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Abstract:
Transition was never going to be easy, even with the highly promising long-run outlook. Not only was the process itself a major theoretical and policy challenge, but politics and economics were bound to interfere. And yet, with some spectacular exceptions, most countries are now on the right track.

After surveying the facts and distilling the voluminous literature on the transition to market economies, Wyplosz arrives at several conclusions:
With hindsight, the old debate - Big Bang versus gradualism - was really a problem of feasibility, although many of the arguments in favor of the Big Bang have now been proven right.

Once more, inflation has been found to be incompatible with growth and the importance of a good microeconomic structure - especially an effective banking system - has been confirmed.

The decline of the state in transition economies is both spectacular and puzzling - combining features that are both desirable and dangerous.

Among useful lessons learned:

· It has paid to start early and move fast. The Big Bang is highly desirable but impractical, and gradualism is unavoidable but ought to be compressed as much as possible. The countries that bit the bullet early and hard have done better over the past decade.

· Stabilize first; grow next. Macroeconomic stabilization is a prerequisite for growth. The budget deficit need not be eliminated, but the link between deficits and money growth must be severed.

· Structural reform is important, and microeconomic policies, often overlooked, should be started as soon as possible. This means establishing property rights, hardening budget constraints, building a healthy banking system, and ensuring true domestic competition.

· The choice of an exchange rate regime, another early controversy, is apparently less important than adherence to a strict monetary policy. The floaters have tightly managed their exchange rates, while the fixers have repeatedly devalued and have often ended up floating. Some form of monetary targeting is needed, but it matters little which target is chosen so long as it is adhered to.

· Creating irreversibilities early on allows governments to change without seriously affecting the transition. The less stable the economy, the more politics matters. A shaky economic basis is fertile ground for policy reversals that set the clock back several years (Bulgaria, Romania, Russia).

This paper - a product of the Research Advisory Staff - was presented at the Annual Bank Conference on Development Economics, April 28-30, 1999. The author may be contacted at wyplosz@hei.unige.ch.

Abstract:
This paper is concerned with the fact that the incidence of speculative attacks tend to be temporally correlated; that is, currency crises appear to pass 'contagiously' from one country to another. The paper provides a survey of the theoretical literature, and analyses the contagious nature of currency crises empirically. Using 30 years of panel data from 20 industrialized countries, we find evidence of contagion. Contagion appears to spread more easily to countries that are closely tied by international trade linkages than to countries in similar macroeconomic circumstances.

Channels, data, international, macroeconomic, panel, similarity, speculative, trade

Abstract:
This paper is concerned with the fact that the incidence of speculative attacks tends to be temporally correlated; that is, currency crises appear to pass contagiously from one country to another. The paper provides a survey of the theoretical literature, and analyzes the contagious nature of currency crises empirically. Using thirty years of panel data from twenty industrialized countries, we find evidence of contagion. Contagion appears to spread more easily to countries which are closely tied by international trade linkages than to countries in similar macroeconomic circumstances.

Abstract:
Nearly two years after the onset of the financial crises, many central banks have brought their policy interest rates down to, or close to zero. Various governments have seen their budget deficits soar. Both policies have affected exchange rates, partly through market expectations. With a majority of exchange rates officially floating, exchange rate movements do not necessarily reflect official decisions as was the case in the 1930s. Yet, also in the 2008 crisis, authorities have directly intervened in the foreign exchange market, sometimes in order to defend a falling currency but in other instances with the aim to limit appreciation pressure, akin of competitive devaluations. This paper documents the exchange rate interventions during the height of the 2008/09 financial crisis and identifies the countries which have particular high incentives to intervene in the foreign exchange market to competitively devalue their currency. While various countries had increased incentives to devalue, we find that direct exchange rate interventions have been rather limited and contagion of devaluation has been restricted to one regionally contained case. However, sharp market-driven exchange rate movements have reshaped competitive positions. It appears that these movements have so far not seriously disrupted global trade. After all, a world crisis is likely to require widespread exchange rate adjustments as different countries are affected in different ways and have different capacities to weather the shocks.

