Conferences: Winter, 2001

Economic and Financial Crises in Emerging Market Economies

As part of the NBER's Project on Economic and Financial Crises in Emerging Market Economies, NBER President Martin Feldstein organized a conference that brought together a group of distinguished individuals from the United States and other countries who have been key participants in the resolution of such crises. On October 20 and 21 in Woodstock, Vermont, they convened to discuss their experiences and share their thoughts.

The motivation for the discussion was provided by six background papers covering different aspects of the prevention and management of the crises. These papers, currently available at Books in Progress, by topic and author are:

• Exchange Rate Regimes -- Sebastian Edwards, NBER and University of California at Los Angeles
• Financial Policies -- Frederic Mishkin, NBER and Columbia University
• Industrial Country Policies -- Jeffrey Frankel, NBER and Harvard University, and Nouriel Roubini, NBER and New York University
• IMF Stabilization Programs -- Anne O. Krueger, NBER and Stanford University
• IMF Structural Programs -- Morris Goldstein, Institute for international Economics
• Creditor Relations -- William Cline, Institute of International Finance

The conference itself was organized into six sessions, which dealt with these topics. Each session began with prepared remarks by three individuals who have been government or private sector participants in the crisis management or have had key positions in affected countries. Some of the current and former U.S. officials who spoke at the conference were: former U.S. Treasury Secretary Robert Rubin; current U.S. Treasury Secretary Lawrence Summers; and former Chairman of the Federal Reserve Board of Governors Paul Volcker.

The international financial agencies were represented at the conference by, among others, Andrew Crockett, General Manager of the Bank for International Settlements; Stanley Fischer, First Deputy Managing Director of the IMF; and Nicholas Stern, Chief Economist of The World Bank.

The current and former officials of foreign nations included: Montek Singh Ahluwalia, Chairman of India's Planning Commission and former chief economist for the Indian government; Domingo F. Cavallo, former Minister of Finance of Argentina; Arminio Fraga, Governor of the Central Bank of Brazil; Jacob Frenkel, former Governor of the Bank of Israel and former Chief Economist of the International Monetary Fund; Paul Keating, former Finance Minister and Prime Minister of Australia; Mervyn King, Deputy Governor of the Bank of England; and Guillermo Ortiz, Governor of the Bank of Mexico.

Among those who participated coming from private financial institutions were: E. Gerald Corrigan, Goldman Sachs and Co.; John Crow, J&R Crown, Inc.; David Lipton, Moore Capital Strategy Group; Roberto Mendoza, Goldman Sachs International; George Soros, Soros Fund Management; and Lin See Yan, LIN Associates.

Other participants included: Caroline Atkinson, Timothy Geithner, and Edwin Truman of the U.S. Treasury Department; Jack Boorman, International Monetary Fund; Charles Dallara, Institute of International Finance; Peter Garber, Deutsche Bank; Takatoshi Ito, Ministry of Finance, Japan; Karen Johnson, Federal Reserve Board of Governors; Paul Krugman, NBER and Princeton University; John Langlois, Center for International Political Economy; John McHale, Harvard University; Manuel Montes, The Ford Foundation; Yung Chul Park, Korea University; Jeffrey Sachs, NBER and Harvard University; Ammar Siamwalla, Thailand Development Research Institute; and Martin Wolf, The Financial Times.

A summary of the conference discussion as well as the 17 formal remarks and the background papers will appear in a University of Chicago Press volume edited by Feldstein. Prior to its publication, these papers and a summary of the discussion are available on the NBER's web site under Books in Progress.

This conference was part of a larger project organized jointly by Feldstein and Frankel. In the future as part of that project, there will be scientific conferences on "Reducing the Risk of Currency Crises," organized by Frankel and Edwards, and "Managing Currency Crises," organized by Frankel and Dooley. Five one-day meetings over the last few years have looked at developments in specific countries: Mexico, Thailand, Korea, Indonesia, and Brazil. The project is supported by the Ford Foundation, the Mellon Foundation, and the Center for International Political Economy.

