Working Papers
January 1, 0001
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2003
November 1, 2003
Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt
Description: This paper highlights the importance of debt composition in setting optimal fiscal and monetary policy over short-run business cycles and in the long run. Nominal debt as state-contingent debt can be a significant policy tool to reduce the volatility of distortionary government policy, thereby reducing macroeconomic volatility while increasing equilibrium output and consumption. The welfare gain from using nominal debt to hedge against shocks to the government budget is as large as the welfare gain from the ability to issue debt.
November 1, 2003
What Sustains Fiscal Consolidations in Emerging Market Countries?
Description: This paper examines the factors affecting the persistence of fiscal consolidation in 25 emerging market countries during 1980-2001. It proposes a new approach for defining spells of fiscal consolidation. The results indicate that the probability of ending a fiscal adjustment is affected by the legacy of previous fiscal failures, the size of the deficit, the composition of spending, and level of total revenues. There is also some evidence that the initial debt stock, exchange rate developments, inflation, and the unemployment rate have an impact on the persistence of adjustments.
November 1, 2003
The Role of Supervisory tools in Addressing Bank Borrowers' Currency Mismatches
Description: Bank borrowers' currency mismatches often result from unhedged foreign currency borrowing in economies where there is significant dollarization, exposing the financial sector to disguised credit risk. In the absence of standard tools or guidelines to counteract this risk, countries have resorted to outright regulatory limits in cases of moderate dollarization and to undesirable exchange controls in other cases. This paper proposes a "specific-to-group" provision rule based on the effective borrowing cost differential between domestic and foreign currency. Such a rule would help internalize the corresponding risks for banks and their borrowers in line with internationally accepted prudential and accounting standards.
November 1, 2003
Understanding the Costs of Deflation in the Japanese Context
Description: This paper examines the cost of deflation in the context of Japan's ongoing deflationary episode. The impact of deflation owing to the zero interest rate bound on monetary policy, wage rigidity, redistribution of wealth from debtor to creditor, and inflexibilities in the financial sector are examined. It is seen that the generalized decline in the Japanese price level, however gradual or mild, has substantially exacerbated the economy's adjustment process under already difficult economic conditions.
November 1, 2003
China's Labor Market Performance and Challenges
Description: A more market-oriented labor market has emerged in China in the past twenty years with growing importance of the urban private sector, as state-owned enterprises have downsized. Despite the progress on reforms, a sizable surplus of labor still exists in the rural sector and state-owned enterprises. The main challenge facing China’s labor market in coming years is to absorb the surplus labor into quality jobs while adjusting to World Trade Organization (WTO) accession. This paper estimates that if annual GDP growth averages 7 percent and the employment elasticity is one-half, urban unemployment could double to about 10 percent over the next three to four years. These pressures would be limited by stronger economic growth, especially in the private sector and more labor-intensive service industries which have generated the most jobs in recent years. Therefore, policy should focus on encouraging private sector development while reducing barriers to labor mobility, improving worker skills, upgrading job search services, and strengthening the social safety net.