A Model of the Macroeconomic Effects of Privatization on Employment in Transition and Developing Countries with an Application to China

It is generally agreed that privatization of state-owned enterprises improves economic efficiency, but it is also widely feared that it exacerbates unemployment especially in transition and developing economies. This paper proposes a theoretical model of the macroeconomic relationships between privatization, efficiency, output, and employment. The model explains how privatization affects employment in transition and developing economies through different, and often opposing, channels. As a result, job losses at firms being privatized may result in overall job gains or losses in the economy, depending on the macroeconomic conditions. We apply this model to China and find that the model provides an intuitively appealing explanation for the job gains and losses caused by privatization in China during its transition. The model further suggests policies to maximize the gains and minimize the costs of privatization.     

Real Exchange Rates in Transition Countries

This paper discusses the ways in which real exchange rate changes have affected macroeconomic and structural developments in transition economies. More specifically, it deals with four issues: it analyzes the real exchange rate dynamics in transition economies; it provides a comparative evaluation of the exchange rate regimes adopted by transition countries; it focuses on the link between exchange rate movements and financial crises; and it discusses the applicability of the Balassa–Samuelson hypothesis to transition economies.     

WHAT IS HAPPENING TO THE IMPACT OF FINANCIAL DEEPENING ON ECONOMIC GROWTH?

Although the finance‐growth relationship is now firmly entrenched in the empirical literature, we show that it is not as strong in more recent data as it was in the original studies with data for the period from 1960 to 1989. We consider several explanations. First, we find that the incidence of financial crises is related to the dampening of the effect of financial deepening on growth. Excessive financial deepening or too rapid a growth of credit may have led to both inflation and weakened banking systems which in turn gave rise to growth‐inhibiting financial crises. Excessive financial deepening may also be a result of widespread financial liberalizations in the late 1980s and early 1990s in countries that lacked the legal or regulatory infrastructure to exploit financial development successfully. However, we find little indication that liberalizations played an important direct role in reducing the effect of finance. Similarly, there is little evidence that the growth of equity markets in recent years has substituted for debt financing and led to a reduced role of financial deepening on growth. (JEL E44, G10, O40)     

MONETARY POLICY REGIME SHIFTS: NEW EVIDENCE FROM TIME‐VARYING INTEREST RATE RULES

We estimate forward‐looking interest rate rules for five large Organization for Economic Cooperation and Development economies, allowing for time variation in the responses to macroeconomic conditions and in the variance of the policy rate. Conventional constant parameter reaction functions likely blur the impact of (1) model uncertainty, (2) conflicting objectives, (3) shifting preferences, and (4) nonlinearities of policymakers' choices. We find that monetary policies followed by the United States, the United Kingdom, Germany, France, and Italy are best summarized by feedback rules that allow for time variation in their parameters. Estimates point to sizeable differences in the actual conduct of monetary policies even in countries now belonging to the European Monetary Union. Moreover, our time‐varying parameter specification outperforms the conventional Taylor rule and generalized method of moment–based estimates of reaction functions in tracking the actual Fed funds rate. (JEL E52, E58, E60)     

SOVEREIGN DEBT CRISIS IN A MONETARY UNION: ACCOUNTING FOR EXCESSIVE DEBT,HOUSING BUBBLES,AND THE TRANSMISSION OF CRISES

Despite vast empirical documentation of the recent sovereign debt crisis in southern Europe, there is little research accounting for the following stylized facts in a single coherent framework: continuous borrowing, high growth, housing bubbles, and current account deficits since the beginning of the European Monetary Union ending with a sudden crisis and subsequent contagion of crisis. We fill this gap by proposing a model and fitting it to the data. Using a growth model with collateral constraints of small peripheral economies in the institution of a monetary union, we analyze the multilayer moral hazards underlying excessive borrowing. Since housing bubbles can support a constant loan‐to‐value (LTV) ratio lower than LTV limits, peripheral economies can lock into a steady‐state Ponzi growth equilibrium with high growth and current account deficits, but these economies become vulnerable to crises. We identify the “self‐fulfilling crisis region” (SFCR), in which the economy grows fast with a seemingly safe LTV ratio, but with a vulnerability to crises. Moreover, a crisis in one sector propagates to other sectors by endogenously expanding their SFCRs. We derive some policy implications on LTV regulations and market psychology. Finally, our calibration exercise presents how bubbles develop and burst along with contagion across sectors, accounting for the data. (JEL E44, F34, O16)     

Catching up,forging ahead or falling behind? Central and Eastern European development in 1990–2005