Changes in Real Exchange Rates

An NBER-Universities Research Conference on "Changes in Real Exchange Rates: Causes and Consequences" took place in Cambridge on December 8 and 9. Alan C. Stockman, NBER and University of Rochester, organized this two-day program:

• Mario J. Crucini, Vanderbilt University; Christopher I. Telmer, Carnegie Mellon University; and Marios Zachariadis, Louisiana State University, "Cross-Sectional Variation in European Real Exchange Rates"
• Discussant: Kenneth S. Rogoff, NBER and Harvard University
• Masanaga Kumakura, University of Cambridge, "Exchange Rates and Dynamics of Traded Goods Prices: Does Exchange Rate Uncertainty Matter?"
• Discussant: Joshua Aizenman, NBER and Dartmouth College
• David Cook, Hong Kong University of Science and Technology, and Michael B. Devereux, University of British Columbia, "The Macroeconomic Effects of International Financial Panics"
• Discussant: Andres Velasco, NBER and Harvard University
• Margarida Duarte, Federal Reserve Bank of Richmond, "Why Don't Macroeconomic Quantities Respond to Exchange Rate Variability? Comparing Fixed and Floating Exchange Rate Systems"
• Discussant: Enrique G. Mendoza, NBER and Duke University
• Gianluca Benigno, Bank of England, "Real Exchange Rate Persistence and Monetary Policy Rules"
• Discussant: Alex Wolman, Federal Reserve Bank of Richmond
• Michael W. Klein, NBER and Tufts University, and Scott Schuh and Robert K. Triest, Federal Reserve Bank of Boston, "Job Creation, Job Destruction, and the Real Exchange Rate" (NBER Working Paper No. 7466)
• Discussant: Pierre-Olivier Gourinchas, NBER and Princeton University
• Marianne Baxter, NBER and Boston University, and Michael A. Kouparitsas, Federal Reserve Bank of Chicago, "What Causes Fluctuations in the Terms of Trade?" (NBER Working Paper No. 7462)
• Discussant: Jaume Ventura, NBER and MIT
• David C. Parsley, Vanderbilt University, and Shang-Jin Wei, NBER and Harvard University, "Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography" (NBER Working Paper No. 7836)
• Discussant: Charles M. Engel, NBER and University of Wisconsin

Using a panel of over 5,000 local currency prices of retail goods and services sold in the capital cities of Europe in 1975, 1985, and 1990, Crucini, Telmer, and Zachariadis characterize the behavior of average relative prices -- "real exchange rates" -- as well as the dispersion around those averages. They find that the averages are surprisingly close to what purchasing power parity (PPP) would suggest. In other words, the averages of foreign-to-domestic price ratios (across goods for a particular pair of countries) provide relatively accurate predictions of most nominal cross-rates. However, variation around the averages is large and related to economically meaningful characteristics of goods, such as measures of international tradeability, the importance of nontraded inputs in production, and the competitive structure of the markets in which the goods are sold. Using data on product brands, the authors also find that product heterogeneity is at least as important as geography in explaining relative price dispersion.

Empirical floating exchange rates tend to exhibit substantial volatility and persistent misalignments. Kumakura discusses how the instability and the consequent uncertainty of floating rates can affect the relationship between exchange rates and import/export prices. He suggests the possibility that currency instability influences the dynamic relationship between exchange rates and prices in subtle but important ways. His models also can explain many empirical puzzles about traded goods prices.

Cook and Devereux explore the macroeconomic effects of capital market panics in a small open economy. Their model arises out of the sudden and dramatic capital outflows from East Asian economies in 1997-8, which led to sharp exchange rate depreciations, and were followed by a collapse in the real economy and a large reversal in the position of the current account. The authors' interpretation of this event follows the literature on "financial fragility," which points to the problems of the maturity mismatch between short-term borrowing and long-term investment projects giving rise to the risk of capital market panics. However, Cook and Devereux go beyond this literature by constructing a complete macro model that can reproduce many of the quantitative features of the Asian crisis.

Empirical studies comparing fixed and flexible exchange rate regimes document that countries moving from pegged to floating systems experience a systematic and dramatic rise in the variability of the real exchange rate. However, there is very little evidence that the behavior of other macroeconomic variables varies systematically with the regime. Duarte seeks to resolve this puzzle. She examines the effects of the exchange rate regime in a dynamic general equilibrium model with incomplete asset markets and nominal goods prices set in the buyers' currency. The model predicts a sharp increase in the volatility of the real exchange rate when moving from pegged to floating rates, while this pattern is not observed for other variables. The model also predicts a higher co-movement of variables across countries under fixed rates than under flexible rates, a prediction that accords with recent empirical studies.

Benigno analyzes the effects of alternative monetary rules on real exchange rate persistence. Using a two-country stochastic dynamic general equilibrium model, with nominal price stickiness and local currency pricing, he shows how the persistence of PPP deviations can be related to a monetary theory of these deviations. There is no proportionality found between the time during which prices remain sticky and the persistence of the response of the real exchange rate. That is, high nominal price rigidity is not sufficient to generate any persistence following a monetary shock.

