Working Papers
1994
December 1, 1994
The Response of Wages and Labor Supply Movements to Employment Shocks Across Europe and the United States
Description: This paper assesses the responsiveness of wages and labor force movements to employment shocks across British and U.S. regions and across Europe using a multivariate vector autoregression technique. The paper finds inflexible real wages in all three areas in that each area’s real wage responds very little to employment shocks. However, the response of the labor force to employment shocks is much greater in the United States compared to Europe. The strong labor force response in the United States prevents any persistence in relative regional unemployment rates whereas the lack of mobility in Europe results in persistent unemployment rate differentials across British regions and European nations. Europe must therefore adopt measures to reduce barriers to immobility if it is to succeed in moderating the persistence in relative unemployment rates.
December 1, 1994
Human Capital Flight: Impact of Migrationon Income and Growth
Description: This paper analyses the impact of government tax and subsidy policy on immigration of human capital and the effect of such immigration on growth and incomes. In the context of a two-country endogenous growth model with heterogeneous agents and human capital accumulation, we argue that human capital flight or “brain drain” arising out of wage differentials, say because of differences in income tax rates or technology, can bring about a reduction in the steady state growth rate of the country of emigration. Additionally, permanent difference in the growth rates as well as incomes between the two countries can occur making convergence unlikely. While in a closed economy, tax-financed increases in subsidy to education can have a positive effect on growth, such a policy can have a negative effect on growth when human capital flight is taking place. Since subsidizing higher education is more likely to induce substantial brain drain, it is likely to be inferior to subsidy to lower levels of education if growth is to be increased.
Notes: Also published in Staff Papers, Vol. 42, No. 3, September 1995.
December 1, 1994
Asset Prices, Financial Liberalization, and the Process of Inflation in Japan
Description: The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
December 1, 1994
Foreign Exchange Hedging with Synthetic Options and the Interest Rate Defense of a Fixed Exchange Rate Regime
Description: The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Notes: Also published in Staff Papers, Vol. 42, No. 3, September 1995.
December 1, 1994
Unemployment Hysteresis, Wage Determination, and Labor Market Flexibility: The Case of Belgium
Description: This paper examines the potential contribution of unemployment hysteresis theories to the understanding of the Belgian labor market. It estimates models of wage determination using aggregate and firm-level panel data. Two main conclusions emerge: (i) the long-term unemployed do not exert a negative impact on wages; and (ii) there is some evidence that the incumbent workers, the “insiders,” exercise market power in wage determination, taking greater account of their own interests than those of the unemployed “outsiders.” In addition, it is argued that the automatic indexation of wages to prices in Belgium can cause a downward rigidity in real wages, given the multi-tier real wage bargaining process. Recent initiatives, including the introduction of a competitiveness norm for indexation, and labor market programs aimed at the long-term unemployed and the young, such as the plan d’accompagnement and the plan d’embauche des jeunes, are appropriate in view of the existence of insider power in wage determination.
December 1, 1994
The Coordination of Domestic Public Debt and Monetary Management in Economies in Transition: Issues and Lessons From Experience
Description: In economies in transition, the development of financial markets is a common objective linking the monetary and fiscal authorities, while monetary and public debt management cannot be strictly separated. This calls for close coordination of objectives and instruments of monetary and debt management, and the development of supporting institutional and operational arrangements. Key aspects of these arrangements are surveyed.
December 1, 1994
The Credibility of the United Kingdom's Commitment to the Erm: Intentions Versus Actions
Description: The paper presents estimates of a model of the credibility of the U.K. commitment to its central parity against the deutsche mark during the period of U.K. ERM membership (1990-92). The measure of credibility used is the long-term interest differential with Germany. Credibility is decomposed into two aspects: an assessment of whether the government was truly committed to the ERM, and the probability that even a committed government would be able to continue to bear the unemployment costs. Doubts about the first aspect—which could lead to a self-fulfilling crisis—are shown to have declined steadily during the period of ERM membership, while the second aspect is estimated to have become increasingly important, due to rising unemployment.
Notes: Presents estimates of a model of the credibility of the U.K. commitment to its central parity against the deutsche mark during the period of U.K. ERM membership (1990-92).
December 1, 1994
North-South RandD Spillovers
Description: We examine the extent to which developing countries that do little, if any, research and development themselves benefit from R&D that is performed in the industrial countries. By trading with an industrial country that has a large “stock of knowledge” from its cumulative R&D activities, a developing country can boost its productivity by importing a larger variety of intermediate products and capital equipment embodying foreign knowledge, and by acquiring useful information that would otherwise be costly to obtain. Our empirical results, which are based on observations over the 1971-90 period for 77 developing countries, suggest that R&D spillovers from the industrial countries in the North to the developing countries in the South are substantial.
December 1, 1994
Demographic Dynamics and the Empirics of Economic Growth
Description: This paper examines the effects of demographic dynamics on the measured rates of economic growth. First, it develops a model of production with labor productivity that varies with age. Second, it uses macroeconomic and demographic data to estimate the relative productivity of different age groups. Third, it constructs a panel database of effective labor supply in order to reflect the changing age-structure of the population. Fourth, it decomposes the historical measured growth rates into effects of demographic dynamics and into “real” growth rates, net of demographic effects.
Notes: Also published in Staff Papers, Vol. 42, No. 2, June 1995.
December 1, 1994
Foreign Exchange Risk Regulation: Issues for Industrial and Developing Countries
Description: Capital adequacy regulations or quantity restrictions on bank portfolios put forward by the Basle Committee on Banking Supervision have virtually become an international standard of prudential regulation. Recent proposals aim at extending this approach to market risks, in particular to foreign exchange risk. The present paper provides a critical analysis of proposals to introduce foreign exchange position limits on a uniform cross-country basis, focusing on their effectiveness and their possible impact on the functioning of both mature and developing foreign exchange markets. Theoretical considerations are underpinned in the paper with descriptions of existing or proposed regulations, in a broad range of both industrial and developing countries. Experiences with the use of foreign exchange position limits in developing countries provide insight into their widespread use for other than prudential purposes, in particular to support exchange rate and exchange control policies.