Currencies and Exchange Rates, Debt Markets, Emerging Markets, Economic Stabilization, Economic Theory & Research

Abstract:
This paper considers how an international lender of last resort (LOLR) can prevent self-fulfilling banking and currency crises in emerging economies. We compare two different arrangements: one in which the international LOLR injects liquidity into international financial markets, and one in which its resources are used to back domestic banking safety nets. Both arrangements would require important changes in the global financial architecture: the first would require a global central bank issuing an international currency, while the second would have to be operated by an "international banking fund" closely involved in the supervision of domestic banking systems.

lender of last resort bank runs multiple equilibria credit crunch exchange rate regime dollarization deposit insurance Asian crisis

Abstract:
This paper presents an empirical analysis of speculative attacks on pegged exchange rates in 22 countries between 1967 and 1992. We define speculative attacks or crises as large movements in exchange rates, interest rates, and international reserves. We develop stylized facts concerning the univariate behavior of a variety of macroeconomic variables, comparing crises with periods of tranquility. For ERM observations we cannot reject the null hypothesis that there are few significant differences in the behavior of key macroeconomic variables between crises and non-crisis periods. This null can be decisively rejected for non-ERM observations, however. Precisely the opposite pattern is evident in the behavior of actual realignments and changes in exchange rate regimes. We attempt to tie these findings to the theoretical literature on balance of payments crises.

Abstract:
A stylized fact of the transition process is an early profound exchange rate depreciation followed by continuing real appreciation. Absent historical reference points, it is difficult to judge whether the real appreciation is threatening competitiveness. This paper interprets the stylized facts and offers estimates of the equilibrium real exchange rate based on an international comparison of dollar wages and on a study of the dynamics of real exchange rates in several transition economies. The results suggest that the process of real appreciation is a combination of a return to equilibrium following the early overshooting and equilibrium appreciation.

Abstract:
In this Paper we reconsider the evidence on capital account liberalization and growth. While we find indications of a positive association, the effects vary with time, with how capital account liberalization is measured, and with how the relationship is estimated. The evidence that the effects of capital account liberalization are stronger in high-income countries is similarly fragile. There is some evidence that the positive growth effects of liberalization are stronger in countries with strong institutions, as measured by standard indicators of the rule of law, but only weak evidence that the benefits grow with a country's financial depth and development. We find more evidence of a correlation between capital account liberalization and growth when we allow the effect to vary with other dimensions of openness. There are two interpretations of this finding, one in terms of the sequencing of trade and financial liberalization, the other in terms of the need to eliminate major macroeconomic imbalances before opening the capital account. By and large our results support the second interpretation.

Capital

Abstract:
In this paper we reconsider the evidence on capital account liberalization and growth. While we find indications of a positive association, the effects vary with time, with how capital account liberalization is measured, and with how the relationship is estimated. The evidence that the effects of capital account liberalization are stronger in high-income countries is similarly fragile. There is some evidence that the positive growth effects of liberalization are stronger in countries with strong institutions, as measured by standard indicators of the rule of law, but only weak evidence that the benefits grow with a country's financial depth and development. We find more evidence of a correlation between capital account liberalization and growth when we allow the effect to vary with other dimensions of openness. There are two interpretations of this finding, one in terms of the sequencing of trade and financial liberalization, the other in terms of the need to eliminate major macroeconomic imbalances before opening the capital account. By and large our results support the second interpretation.

Abstract:
This paper considers how an international lender of last resort (LOLR) can prevent self-fulfilling banking and currency crises in emerging economies. We compare two different arrangements: one in which the international LOLR injects liquidity into international financial markets, and one in which its resources are used to back domestic banking safety nets. Both arrangements would require important changes in the global financial architecture: the first one would require a global central bank issuing an international currency, while the second one would have to be operated by an 'international banking fund' closely involved in the supervision of domestic banking systems.