Klein, Schuh, and Triest demonstrate a statistically significant and economically relevant effect of the real exchange rate on job creation and job destruction in U.S. manufacturing industries from 1973 to 1993. The responsiveness of these gross job flows to the real exchange rate reflects pervasive heterogeneity with respect to international conditions across firms, even within narrowly defined industries. The authors show that the responsiveness of job flows to movements in the real exchange rate varies with the industry's openness to international trade. They also show an asymmetry in the responsiveness of job flows to the real exchange rate; appreciations play a significant role in job destruction, but job flows do not respond significantly to dollar depreciations.

Fluctuations in the terms-of-trade -- the price of a country's exports relative to the price of its imports -- are a source of perennial concern to policymakers in developing and industrialized nations alike. Baxter and Kouparitsas decompose a country's terms of trade volatility into a "goods price effect," which stems from differences in the composition of import baskets and export baskets, and a "country price effect," which results from cross-country differences in the price of a particular class of goods. They then ask whether the decomposition depends on country characteristics, for example, developed versus less-developed, or exporter of manufactured goods versus exporter of fuels or other commodities.

Parsley and Wei exploit a three-dimensional panel dataset of prices on 27 traded goods over 88 quarters and across 96 cities in the United States and Japan. They show that a simple average of goods-level real exchange rates tracks the nominal exchange rate well, suggesting strong evidence of sticky prices. Focusing on dispersion in prices between city-pairs, the authors find that crossing the U.S.-Japan border is equivalent to adding as much as 43,000 trillion miles to the cross-country volatility of relative prices. The authors find that distance, unit-shipping costs, and exchange rate variability, collectively, explain a substantial portion of the observed international market segmentation. Relative wage variability, on the other hand, has little independent impact on segmentation.

Thirteenth Annual NBER-CEPR-TCER Conference

The NBER held its Thirteenth Annual NBER-CEPR-TCER conference, on the topic of unemployment, in Tokyo on December 15 and 16. Yoshio Higuchi, Keio University; Takeo Hoshi, TCER and University of California, San Diego; and Sadao Nagaoka, TCER and Hitotsubashi University, organized the program and chose these papers for discussion:

• David G. Blanchflower, NBER and Dartmouth College, "Unemployment, Well-being and Wage Curves in Eastern Europe"  Discussant: Yoshio Higuchi
• Yuji Genda, TCER and Gakushuin University, and Masako Kurosawa, Meijigakuin University, "Transition from School to Work in Japan"  Discussant: Kuramitsu Muramatsu, Nanzan University
• John M. Abowd, NBER and Cornell University; Francis Kramarz, CEPR and INSEE-CREST; David N. Margolis, Université de Paris; and Kenneth R. Troske, University of Missouri, Columbia,
• "The Relative Importance of Employer and Employee Effects on Compensation: A Comparison of France and the United States"  Discussant: Isao Ohashi, Hitotsubashi University
• Eugene Kandel, Hebrew University, and Neil D. Pearson, University of Illinois, Champaign-Urbana, "Flexibility versus Commitment in Personnel Management" Discussant: Hideshi Itoh, Hitotsubashi University
• Takao Kato, Colgate University, "The End of 'Lifetime Employment' in Japan? Evidence from National Surveys and Field Research" Discussants: Masanori Hashimoto, Ohio State University, and Jennifer Corbett, CEPR and Oxford University
• Michèle Belot and Jan C. van Ours, Tilberg University, "Unemployment and Labor Market Institutions: An Empirical Analysis" Discussants: Shin-Ichi Fukuda, TCER and University of Tokyo, and Yuji Genda
• Masahiro Abe, Dokkyo University, and Souichi Ohta, Nagoya University, "Industry Characteristics and Unemployment Fluctuations"  Discussants: Hiroshi Fujiki, Bank of Japan, and Masanori Hashimoto

Blanchflower studies the labor markets of 21 Eastern European countries using survey data on over 200,000 individuals for 1990-7. Using a variety of attitudinal measures, he finds that East Europeans report being less contented than their West European counterparts. Men, the young, the most educated, students, and the employed, particularly the self-employed, most strongly support the changes that have occurred in Eastern Europe. Support for market reforms actually dropped from the early 1990s to the mid-1990s; by 1997, it had risen somewhat but not returned its high levels of the early 1990s. Generally, job satisfaction levels in Eastern Europe are lower than in Western Europe, but the gap has closed slightly.

