Working Papers
2002
September 1, 2002
On Sand and the Role of Grease in Labor Markets: How Does Germany Compare?
Description: This paper investigates wage setting in (west) Germany using the German Socioeconomic Panel dataset on individuals and compares the findings with those available for the United Kingdom and the United States. The fraction of job stayers in (west) Germany who suffer unchanged wages or wage cuts compares with that in similar data for the Anglo-American countries, even after various adjustments for potential reporting errors. While nominal wages of job stayers are rigid downward, real wages are not. Nevertheless, the macroeconomic effects of the nominal rigidity are limited and cannot be weakened substantially by raising inflation.
September 1, 2002
Politics, Government Size, and Fiscal Adjustment in Industrial Countries
Description: It is now well established that political and institutional factors matter for fiscal outcomes. Following a review of the literature, this paper examines the relationship between a variety of political-institutional variables and fiscal aggregates-encompassing the overall balance as well as expenditure and revenue and their various components-across 19 industrial countries over the past two decades. It finds strong effects on fiscal policy from such factors as type of electoral system, degree of legislative or government fragmentation, and stability of government. Some of the strongest results emerge for certain components of expenditure, such as transfers, and for the balance between labor and consumption taxation. There are clear relationships between the type of political system and choice of tax and expenditure system. The paper also examines fiscal adjustment since the late 1980s in light of these political factors, finding some evidence of a reversal in trend, but only when growth has been high or when debt has become problematic.
September 1, 2002
Microfinance Institutions and Public Policy
Description: Many governments and nongovernmental organizations have adopted policies to promote the growth of microfinance institutions (MFIs). The appropriate level and form of support for MFIs are discussed in this paper on the basis of a review of key MFI characteristics. Governments are also responsible for the regulation of MFIs; here, some principles concerning the extent and coverage of MFI regulation and supervision are developed.
September 1, 2002
Internal Models, Subordinated Debt, and Regulatory Capital Requirements for Bank Credit Risk
Description: Shortcomings make credit VaR estimates an unsuitable basis for setting bank regulatory capital requirements. If, alternatively, banks are required to issue subordinated debt that has a minimum market value and maximum acceptable probability of default, banks must set their equity capital in a manner that limits both the probability of bank default and the expected loss on insured deposits, largely removing any safety net-related funding cost subsidy and the moral hazard incentives it creates. Required equity capital can be estimated using a modified credit-VaR framework, and supervisors can use external credit ratings to indirectly verify the accuracy of bank internal model estimates.
September 1, 2002
The Determinants of On-the-job Search: An Empirical Exploration
Description: There was a surge in the number of employed people looking for another job in the United Kingdom in the 1980s. In this paper, we present a panel analysis of aggregate data and a cross-section analysis of individual data on on-the-job search in the United Kingdom. We find evidence that the availability of jobs and wage dispersion increase on-the-job search. The importance of these results is twofold. First, to the extent that on-the-job search responds to the tightness of the labor market, it can contribute to explaining the observed cyclical behavior of the unemployment outflow rate. Second, as shown in Fuentes (2002), to the extent that changes in on-the-job search can be explained by factors other than labor market tightness, such as wage dispersion, these shift the unemployment-vacancies relationship (the Beveridge curve) and therefore have a role to play in the determination of unemployment.
September 1, 2002
The Evolution of Exchange Rate Regimes Since 1990: Evidence From De Facto Policies
Description: This paper presents a monthly database on de facto exchange rate regimes that covers all IMF members since 1990. Information from IMF country reports and other sources, including exchange rate data, is utilized to determine de facto exchange rate policies. Countries are categorized based on these policies using the IMF nomenclature adopted in 1999. This approach ensures the forward compatibility of the database. The database is then used to examine whether the "bipolar view" of exchange regimes holds with de facto regimes. It is found that the proportion of countries adopting "intermediate" regimes has indeed been shrinking in favor of greater flexibility or greater fixity, especially for countries more integrated with international markets. Analyses based on Markov chains of regime transitions, however, provide (mixed) evidence against the bipolar view.
September 1, 2002
Corporate Performance and Governance in Malaysia
Description: This paper measures corporate sector performance (efficiency) and empirically examines the role of corporate governance. A stochastic frontier with inefficiency effects is fitted to a panel dataset of 31 of the largest nonfinancial companies listed on the Kuala Lumpur Stock Exchange for the period 1995 to 1999. Focusing specifically on the impact of the system of corporate governance and the level of control on firm-level performance, results show an underlying vulnerability in these firms, exacerbated by their reliance on bank-based borrowing and a highly concentrated shareholding structure with complex cross holdings. Furthermore, debt does not appear to have the control features present in outsider systems of corporate governance.
September 1, 2002
Wage Moderation in France
Description: Using household level data for France from 1990 to 2000, we estimate a relationship between wages and unemployment taking into account compositional, time and regional effects. We show that this relationship shifted outward during the 1990s most likely because of a structural change in workers' behavior, i.e. "wage moderation". The outward shift was particularly large between 1996 and 2000 and undoubtedly contributed strongly to the exceptional employment performance during that period.
September 1, 2002
Sovereign Defaults: The Role of Volatility
Description: While the relationship between volatility and credit risk is central to much of the literature on finance and banking, it has been largely neglected in empirical macro studies on sovereign defaults. This paper presents new econometric estimates for a panel of 25 emerging market countries over 1970-2001, breaking down aggregate volatility into its external and domestic policy components. We find that countries with historically higher macroeconomic volatility are more prone to default, and particularly so if part of this volatility is policy-induced. Reducing policy volatility thus appears to be key to improving a country's credit standing.
September 1, 2002
Trade and Integration in the Caribbean
Description: This paper analyzes trade in the Caribbean community (CARICOM) using a gravity model framework. The paper seeks to shed light on the dynamics of trade among CARICOM member countries, as well with the rest of world over 1980–99. Overall, the results show that intra-CARICOM trade has increased, suggesting that further regional integration is desirable. At the same time, CARICOM’s trade with the rest of the world has risen as well, fueled notably by the reduction of the arrangement’s common external tariff and despite the negative impact of the declining preferential access to EU markets for banana. In contrast, WTO membership does not appear to have had a positive impact on trade. Overall, it appears that trade liberalization is consistent with greater CARICOM trade integration.