Abstract:
This paper considers how an international lender of last resort can prevent self-fulfilling banking and currency crises in emerging economies. We compare two different arrangements: one in which the international lender of last resort injects international liquidity into financial markets, and one in which its resources are used to back domestic banking safety nets. We argue that these arrangements have very different institutional implications: the first one implies an international lender of last resort with unlimited resources (a global central bank), while the second one could be operated by a limited 'international banking fund'. This fund, however, would have to be closely involved in the supervision of domestic banking systems. Both arrangements would require important changes in the global financial architecture.

Lender of last resort, bank runs, multiple equilibria, credit crunch, exchange rate regime, dollarization, deposit insurance, Asian crisis, International Monetary Fund

Abstract:
This Paper looks at the effect of domestic and external financial liberalization. Using a sample of 27 developing and developed countries, it studies the exchange market pressure and output gap effects of liberalization. The results show that developing and developed countries differ in many respects. By and large, the effects are significantly stronger in developing countries. Exchange market pressure to be strongly positive as capital flows, but reversals seem to follow systematically. Similarly, the behaviour of the output gap corresponds well to boom and bust cycles. The Paper concludes with a discussion of policy measures desirable to make liberalization safer than it has been so far.

Currency crises, liberalization, sequencing

Abstract:
The Paper explores how fiscal policy can be made both more disciplined and more counter-cyclical. It first examines whether the decline of public debts observed in the OECD area during the 1990s can be explained either by less activism or by a priority towards consolidation. It then argues that rules, for example the Stability and Growth Pact, are less likely to deliver the desired outcome than institutions. Drawing a parallel with monetary policy, it examines how a Fiscal Policy Committee could reproduce what Monetary Policy Committees have achieved in central banking.

Fiscal policy, discipline, cyclicality, rules and discretion, institutions

Abstract:
Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to reveal its information. This paper extends their model to the more realistic case where the central bank must anyway convey some information by setting the interest rate. This situation radically changes the conclusions. In many cases, full transparency is socially optimal. In other instances the central bank can distill information to either manipulate private sector expectations in a way that reduces the common knowledge effect or to reduce the unavoidable information content of the interest rate. In no circumstance is the option of only setting the interest rate socially optimal.

Central bank transparency

Abstract:
This paper develops a framework for analyzing the effects of fiscal policy on the real exchange rate. The short-run impact of various types of fiscal measures are considered as well as the dynamics of adjustment to long-run steady states. The analysis and related simulations suggest that the effect of fiscal policy changes on the real exchange rate can vary widely and will depend closely on a number of structural features, including the degree of asset substitutability,the composition of government spending, and the initial size of the public debt and net external position.

Abstract:
This paper explores the link between trade and European labour markets by using evidence on relative commodity prices and intra-sectoral skill levels at the NACE three-digit level for the four large EC countries and for the period 1976?90. We find that if the relative import prices of unskilled labour intensive sectors have not fallen significantly over time, substantial and varied restructuring is observed in those sectors. Defensive restructuring, involving upgrading of skills and expansion, is about as common as the contraction of employment and wages predicted by the Hecksher-Ohlin principle.

European labour markets, trade

Abstract:
This paper explores the link between trade and European labour markets by using evidence on relative commodity prices and intra-sectoral skill levels at the NACE three- digit level for the four large EC countries and for the period 1976=F190. We find that if the relative import prices of unskilled labour intensive sectors have not fallen significantly over time, substantial and varied restructuring is observed in those sectors. Defensive restructuring, involving upgrading of skills and expansion, is about as common as the contraction of employment and wages predicted by the Hecksher-Ohlin principle.

Abstract:
In this paper we reassess the cyclical performance of the French economy in the 1920s, focusing in particular on the period 1926-1931 and on France`s resistance to the Great Depression. France expanded rapidly after 1926 and, unlike the other leading industrial economies, resisted the onset of the Depression until 1931. We find strikingly little support for the conventional explanation for these events, which emphasizes an undervalued French franc and an export-led boom. While French exports as a share of GDP turned down as early as 1928, the economy continued to expand for several subsequent years. Investment, not exports, emerges as the proximate source of the French economy`s resistance to the Great Depression. And fiscal policy emerges as the major determinant of the surge in French investment spending. Previous accounts have emphasized the role of monetary policy in determining the seal and nominal exchange rates ostensibly responsible for French economic fluctuations in the decade after 1921. In contrast, we argue here for a more balanced view of the roles of monetary and fiscal policies in French macroeconomic fluctuations over that critical decade.