Using retrospective data on work experiences for youth in Japan, Genda and Kurosawa find that the labor market conditions when the workers first entered the laborforce after leaving school have a significant and lasting impact on the employment experiences of workers in their teens and twenties. An increase in the unemployment rate at the time of labor market entry reduces the probability of getting full-time regular jobs and raises the probability of workers leaving employers because of lower quality job matches. The vocational guidance or recommendations that future workers receive at school can be effective in raising job match quality, though. Finally, the adverse effect of the initial unemployment rate on job opportunities is observed most profoundly among female college graduates.

Abowd, Kramarz, Margolis, and Troske compare the French and U.S. pay systems. They find that for France, individual characteristics and establishment effects explain more of the variability in compensation than in the United States. The relationship between individual and establishment compensation and firm performance--including value-added per worker, sales per worker, and profit per unit of capital--exhibits important similarities and differences between the two countries. In general, higher paid workers--either because of individual characteristics or establishment effects--are employed in firms that are more productive. In France, higher pay as a result of enterprise heterogeneity is associated with higher profitability. In the United States, it is associated with lower profitability.

Kandel and Pearson compare HR policies in Japan and the United States and model the trade-off between the flexibility to adjust the labor force and the higher productivity that stems from a firm's commitment to its employees. They assume two types of employment contracts: a permanent contract, which precludes dismissal at will and a temporary contract, with higher labor cost per unit of output, which allows the flexibility to adjust the firm's labor force during downturns in demand. The results of their model are consistent with the stylized facts in the literature. Also, after estimating the value of flexibility for a firm, they suggest that adopting long-term contracts in the "wrong" environment can significantly reduce the firm value.

Using survey data and field research, Kato shows that, despite popular rhetoric on "the end of lifetime employment" (or implicit long-term employment contracts for the regular workforce) in Japan, the celebrated practice endures. Specifically, he finds little evidence for any major decline in the job retention rates of Japanese employees from the period prior to the burst of the bubble economy in the late 1980s to the post-bubble period. Instead, large firms in Japan have been doing everything they can to avoid laying off workers. However, the measured job retention rates may overstate the importance of long-term employment in recent years. Finally, Kato finds that the burden of downsizing appears to fall disproportionately on young workers and on middle-aged workers with shorter tenure.

The development of the unemployment rate differs substantially among OECD countries. Belot and van Ours investigate to what extent these differences are related to labor market institutions. In their analysis, they use data from 18 OECD countries over the period 1960-94 and show that the way in which institutions interact is important.

Through the 1990s, the Japanese employment situation grew steadily worse. Abe and Ohta investigate the causes of this increasing unemployment using individual data on male workers over the 12 years from 1988 to 1999. The authors find that the declining inflow probabilities in the construction, service, and manufacturing industries greatly affected the deteriorating state of the macro-unemployment rate. They also find that fluctuations in the unemployment rate depend a great deal on the crowding effect in unemployment. One reason for this strong crowding effect is that unemployed people seek employment in the same industry, and movement across industries is difficult. Finally, although the recent advancements in technology cannot explain it, the inflow probability for less educated and part-time workers and for people who are not working improved in the late 1990s.

These papers will appear in a special edition of the Journal of Japanese and International Economies.

Economic Reform in India

On December 18-20, the NBER and India's National Council for Applied Economic Research (NCAER) again brought together a group of ten NBER economists and about two dozen economists from Indian universities, research institutions, and government departments to discuss the current economic scene in India. Raghuram G. Rajan, NBER and University of Chicago, organized the conference jointly with Subir Gokarn of NCAER.

The U.S. participants were: Kaushik Basu, Cornell University; Eli Berman, NBER and Boston University; Jagdish Bhagwati, NBER Director and Columbia University; Kathleen Cooper, NBER Director and Exxon Corporation; Mihir Desai, Martin Feldstein, Andrei Shleifer, and David Wise, NBER and Harvard University; Anne Krueger, NBER and Stanford University; Andrew Samwick, NBER and Dartmouth College; and Luigi Zingales, NBER and University of Chicago.

After introductory remarks by NBER President Feldstein and Rakesh Mohan of NCAER, the participants discussed: the world trade order; current issues in public finance; the concept of fiscal federalism; current issues in corporate finance; the analysis, management, and regulation of risk; corporate governance; and social security.