World Economics

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Debunking the Relevance of the Debt-to-GDP Ratio
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Arturo C. Porzecanski, World Economics, March 2018
Historical experience does not confirm the simplistic notion that the heavier the burden of the public debt relative to GDP, the greater is the risk that governments will encounter debt-servicing difficulties. In 25 government defaults that occurred during 1998-2017, the pre-default debt-to-GDP ratios ranged from a very low of 27% (Ecuador in 2008) to a very high of 236% (Nicaragua in 2003), with a sample median of 79%. As ratios of government debt rise, some societies manage to deliver more responsible fiscal behaviour. Low debt ratios, on the other hand, often mask dangerous currency or maturity mismatches, as well as contingent liabilities, capable of suddenly impairing banks and governments. The demand for government bonds can behave unpredictably, and governments with low or high debt ratios can suddenly find themselves cut off from needed financing. Official institutions like the IMF, European Commission, and World Bank have done themselves and their member states a great disfavour by obsessing about debt ratios which do not predict fiscal outcomes.
Currency Valuation and Purchasing Power Parity
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Jamal Ibrahim Haidar, World Economics, September 2011
This paper aims to highlight key limitations of The Economist magazine’s Big Mac Index (BMI). The Economist markets the BMI as a tool to determine valuation of currencies. This paper shows that the BMI is a misleading measure of currency valuation for economies whose markets are structurally different from the benchmark currency countries.
International Comparisons of GDP
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Elio Lancieri, World Economics, September 2008
The recent publication by the World Bank of PPP-GDP estimates for 2005, referred to 146 countries, seems a good occasion to reopen the long-standing debate on the use of Purchasing Power Parities. While theoretical speculations on the subject have continued, no estimates were supplied for more than a decade. The author’s alternative method for GDP estimation is based on inflationadjusted long-term exchange rates, where real GDP estimates are obtained through simultaneous equations. He describes the method in the light of his experience and compares its results for 100 countries with both ICP estimates and GDPs at exchange rates.
From Big Macs to iMacs
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Jonathan Haskel & Holger Wolf, World Economics, June 2000
The authors review recent international price comparisons to examine the veracity of claims about “rip-off Britain”. They reach three conclusions. First, methodologically, the data requirements for a meaningful price comparison are very demanding and most of the evidence does not meet these standards. Second, price differences within countries seem, in many cases, to be just as high if not higher than price differences between countries. Third, for most goods, the difference between the UK and the rest of the EU seems to be minor relative to the difference between the EU and the United States. The real puzzle is the comparatively high prices in the EU.

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