Working Papers
1995
April 1, 1995
Growth, Nontradables, and Price Convergence in the Baltics
Description: This paper reviews the recent real exchange rate appreciation observed in the three Baltic countries. Until now, this phenomenon may be viewed primarily as a consequence of the undervalued real exchange rates of the new currencies. Looking ahead, a tendency for continued real appreciation is to be expected as part of the transition process toward higher income levels, due in part to differential productivity growth rates in the tradable and nontradable sectors. In the absence of an appreciation of the nominal exchange rate, this real appreciation will occur through inflation rates that are higher than in industrial countries. Provided that the current prudent economic policies are continued, such higher inflation will not threaten macroeconomic objectives and may indeed be viewed as an indication that the transition process is progressing as expected.
April 1, 1995
Stabilization in the Baltic Countries: A Comparative Analysis
Description: The Baltic countries began their stabilization and reform process in earnest in mid-1992. During the first two and a half years of reform, these countries have made significant progress in macroeconomic stabilization. Financial policies were tight, inflation was brought down, and by 1994, the output decline had bottomed out and recovery was under way. The paper analyzes the key aspects of this adjustment process in a comparative framework. Apart from comparing the Baltic stabilization programs themselves, major features of their fiscal adjustment, price, and output stabilization are related to the Central European experience. Factors that could explain the good performance in the Baltic countries are suggested and key aspects of an adjustment process typical for an exchange-rate-based stabilization and money-based stabilization, respectively, are discussed. The paper argues that in light of the Baltic experience the credibility of stabilization policies has been of greater importance than the choice of the exchange rate regime per se. Moreover, the cost of disinflation in terms of lost output was limited and short lived.
April 1, 1995
Who Needs Bands? Exchange Rate Policy Before Emu
Description: Two issues are discussed. The first is which countries might benefit from entry into EMU before the millennium. Germany and her immediate neighbors appear the most likely to gain; however, our knowledge is too uncertain to say whether all, some, or no countries would reap net economic benefits. The second issue is how to avoid exchange rate instability in the transition to EMU. Experience from earlier exchange rate regimes suggests that an early announcement the parities at which different currencies would enter EMU could reduce such instability if governments were willing to accept the required limitations on domestic policies.
April 1, 1995
Exchange Rate Bands and Shifts in the Stabilization Policy Regime: Issues Suggested by the Experience of Colombia
Description: After 25 years, the Colombian authorities decided to abandon the crawling peg exchange rate policy and implement a regime of nominal exchange rate bands. Initial conditions in Colombia contrast sharply with those of other cases in which bands were part of an ongoing effort to reduce high inflation. This paper argues that the change in regime was motivated by a change in policy objectives. Starting from a policy whose rationale implied targeting stable inflation, a simple analytical model of optimal policy is presented; initial results with the new regime suggest that inflation is now considered costlier and that policy implementation has been consistent with this new view.
April 1, 1995
Exchange Rate Movements and Inflation Performance: The Case of Italy
Description: This paper presents an empirical model to study the response of wages and prices to movements in the nominal exchange rate. A four-equation model is applied to Italian data to evaluate the response of tradeable goods prices, consumer prices, and wages following the lira’s exit from the ERM in the fall of 1992. The model tracks reasonably well the inflation performance of tradeables, especially import prices. But it is argued that structural changes in the labor market contribute to an overprediction of price and wage inflation.
April 1, 1995
Recession and Recovery in the United Kingdom in the 1990'+L927s: A Vector Autoregression Approach
Description: This paper uses a vector autoregression (VAR) approach to identify the causes of the 1990-92 recession in the UK. The VAR approach is shown to be particularly pertinent for quantifying the relative magnitude of the different demand shocks, and in decomposing them into monetary and expectational factors. The main finding is that the recent recession was precipitated primarily by shocks to consumption, and that monetary factors explain just part of this contraction. The VAR model also offers interesting insights about the long duration of the recession and the nature of the recovery that is currently underway.
April 1, 1995
Saving Trends in Southeast Asia: A Cross-Country Analysis
Description: This paper investigates the long-run pattern of private saving in Indonesia, Malaysia, Singapore, and Thailand. These countries have not only maintained saving levels that are currently among the highest in the world but have also experienced a sustained increase in their rate of private saving over the past twenty years. Using a cointegration approach, this paper empirically examines the economic determinants underlying the saving trends in this group and the extent to which these countries share a common experience with respect to the factors accounting for their strong saving performance. The findings suggest that demographic shifts have been an important factor underlying regional saving trends with a similar long-run impact in each country, except for Indonesia where the effects of demographics have been even more pronounced.
April 1, 1995
Bank Lending Rates and Financial Structure in Italy: A Case Study
Description: This paper discusses the relation between the financial structure and the determination of bank lending rates in Italy. It notes that the high degree of stickiness of bank lending rates observed in Italy in the past was related to constraints on competition within the banking and financial markets. In this light, it discusses the effect on the lending rate determination process of the sweeping financial liberalization process that characterized the last few years. The paper discusses also the role of the discount rate in speeding up the adjustment process of bank interest rates, and the pros and cons of its possible indexation. The empirical analysis is characterized by use of microeconomic (individual bank) data for a group of 63 Italian banks operating in locally different financial environments. This approach allows the identification of some aspects of the relation between financial structure and lending rate stickiness that were not highlighted in previous studies.
Notes: Also published in Staff Papers, Vol. 42, No. 3, September 1995.
April 1, 1995
The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis
Description: In this paper, we use micro panel data to examine the effects of oil price changes on employment and real wages, at the aggregate and industry levels. We also measure differences in the employment and wage responses for workers differentiated on the basis of skill level. We find that oil price increases result in a substantial decline in real wages for all workers, but raise the relative wage of skilled workers. The use of panel data econometric techniques to control for unobserved heterogeneity is essential to uncover this result, which is completely hidden in OLS estimates. We find that changes in oil prices induce changes in employment shares and relative wages across industries. However, we find little evidence that oil price changes cause labor to consistently flow into those sectors with relative wage increases.
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