Abstract:
This paper revisits the debates that have surrounded the launch of a unique experience: the adoption of a common currency among developed countries. A striking aspect of this history is that, pressed by what they correctly identified as a window of opportunity, policy-makers crafted this complex project in a short period of time, largely eschewing inputs from the academic profession. Academic research, in turn, developed its own views, which turned out to be critical of some ley orientations, yet it generally recognizes that, in the end, the launch of the euro has been a major success.

Over time, many of the academic criticisms have been taken on board, but not yet fully. The monetary strategy has been slightly amended, but it remains the subject of disagreements between the European Central Bank and monetary economists. Events have confirmed that the Stability and Growth Pact was ill-designed; its reformulation goes some way to address some of the concerns but not all of them. Its ability to deliver fiscal discipline is in doubt.

Another look at the experiment highlights the gap between the principles laid out by those who designed the monetary union and the pragmatism that has prevailed thereafter. The resulting tension between principles and actions sometimes obscures the fact that the Eurosystem has acted wisely so far. The widespread perception that monetary policy is not as transparent as it should be and suffers from a lack of adequate democratic accountability is not just annoying. The general public, including politicians, sometimes blames the Eurosystem for Europe's poor growth performance since the adoption of the euro. This is unfair and could dangerously undermine the monetary union if the Eurosystem were to become the scapegoat for the slow and incomplete reforms that are needed to revigorate the euro area's economies.

Abstract:
The fifth enlargement of the EU has now brought together twenty five countries, a massive success. But success has its price: twenty-five countries do not cooperate as six used to. The result is a general impression that the undertaking is being diluted and that national interests prevail over the common good, which means less willingness to take the next integrative step.

This paper argues that this perception is largely misguided. The EU-25 group is considerably more integrated than the EU-6 ever was. Dilution is not a necessary consequence of enlargement, rather enlargement is bringing to the fore a number of institutional failures that were present all along.

This paper takes a politico-economic view of the link between enlargement and deepening. After a broad review of the task allocation principles, it concludes that enlargement and deepening are not substitutes but complements. It produces evidence that enlargement is not increasing preference heterogeneities within the union, but that it leads national governments to preserve more forcefully their own powers, often against the wishes of their own citizens. The result is an inability to reform the decisionmaking process that has become unwieldy as the result of enlargement.

The issue, then, is how to restore the EU's ability to run its affairs. The European Constitutional Convention has made little headway. Other solutions that go beyond current debates are examined. "Pioneer clubs" raise many unresolved issues. More promising, maybe, is the idea that the acquis communautaires should be once and for all decisions. By lowering the stakes of both sovereignty transfers and qualified majority voting, allowing changes in both directions between shared and national competencies could encourage governments to accept more daring reforms. Strengthening the legitimacy of union-specific institutions (the European Parliament or the Commission Presidency) would create a counter-power to deal with national governments' natural tendency to defend their own prerogatives.

European integration, enlargement, constitution

Abstract:
This paper improves upon the recently developed literature on exits from fixed exchange rate regimes in three ways: 1) It allows for two indicators for post-exit macroeconomic conditions, the change in the exchange rate and the change in the output gap; 2) it tests whether the distinction between orderly and disorderly exit is statistically justified, and concludes that it is not; 3) it deals with the sample selection problem. The results, subject to extensive sensitivity analysis, suggest that post-exits are better when de-pegging occur in good macroeconomic conditions - an unnatural move for most policy-makers - when world interest rates decline and in the presence of capital controls. Importantly, 'good' macroeconomic policies do not seem to help with post-exit performance.

Exchange rate regimes, macroeconomic policy

Abstract:
The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Along with Piguvian taxes, a number of policy measures are examined and welfare-ranked: deficit ceilings, golden rules and delegation. In general, the combination of delegation and an optimally-set deficit ceiling deliver the social optimum, even if the deficit ceiling is not credible.

