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International Monetary Fund. European Dept.
This Selected Issues paper analyzes the drivers of wage growth and inflation in Estonia. The analysis reveals that the role played by the inflation and inflation expectations in Estonia is different from those of the EU15. The impact of inflation on wage formation is smaller than in larger and richer countries with lower inflation volatility. This has limited the downward pressure on wages during the period of very low inflation in 2014–16. Although there has been an episode of wage growth leading inflation before the global financial crisis, the current simultaneous acceleration in prices and wages is not evidence of a developing wage-price spiral, as a significant share of the increase in inflation is owing to exogenous factors.
Mr. Santiago Acosta Ormaechea, Mr. Takuji Komatsuzaki, and Carolina Correa-Caro
We estimate the effects on growth of nine fiscal reform episodes in seven high-income countries using the Synthetic Control Method. These episodes are selected using an indicator-based approach applied to the evaluation of growth-friendly fiscal reforms during 1975-2010. We find that in reform countries the annual growth rate of real GDP was on average about 1 percentage point above their synthetic units 10 years after each respective reform. Moreover, countries which were initially less developed seemed to experience a larger growth impact after their reforms. Results are broadly robust to controlling for structural reforms on business regulation, financial market, labor market, and legal and product markets, which may also affect growth. Our findings also suggest that inequality is not affected by the growth-friendly fiscal reforms analyzed in this paper.
Bibek Adhikari, Mr. Romain A Duval, Bingjie Hu, and Mr. Prakash Loungani
A number of advanced economies carried out a sequence of extensive reforms of their labor and product markets in the 1990s and early 2000s. Using the Synthetic Control Method (SCM), this paper implements six case studies of well-known waves of reforms, those of New Zealand, Australia, Denmark, Ireland and Netherlands in the 1990s, and the labor market reforms in Germany in the early 2000s. In four of the six cases, GDP per capita was higher than in the control group as a result of the reforms. No difference between the treated country and its synthetic counterpart could be found in the cases of Denmark and New Zealand, which in the latter case may have partly reflected the implementation of reforms under particularly weak macroeconomic conditions. Overall, also factoring in the limitations of the SCM in this context, the results are suggestive of a positive but heterogenous effect of reform waves on GDP per capita.
International Monetary Fund
This paper explores how fiscal policy can affect medium- to long-term growth. It identifies the main channels through which fiscal policy can influence growth and distills practical lessons for policymakers. The particular mix of policy measures, however, will depend on country-specific conditions, capacities, and preferences. The paper draws on the Fund’s extensive technical assistance on fiscal reforms as well as several analytical studies, including a novel approach for country studies, a statistical analysis of growth accelerations following fiscal reforms, and simulations of an endogenous growth model.
Mr. Lev Ratnovski
Traditional bank competition policy seeks to balance efficiency with incentives to take risk. The main tools are rules guiding entry/exit and consolidation of banks. This paper seeks to refine this view in light of recent changes to financial services provision. Modern banking is largely market-based and contestable. Consequently, banks in advanced economies today have structurally low charter values and high incentives to take risk. In such an environment, traditional policies that seek to affect the degree of competition by focusing on market structure (i.e. concentration) may have limited effect. We argue that bank competition policy should be reoriented to deal with the too-big-to-fail (TBTF) problem. It should also focus on the permissible scope of activities rather than on market structure of banks. And following a crisis, competition policy should facilitate resolution by temporarily allowing higher concentration and government control of banks.
International Monetary Fund
In this paper we identify some of the main factors behind systemic risk in a set of international large-scale complex banks using the novel CoVaR approach. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find no evidence that a larger size increases systemic risk within the class of large global banks. We also show that the sensitivity of system-wide risk to an individual bank is asymmetric across episodes of positive and negative asset returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee's proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.


This volume, edited by David Folkerts-Landau and Marcel Cassard, consists of papers presented at a conference held in Hong Kong SAR that was hosted by the IMF and the Hong Kong Monetary Authority. It focuses on a wide range of issues confronting policymakers in managing their sovereign assets and liabilities in a world of mobile capital and integrated capital markets. Topics include public debt management strategy, central bank reserves management, technical and quantitive aspects of risk management, and credit costs and borrowing capacity in optimizing debt management. The papers draw on experiences of policymakers and private sector participants actively involved in formulating and implementing debt and reserves policy.

Marcel Cassard and Mr. D. F. I. Folkerts-Landau
In an environment of sizable and volatile capital flows and integrated international capital markets, large and unhedged net external sovereign liabilities expose countries to swings in international asset prices and to potential speculative currency attacks. The paper argues that an essential step in reducing emerging market vulnerability to such external shocks is to reform the institutional arrangements governing asset and liability management policies, so as to promote a transparent, publicly accountable, and professional incentive structure.
International Monetary Fund. Research Dept.
This paper examines the conditions under which the monetary authorities of a large industrial country can influence the exchange rate while keeping the growth rate of the money stock on a predetermined target. Monetary policy in the large industrial countries has in recent years focused primarily on the achievement of predetermined growth rates for monetary aggregates. This study treats such intervention as an example of a broader class of combination policies that, for convenience, may be called “sterilized policies.” In order to determine whether sterilized policies may be expected to be effective, this study examines the role of several specific types of monetary policy instrument in the context of a portfolio-balance model of financial markets. Each of the major countries employs a unique combination of policy instruments, ranging from market-oriented systems largely free of regulation to systems that rely heavily on quantitative ceilings and regulated interest rates. It is shown that sterilized changes in at least three of these instruments, as well as exchange market intervention, will have predictable effects on the exchange rate. The potentially effective instruments are reserve requirements on nonresident deposits or on deposits that are included in the targeted monetary aggregate, and controls on interest rates that are payable on such deposits.