This paper aims to assess the economic development and development policies in the Central and Eastern European (CEE) countries in 1990–2005, from the collapse of the USSR to the enlargement of the European Union. A great number of authors have generally seen the transition as a very positive process. They have concluded that the reform policies focusing on macroeconomic and price stability have been the key to success for CEE economies. A reliable economic environment is, of course, instrumental for longer-term economic success, as exemplified by the prolonged crisis in most of the former Soviet Union. Our analysis of the economic development and competitive advantages in the region, however, leads to the conclusion that the specific approach to transition that the Central and Eastern European countries followed came at a rather high cost. Comparative neglect and weakness of a set of policies crucial for longer-term development, such as science, technology and innovation policies, has led to deterioration in the last decade rather than the strengthening of the competitive advantages of Central and Eastern European economies. Furthermore, we argue that, in most cases, CEE countries have unfortunately overlooked or misjudged a number of development challenges, and have thus implemented policies that have generated growth at the cost of rapidly increasing risks. This is how the financial fragility of several Central and Eastern European countries has recently increased drastically, and the region seems to have virtually arrived at the brink of economic collapse. Since the CEE countries joined the European Union, the CEE governments have gradually moved towards acquiring a more active role in economic development. These policies need, however, to be strengthened considerably and reinforced by macroeconomic policies that curb current excessive dependence on foreign-financed growth.     

INTERNATIONAL NARCOTICS TRADE,FOREIGN AID,AND ENFORCEMENT

Using a general equilibrium model of a developing narcotics‐producing and ‐exporting economy, we analyze the economic effects of policies designed to restrict the production and trade of narcotics: foreign aid tied to anti‐narcotics law enforcement activities, demand reduction policies, and alternative development policies. We characterize the problem as one of serious factor market distortions introduced by illicit production and enforcement. While aid to enforcement generally reduces the production and export of narcotics, it is less effective for economies with market power, and under plausible conditions may raise narcotics output and have negative welfare implications for the recipient. (JEL F1)     

International Financial Integration and Its Distinctions in Transition Economies

We discuss the main tendencies and forms of international financial integration in both developing and developed economies. Integration of financial markets is a topic of economic debates especially for developed and transition economies, particularly Armenia, because it is the most effective way of overcoming the main problems of financial-sector development of transition economies. But there are many problems on the way of financial integration, which are summarized into four groups: institutional problems, legislative problems, macroeconomic instability, and technical problems. All of these problems are analyzed in the article for Armenia, though they are quite relevant for most transition countries.      

SHAPING THE INSTITUTIONAL INFRASTRUCTURE

Certain types of laws and institutions shape economic behavior in market economies. In Eastern Europe these general rules and market institutions are often nonexistent, and a major problem is to create market economies while simultaneously building the supporting institutions. We describe the type of institutions inherited from Soviet-style economies and show institutional reforms and macroeconomic policies may have limited effects due to the interdependence and lack of complementary market institutions. Without a "critical mass" of market institutions, the benefits of markets are slow in realization. The advantages of reforming existing but distorted institutions over building new ones is stressed.     

ECONOMIES OF SCALE IN BANKING,INDETERMINACY, AND MONETARY POLICY

This paper investigates economies of scale (ES) in financial intermediation as a source of equilibrium indeterminacy. Financial intermediation is embedded into a standard flexible‐price monetary model, and provides deposits (inside money) that substitute with currency to purchase consumption. The results indicate that equilibrium indeterminacy does not depend on a large degree of ES in intermediation nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any positive degree of ES, while policies targeting nominal rates eliminate indeterminacy for all degrees of ES. (JEL C62, E44, E52)     

UNDERSTANDING THE MACROECONOMIC IMPACT OF ILLIQUIDITY SHOCKS IN THE UNITED STATES

In this paper, we empirically investigate the role of stock market illiquidity shocks, stemming from Amihud's illiquidity measure, in explaining U.S. macroeconomic fluctuations from 1973 to 2018. We find that the impact of illiquidity shocks on economic activity is substantial, and historical decomposition analysis shows that cumulative illiquidity shocks were an essential contributor to the prolonged economic slump of the Great Recession. Moreover, our identified illiquidity shocks represent a distinct source of macroeconomic instability. This suggests that illiquidity shocks, measured by the stock price impacts, may contain more information than other types of shocks in recent studies, such as financial shocks and uncertainty shocks. (JEL C32, E32)     

MONEY,OUTPUT, AND INFLATION IN THE LONGER TERM: MAJOR INDUSTRIAL COUNTRIES, 1880–2001

We study how fluctuations in money growth correlate with fluctuations in real output growth and inflation. Using band‐pass filters, we extract cycles from each time series that last 2–8 (business cycles) and 8–40 (longer‐term cycles) years. We employ annual data, 1880–2001 without gaps, for 11 industrial countries. Fluctuations in money growth do not play a systematic role at business cycle frequencies. However, money growth leads or affects contemporaneously inflation, but not real output growth, in the longer run. Also, formal break tests indicate no structural changes for the longer‐term money growth and inflation relationship, despite changes in policy regimes.(JEL E3)     

Finance and the Sources of Growth at Various Stages of Economic Development

This article studies the effects of financial development on the sources of growth in different groups of countries. Recent theoretical work shows that financial development may affect productivity and capital accumulation in different ways in industrial versus developing countries. This hypothesis is tested with panel data from 74 countries using GMM dynamic panel techniques. Results are consistent with the hypothesis: finance has a strong positive influence on productivity growth primarily in more developed economies. In less developed economies, the effect of finance on output growth occurs primarily through capital accumulation.     