Common pool, fiscal restraints, fiscal rules, stability pact, fiscal institutions, deficit bias

Abstract:
The Paper looks for evidence of grease and sand effects in Europe, in particular the possibility that the natural rate of unemployment is affected run by the inflation rate. Looking at four countries, France, Germany, the Netherlands and Switzerland, the Paper reports some preliminary evidence that the long-run rate of unemployment is a nonlinear function of inflation. The particular shape of the empirical relationship supports the view that a moderate level of inflation provides some "grease" to the price and wage setting process. In particular, the long-run rate of unemployment is found to reach a maximum of between 0.5% and 1%, and to decline quickly for higher rates of inflation. For the range of inflation rates observed in the sample countries, there is no evidence of sand effects, that uncertainty associated with inflation adversely affect the long-run rate of unemployment.

Inflation, natural rate of unemployment

Abstract:
Can Europe's post-war experience with fixed exchange rates be useful for today's emerging market countries? A new conventional wisdom suggests that the answer is negative, that in today's world of huge capital flows the only choice is between freely floating exchange rates and hard pegs. The Paper argues to the contrary, that Europe's strategy has much to recommend it. Most European countries have identified trade integration as a key objective, and considered that exchange rate stability was a prerequisite for establishing a level-playing field. The survival of the regime was made possible by widespread financial repression. There is no evidence that such a strategy stunted growth, quite the contrary in fact. Nor is it the case that this strategy is impossible today for other small open economies.

Currency crises, exchange rate regimes, liberalization, sequencing

Abstract:
The present paper extends the literature on central bank transparency that relies on information heterogeneity among private agents in four directions. First, it adds the interest rate to the list of signals that the central bank can reveal. Second, it allows for more than one economic fundamental. Third, it extends the range of uncertainties that matter. So far the literature has focused on uncertainty about the economic fundamentals, assumed to be estimated with known precision; we also allow for uncertainty about precision. Fourth, it derives results that are general in the sense that they do not depend on any particular social welfare criterion. Each extension sheds new light on the role of central bank transparency.

Focusing on the signaling role of the interest rate, we consider various degrees of transparency, ranging from full opacity, to just publishing the interest rate, to also revealing the signals and estimates of their precision.

While uncertainty about the fundamentals results in the now familiar common knowledge effect, uncertainty about information precision creates a fog effect, which reduces the quality of decisions taken by the central bank and the private sector. In the absence of the fog effect, full transparency is generally not desirable, because it deprives the central bank from the ability to optimally manipulate private sector expectations. When the central bank's fog is large, we find that full transparency is usually the best communication strategy. This result tends to survive when the private sector's fog is large. Full opacity is only desirable when the central bank is poorly informed.

Another result that emerges from our analysis is that it is usually desirable for the central bank to divulge some information, even if it is erroneous, and known to be erroneous. The reason is that, when the private sector knows that the central bank is mistaken, it needs to evaluate the extent of its mistakes.

central bank transparency, information asymmetry, monetary policy

Abstract:
The Russian crisis which occurred in August 1998 represented the culmination of a long process marked by half-successes and serious setbacks. The paper reviews the factors which led to the collapse of the ruble and the default on the public debt. During the run up period, Russia was operating under an IMF program and was a recipient of large funds from the World Bank as well as from private investments. The paper evaluates the Fund's advice and the apparent blindness on foreign investors. It discusses the effect of foreign behavior and advice on Russia's policymakers' decisions.

Abstract:
Real exchange rates appear to present a specific behaviour in the early phase of transition: they are largely unaffected by nominal exchange rate movements and exhibit trend appreciation. The model presented here describes the transition process as the emergence of two new (traded and non-traded good) sectors and the decline of an inefficient and subsidized state sector. The absence of financial markets means that firms accumulate capital through retained earnings. Labor markets are imperfect giving rise to a wage gap. The model shows that the real exchange plays the crucial role of determining real wages. Through real wages it sets the pace for the development of the new sectors as workers are attracted out of the state sector. The link between growth and real appreciation differs from the usual Balassa-Samuelson effect. The paper also explores the role of labor market distortions and foreign financing.