Working Papers

July 1, 2001

An Assessment of Fiscal Rules in the United Kingdom

Description: The paper assesses the United Kingdom's golden rule and debt rule against "ideal characteristics" of fiscal rules. It concludes that they are clearly defined; transparent in institutional arrangements and measurement; adequate to ensure sustainability; and strike a good balance between flexibility and enforceability. The rules could be strengthened by clarifying the benchmark embodied in the debt rule and the modalities of the "value for money" criterion for investment. Overall, the fiscal framework establishes the necessary preconditions for a credible fiscal policy, but the credibility of the rules could be undermined by the large gap between them and actual medium-term fiscal plans.

July 1, 2001

Investment Banking and Security Market Development: Does Finance Follow Industry?

Description: Long-term relationships between business firms and investment banks are pervasive in developed security markets and there is evidence that better monitoring and information result from these relationships. Therefore, security markets should allocate resources better when an investment banking industry exists. We study the necessary conditions for the emergence of sustainable relationships and explore whether policy can foster them. We show that policy can help alleviate the costs of relationships, but an investment banking industry will not emerge with only a small number of large firms.

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June 1, 2001

Productivity in the OECD Countries: A Critical Appraisal of the Evidence

Description: The failure of the neoclassical growth model to account for differences in output per worker across countries has suggested that these differences should be driven by cross-country differences in total factor productivity (TFP). This paper discusses various measures of productivity and its determinants for the OECD countries from different dimensions: (i) the measurement perspective; (ii) evidence on the evolution of productivity levels across OECD countries; and (iii) a critical review of the theoretical and empirical issues regarding the determinants of cross-country productivity differentials.

June 1, 2001

Resources and Incentives to Reform: A Model and Some Evidence on Sub-Saharan African Countries

Description: The paper models the incentives for a self-interested government to implement "good policies". While good policies lead to investment and growth, they reduce the government's ability to increase supporters' consumption. The model predicts that resource abundance is conductive to poor policies and, consequently, to low investment. The implications of the model are broadly supported by evidence on sub-Saharan African countries. In particular, countries that are rich in natural resources tend to have lower institutional quality and worse macroeconomic and trade policies.

June 1, 2001

Beyond Balanced Growth

Description: Balanced growth models are commonly used in macroeconomics because they are consistent with the well-known Kaldor facts regarding economic growth. These models, however, are inconsistent with one of the most striking regularities of the growth process—the massive reallocation of labor from agriculture into manufacturing and services. This paper presents a simple model consistent with both the Kaldor facts and the dynamics of sectoral labor reallocation. The model shows that balanced growth can be consistent with structural change.

June 1, 2001

The Impact of the EMUon the Structure of European Equity Returns: An Empirical Analysis of the First 21 Months

Description: Using symmetric data sets of 92 weekly return observations before and after the introduction of the euro, the paper analyzes the impact of the new currency on the return structure of equity markets in the European Monetary Union. Variance decompositions, cluster analyses, and principle component analyses are used to explore the changes in the structural relations. European industry factors are found to have dramatically increased in importance with the launch of the single currency, and a new 'country-size' factor in European stock returns is detected. Furthermore, inner-European correlations are documented to have been reduced sharply with the start of the monetary union.

June 1, 2001

Post-Resolution Treatment of Depositors At Failed Banks: Implications for the Severity of Banking Crises, Systemic Risk, and too-Big-To-Fail

Description: Losses may accrue to depositors at insolvent banks both at and after the time of official resolution. Losses at resolution occur because of poor closure rules and regulatory forbearance. Losses after resolution occur if depositors' access to their claims is delayed or "frozen." While the sources and implications of losses at resolution have been analyzed previously, the sources and implications of losses after resolution have received little attention. This paper examines the causes of delayed depositors' access to their funds at resolved banks, describes how the FDIC provides immediate access, reports on a special survey of access practices in other countries, and analyzes the costs and benefits of delayed access in terms of both the effects on market discipline and depositor pressure to protect all deposits.

June 1, 2001

Intellectual Property Rights and International R&D Competition

Description: This paper examines a country's incentives for intellectual property rights (IPR) protection in a global trading environment. There is a time inconsistency problem intrinsic to IPR protection: ex ante strong protection is warranted to promote innovation, but once discovery takes place there is an incentive to lower protection. The sub optimal but time consistent policy involves an insufficient level of protection and, therefore, of innovation. In more technologically advanced economies reputational considerations may be sufficient to maintain strong protection. Otherwise a commitment mechanism, such as participation in the World Trade Organization, or, more controversially, some form of bilateral punishment, may be used.