The microfinance promise—can it be kept? A macro perspective

After five decades of rapid expansion of microfinance worldwide, little is known about its aggregate effects and whether the “microfinance promise” of poverty reduction holds at the macro level. Challenging questions have arisen. Here we explore the dynamic response of microfinance on economic growth, financial deepening and income inequality. Countries are grouped into three broad clusters (stable, moderate and poor) based on macro‐institutional variables. Our results show that microfinance has a significant long‐term ability to affect the broader economy. However, the impact and dynamics of microfinance differ substantially across macro‐institutional environments. It grows in weaker environments, reaches its peak in developing economies, and then gradually “dies out” in more stable economies. While there is evidence of a positive impact of microfinance at the aggregate level, the response is different depending on whether countries are poor, moderately developed or economically stable. Once countries climb up the macro‐institutional “ladder,” microfinance can take a different shape and its relationship with other macroeconomic fundamentals can change. Our results indicate that microfinance has the strongest effect when the external environment is supportive and proactive; in weak environments, microfinance cannot grow sufficiently. Therefore, more attention should be given to supporting the socioeconomic dimensions of economies.     

MORE MORTGAGES,LOWER GROWTH?

In newly collected data on 46 economies over 1990–2011, we show that financial development since 1990 was mostly due to growth in credit to real estate and other asset markets, which has a negative growth coefficient. We also distinguish between growth effects of stocks and flows of credit. We find positive growth effects for credit flows to nonfinancial business but not for mortgage and other asset market credit flows. By accounting for the composition of credit stocks and for the effect of credit flows, we explain the insignificant or negative growth effects of financial development in recent times. What was true in the 1960s, 1970s, and 1980s when the field of empirical credit‐growth studies blossomed, is no longer true in the 1990s and 2000s. New bank lending is not primarily to nonfinancial business and financial development may no longer be good for growth. These trends predate the 2008 crisis. They prompt a rethink of the role of banks in the process of economic growth. (JEL E44, O16, O40, C33)     

CHAINED CREDIT CONTRACTS AND FINANCIAL ACCELERATORS

Sufficiently high net worth of financial intermediaries (FIs) is considered a necessary condition for financial and macroeconomic stability. In this paper, we explore why the net worth of FIs is important as compared to that of nonfinancial firms using a dynamic general equilibrium model, in which both FIs and nonfinancial firms rely on costly external debt. We find that an exogenous disruption of the FIs' net worth has a greater aggregate impact than does the same‐sized disruption of the nonfinancial firms' net worth. The key reason is that the net worth of the FIs in the United States is small. (JEL E22, E44, G21)     

Monies that Matter,on the Discursive Power of the Bank for International Settlements

The Bank for International Settlements (BIS) and its committees perform an increasingly important systemic regulatory role on the global financial markets, as well as for national monetary policies. In this article I argue that the cooperation and coordination among central banks makes this community vital for global discourse formation around monetary policies and financial interaction. The self-image displayed in speeches and evaluations of BIS representatives indicate that the community influences national economies. Using the concept of performativity for analysing the power dynamics of the BIS community, the article argues that cooperating central banks have considerable influence on economic interaction both nationally and globally. The nature of this political influence is not conspiratory or intentional, but embedded in the economistic interaction within and around the BIS.     

BETWEEN SCYLLA AND CHARYBDIS: INCOME DISTRIBUTION,CONSUMER CREDIT,AND BUSINESS CYCLES

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy. (JEL C63, D31, E62, G01)     

DOES THE GREAT RECESSION IMPLY THE END OF THE GREAT MODERATION? INTERNATIONAL EVIDENCE

In this paper we examine whether or not the Great Recession had a temporary or permanent effect on output growth volatility after years of low macroeconomic volatility since the early eighties. Based on break detection methods applied to a set of advanced countries, our empirical results do not give evidence to the end of the Great Moderation period but rather that the Great Recession is characterized by a dramatic short‐lived effect on the output growth but not on its volatility. We show that neglecting the breaks both in mean and in variance can have large effects on output volatility modeling based on GARCH specifications. (JEL E32, C22, O40)     

DOES A GOOD CENTRAL BANKER MAKE A DIFFERENCE?

The personalities of central bankers moved center stage during the recent financial crisis. Indeed, several central bankers even became “superstars.” In this article, we investigate whether superstar central bankers have an impact on economic performance. We employ school grades given to central bankers by the financial press, defining as superstars those central bankers receiving the top grade. First, we explain the grades in a probit estimation with measures of economic performance, institutional features, and personal characteristics. Second, we employ a matching approach to account for the endogeneity of grading with respect to economic performance. Using entropy balancing, we identify credible counterfactuals for top‐graded central bankers, that is, nonsuperstar central bankers who face similar situations. Comparing the economic performance of both groups, we find that superstars do indeed matter: a top‐graded central banker faces a significantly more favorable output‐inflation tradeoff than his peers. This effect is driven by outstanding central bankers in both advanced and emerging economies and is especially prevalent in the precrisis subsample. (JEL E52, E58)