Working Papers
January 1, 0001
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January 1, 0001
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January 1, 0001
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1998
February 1, 1998
Opening Up and Geographic Diversification of Trade in Transition Economies
Description: This paper looks at the progress in transition and the geographic diversification of trade, focusing on two issues--the degree of trade openness and trade integration--for a sample of countries in transition. It concludes that about half of the group of countries sampled are becoming as open as similar market economies, but that many others remain relatively closed. Geographic diversification (to the European Union) is found to be greater the closer is geographic proximity and the more advanced the country is with reforms. The analysis is then extended, in an illustrative way, to show how much larger would be the share of exports to the EU if structural reforms were more ambitious.
February 1, 1998
Monetary Policy with a Convex Phillips Curve and Asymmetric Loss
Description: Recent theoretical and empirical work has cast doubt on the hypotheses of a linear Phillips curve and a symmetric quadratic loss function underlying traditional thinking on monetary policy. This paper analyzes the Barro-Gordon optimal monetary policy problem under alternative loss functions—including an asymmetric loss function corresponding to the “opportunistic approach” to disinflation—when the Phillips curve is convex. Numerical simulations are used to compare the implications of the alternative loss functions for equilibrium levels of inflation and unemployment. For parameter estimates relevant to the United States, the symmetric loss function dominates the asymmetric alternative.
February 1, 1998
Why Do Different Countries Use Different Currencies?
Description: During long periods of history, countries have pegged their currencies to an international standard (such as gold or the U.S. dollar), severely restricting their ability to create money and affect output, prices, or government revenue. Nevertheless, countries generally have maintained their own currencies. The paper presents a model where agents have heterogeneous preferences—that are private information—over goods of different national origin. In this environment, it may be optimal for countries to have different currencies; we also identify conditions where separate national currencies do not expand the set of optimal allocations. Implications for a currency union in Europe are discussed.
February 1, 1998
Brady Bonds and Default Probabilities
Description: This paper computes the default probabilities implicit in the prices of Brady bonds of seven developing countries and examines the factors that determine the high cross-correlation of the probability paths. The term structure of U.S. interest rates and the ratio of long-term foreign debt to GDP, together with a developing market index, explain more than 75 percent of the cross-sectional distribution of the default probabilities. The paper also demonstrates a new way to extract sovereign riskiness, implicit in traded bond prices. This allows the above results to be interpreted as explaining the cross-sectional distribution of sovereign riskiness as well.
February 1, 1998
French Public Finances: Modeling Long-Term Prospects and Reform Options
Description: Over the coming decades, demographic developments will lead to a significant increase in public outlays on pensions and health care, relative to national income. This study extends earlier work by considering the adverse effects of taxation on the determinants of economic growth -- in particular, investment, productivity growth, and labor force participation. Available empirical evidence suggests that these adverse effects could well be sizable, and that conventional estimates of the adverse effects of population aging probably severely underestimate their impact on the public finances and economic performance. The paper uses stochastic simulations to examine the robustness of the results to changes in parameter values. It also provides quantitative simulations of various reform options, including mainly an increase in the effective retirement age and flanking labor market measures.
February 1, 1998
Pension Reform in the Baltics, Russia, and other Countries of the Former Soviet Union (BRO)
Description: Despite their increasing fiscal burden, the public pension systems of BRO countries are failing to provide adequate social protection. Although there is a broad consensus about the need for pension reforms, BRO countries are debating whether to embark on systemic reforms or whether to correct the distortions in their pay-as-you-go (PAYG) pension systems. The paper reviews the measures taken by BRO countries during the transition period to address their pension problems and examines the options for further reform. It makes a strong case for a gradual reform approach aimed at establishing a multi-pillar system over the long run, but initially focused on implementation of “high-quality” reforms of the PAYG system.
February 1, 1998
Open Regionalism in a World of Continental Trade Blocs
Description: Continental trade blocs are emerging in many parts of the world almost in tandem. If trade blocs are required to satisfy the McMillan criterion of not lowering trade volume with outside countries, they have to engage in a dramatic reduction of trade barriers against non-member countries. That may not be politically feasible. On the other hand, in a world of simultaneous continental trade blocs, an open regionalism in which trade blocs undertake relatively modest external liberalization can usually produce Pareto improvement.
Notes: Also published in Staff Papers, Vol. 45, No. 3, September 1998.