Working Papers
1996
December 1, 1996
Union Behavior, Industry Rents, and Optimal Policies
Description: This paper examines the supposed welfare gains from strategic trade and industrial policies in the U.S. steel industry. Strategic policies to capture labor rents lead to an endogenous response which greatly diminishes their importance. On the other hand, reducing domestic labor market distortions results in welfare gains nearly as large as those from optimal trade and industrial policies. The paper concludes that the focus on labor rents as the subject of U.S. trade and industrial policy is overstated, at least in manufacturing industries such as integrated steel.
December 1, 1996
Banking System Fragility: Likelihood Versus Timing of Failure: An Application to the Mexican Financial Crisis
Description: This paper tests empirically the proposition that bank fragility is determined by bank-specific factors, macroeconomic conditions and potential contagion effects. The methodology allows for the variables that determine bank failure to differ from those that influence banks’ time to failure (or survival rate). Based on the indicators of fragility of individual banks, we construct an index of fragility for the banking system. The framework is applied to the Mexican financial crisis beginning in 1994. In the case of Mexico, bank-specific variables as well as contagion effects explain the likelihood of bank failure, while macroeconomic variables largely determine the timing of failure.
Notes: See also Staff Papers, Vol. 44, No. 3, September 1997, entitled "Determinants of Banking System Fragility: A Case Study of Mexico."
December 1, 1996
Globalization, Tax Competition and the Future of Tax Systems
Description: This paper discusses the implications for tax systems of globalization of capital markets and of economies. It shows the extent to which particular taxes are affected by the globalization process. It speculates on future developments in this area and on tax competition.
December 1, 1996
Government Debt, Life-Cycle Income and Liquidity Constrains: Beyond Approximate Ricardian Equivalence
Description: Evans (1991) has demonstrated that Blanchard’s (1985) finite-horizon model obeys approximate Ricardian equivalence. We show that this result is determined largely by an unrealistic assumption that labor income grows monotonically over a consumer’s entire lifetime. Introducing more realistic lifetime earnings profiles, we find that the effects of government debt on the real interest rate and the capital stock become considerably larger. In particular, leaving aside the effects of distortionary capital taxation, the extended model with liquidity constraints predicts that real interest rates would decline by about 150-200 basis points if government debt were eliminated completely in all OECD countries.
Notes: Also published in Staff Papers, Vol. 44, No. 3, September 1997.
December 1, 1996
Social and Political Factors in a Model of Endogenous Economic Growth and Distribution: An Application to the Philippines
Description: This paper proposes a model of endogenous economic growth and distribution explicitly incorporating social extraction and political competition, with an application to the Philippine historical experience. The major objective is to explain developments in the distribution of national income and wealth and in the growth rate of per capita capacity output. When calibrated, the proposed model is found to be consistent with the broad contours of Philippine macroeconomic history.
December 1, 1996
Capital Inflows and the Real Exchange Rate: Analytical Framework and Econometric Evidence
Description: This paper examines the links between capital inflows and the real exchange rate under pegged exchange rates. The analytical framework is described, and a near-VAR model linking capital inflows, interest rate differentials, government spending, money base velocity, and the temporary component of the real exchange rate (TCRER) is estimated for Korea, Mexico, the Philippines, and Thailand. TCRER movements are associated only weakly with shocks to capital flows. Negative shocks to U.S. interest rates lead to capital inflows in Asia and a TCRER appreciation in the Philippines and Thailand. Positive shocks to government spending have a small but statistically significant effect on the TCRER for Korea.
December 1, 1996
Mobilization of Saving in Developing Countries: The Case If the Islamic Republic of Iran
Description: Mobilization of national saving is an important determinant of investment and growth. It assumed greater importance in the case of the Iranian economy, given the difficult external environment. This paper discusses the recent saving performance of the Iranian economy, particularly in relation to investment needs. Following a quantitative evaluation of the determinants of saving, the paper reviews the main implications for domestic economic policies in the period ahead.
December 1, 1996
A Credit Crunch? a Case Study of Finland in the Aftermath of the Banking Crisis
Description: This paper estimates a disequilibrium model of credit supply and demand to evaluate whether there was a credit crunch in Finland following the banking crisis of 1991-92. Empirical analysis suggests that the marked reduction in bank lending was mainly in reaction to a cyclical decline in credit demand, likely exacerbated by the high level of indebtedness of the borrowers. It also appears that banks became less willing to supply credit during periods associated with a deterioration in asset quality, and reduced profits due to declining regulatory protection from competition, and a need to increase capital adequacy levels.
Notes: Also published in Staff Papers, Vol. 44, No. 3, September 1997.
December 1, 1996
Financial Sector Reform and Banking Crises in the Baltic Countries
Description: Financial sector reform in the Baltic countries is reviewed in light of the banking crises that emerged during the reform period. It is argued that the crises had their roots in the structural deficiencies specific to planned economies and the financial environment that developed before and after these countries regained their independence, thus rendering them largely inevitable. Because of the low level of financial intermediation, however, even the failure of large banks had limited systemic effects and a minor negative impact on output and incomes. The crises slowed down the financial reform process, but brought about a desired consolidation of the banking sector.
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