Working Papers
2005
March 1, 2005
Alternative Models of Wage Dispersion
Description: We analyze labor market models where the law of one price does not hold-that is, models with equilibrium wage dispersion. We begin by assuming workers are ex ante heterogeneous, and highlight a flaw with this approach: if search is costly, the market shuts down. We then assume workers are homogeneous, but matches are ex post heterogeneous. This model is robust to search costs, and it delivers equilibrium wage dispersion. However, we prove the law of two prices holds: generically, we cannot get more than two wages. We explore several other models, including one combining ex ante and ex post heterogeneity, which is robust and can deliver more than two-point wage distributions.
March 1, 2005
Are Laws Needed for Public Management Reforms? An International Comparison
Description: There has been widespread adoption of new laws to support new public management. In many countries that have implemented comprehensive and deep reforms, new or amended laws have fundamentally changed the role of the state and the budget processes supporting it. Paradoxically, far-reaching modifications to the legal framework for public management have been strongest in countries that often rely on executive decrees for introducing reforms. This reflects the fundamental nature of the changes, including introducing performanceoriented budgeting and enhancing fiscal transparency and accountability. Differences in political systems, policy preoccupations, administrative arrangements and legal cultures will prevent globalization of the legal framework for public management.
March 1, 2005
Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility
Description: The paper analyzes some key policy trade-offs involved in the implementation of the Stability and Growth Pact. Greater "procedural" flexibility in the Pact's implementation may improve welfare. Procedural flexibility designates the enforcer's room to apply judgment on underlying policies and to set a consolidation path that does not discourage high-quality measures. Budgetary opaqueness may hinder the qualitative assessment of fiscal policy; therefore, better monitoring and greater transparency would increase the benefits from procedural flexibility. Overall, a simple deficit rule with conditional procedural flexibility can contain excessive deficits, lower unproductive spending, and increase high-quality outlays.
March 1, 2005
The Implications of South African Economic Growth for the Rest of Africa
Description: This paper measures the extent to which South African economic growth is an engine of growth in sub-Saharan Africa. Results based on panel data estimation for 47 African countries over four decades suggest that South African growth has a substantial positive impact on growth in the rest of Africa, even after controlling for other growth determinants. The estimates are robust to the effects of global and regional shocks, changes in model specification, and sample period.
March 1, 2005
On Cyclicality in the Current and Financial Accounts: Evidence from Nine Industrial Countries
Description: The paper investigates cyclical fluctuations in the current and financial (formerly capital) accounts of the balance of payments and major underlying components for nine industrial countries. The empirical model uses as explanatory variables domestic output growth, price inflation, real exchange rate fluctuations, energy price inflation, global growth, and regional growth. The evidence from the estimation of the model indicates the importance of fluctuations in output growth to the cyclicality of the current and financial account balances. The necessary and sufficient condition to sustain a large current account deficit is high domestic growth, which tends to stimulate financial inflows and provides adequate resources for financing. Other factors appear to be less important to the cyclicality of the current and financial account balances and their negative correlations.
March 1, 2005
Trade Costs and Location of Foreign Firms in China
Description: This study examines the determinants of entry into by foreign firms, using information on 515 Chinese industries at the provincial level during 1998-2001. The analysis, rooted in the new economic geography, focuses on market and supplier access within and outside the province of entry, as well as production and trade costs. The results indicate that market and supplier access are the most important factors affecting foreign entry. Access to markets and suppliers in the province of entry matters more than access to the rest of China, which is consistent with market fragmentation due to underdeveloped transport infrastructure and informal trade barriers.
March 1, 2005
How Should Subnational Government Borrowing Be Regulated? Some Cross-Country Empirical Evidence
Description: Countries have adopted various institutional responses to subnational government borrowing. Using a sample of 44 countries 1982-2000, this paper provides a panel data analysis to determine the most effective borrowing constraints for containing local fiscal deficits. The results suggest that no single institutional arrangement is superior under all circumstances. The appropriateness of specific arrangements depends upon other institutional characteristics, particularly the degree of vertical fiscal imbalance, the existence of any bailout precedent, and the quality of fiscal reporting.
March 1, 2005
Why Do Some Countries Manage to Extract Growth from Foreign Aid?
Description: Aid is primarily given to governments whereas the engine of sustained growth is the private sector. It is therefore illusory to investigate the impact of aid on growth without considering the impact of government interventions on the private sector. The model shows how these interventions improve capacity utilization and growth. However, distortionary interventions can also cause capacity underutilization and an increase in the informal economy, that is, the very market failures the interventions initially sought to address. Countries that fall into this trap are characterized by insufficient credibility in promoting the private sector, which translates into aid dependence and slower growth over time. The empirical evidence is supportive. This paper finds that aggregate aid has a positive impact on growth (even without diminishing returns) but the impact is substantially smaller for low-income countries.
March 1, 2005
The Accountability of Financial Sector Supervisors: Principles and Practice
Description: Policymakers' uneasiness about granting independence to financial sector regulators stems to a large extent from the lack of familiarity with, and elusiveness of, the concept of accountability. This paper gives operational content to accountability and argues that it is possible to do so in a way that encourages and supports agency independence. The paper first elaborates on the role and purposes of accountability. Second, it shows that the unique features of financial sector supervision point to a more complex system of accountability arrangements than, for instance, the conduct of monetary policy. Finally, the paper discusses specific arrangements that can best secure the objectives of accountability and, thus, independence. Our findings have a wider application than financial sector supervision.
March 1, 2005
“Rules of Thumb” for Sovereign Debt Crises
Description: This paper contains an empirical investigation of the set of economic and political conditions that are associated with a likely occurrence of a sovereign debt crisis. We use a new statistical approach (Binary Recursive Tree) that allows us to derive a collection of "rules of thumb" that help identify the typical characteristics of defaulters. We find that not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks. We also characterize the set of fundamentals that can be associated with a relatively "risk free" zone. This classification is important for discussing appropriate policy options to prevent crises and improve response time and prediction.