare, the model predicts a sizable aggregate loss of 2.39 percent when capital controls are introduced, with welfare decreasing twice as much for high-productivity firms. We empirically corroborate the main insights in terms of misallocation obtained from the model using Chilean manufacturing firm data from 1990 to 2007.

Trade, growth, and convergence in a dynamic Heckscher-Ohlin model

In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher-Ohlin model — a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model — with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.

Trade, growth, and convergence in a dynamic Heckscher-Ohlin model

In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher-Ohlin model — a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model — with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.

The International Aspects of Macroprudential Policy

Countries are making more active use of macroprudential tools than in the past with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce a country's vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility, and they generate leakages to the nonbank financial system and spillovers through international borrowing, lending, and other cross-border exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The COVID-19 crisis provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. The experience to date suggests that macroprudential tools provide some benefits and should remain a focus of macroeconomic policy, but with realistic expectations about what they can accomplish. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Horizons of the post-pandemic recovery of the world economy

The shock experienced by the global economy as a result of the novel coronavirus pandemic is un-precedented in strength and specifi city of its impact, and the current global recession seems to be becoming protracted and will require a restructuring of the mechanisms of multilateral economic regulation that developed earlier. The purpose of our study was to analyze the key aspects, opportunities and mechanisms for the restoration of the world economy in the short and medium term. We came to the conclusion about the greater scale of the current global crisis in comparison with the previous recessions, which determines the uncertainty of the further trajectory of the impact of the pandemic on the world economy, and its particular impact on the economies of developing coun-tries. We believe that the structural reform of the economies of diff erent countries will accelerate due to the current crisis, which will also be facilitated by further digitalization and automation. In a pandemic, to revive economic growth, countries need to build confi dence from investors and con-sumers, and the economy must increasingly detach itself from speculative fi nancial markets to the real sector. Despite the opposite scenarios of the global economic recovery, it is now more related to progress with vaccinations, which is a key factor in lifting quarantine restrictions and further eco-nomic growth. At the same time, it is necessary to solve the problem of economic productivity growth and challenges in the development of international borrowing. Multilateral cooperation be-tween countries should be aimed at eliminating over-indebtedness, overcoming imbalances in the balance of payments, and improving the fi scal and monetary policies of key countries of the world.

The Saudi crown prince will relaunch his grand plans

Significance Crown Prince Mohammed bin Salman has started 2021 with a series of bold initiatives to give fresh impetus to visionary investment plans, after a pause because of reputational reverses and then COVID-19. The PIF is the main instrument for these, with support from the Saudi private sector, foreign investment and international borrowing. Impacts The PIF will reduce its prioritisation of foreign trophy assets. Pressure on central bank reserves could endanger the currency peg in the longer term. Saudi Arabia will emphasise climate-friendly approaches to placate a new US administration.

Shifting the Education Paradigm: Why International Borrowing is No Longer Sufficient for Improving Education in China

Purpose —The purpose of this article is to examine the consequences of mutual borrowing of educational policies and practices between the East and the West and implications for Chinese education. Design/Approach/Methods —This paper draws upon a wide variety of historical, cultural, and international assessment data. Findings —The analyses found that the mutual borrowing is unlikely to improve education to the extent that the future world demands. Originality/Value —Thus, the article concludes that instead of wasting resources and time on learning from each other's past, education systems around the world should work on inventing a new paradigm of education. China is in a unique position to work on the new paradigm.