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The ease with which workers can move between sectors has a strong impact on the effects on labor markets of shocks such as changes in world prices or migration flows. This paper introduces an approach to labor mobility with frictions under which worker capabilities (their efficiencies in different sectors) depend on their sector affiliation. If workers in sector a move to sector a', their efficiency shortfall due to a capability misfit compared to what is needed in a' (and possessed by workers already in a') is measured by a proximity parameter, 0 ? proxa,a' ? 1. If proxa, a' < 1, the efficient quantity reaching a' is below the physical quantity. In this setting, profit-maximizing producers are willing to pay the same wage per efficiency unit irrespective of worker origin and thus pay less efficient workers a lower wage per physical unit. This approach to labor mobility is tested in a static CGE model that is applied to an illustrative sub-Saharan African dataset with sector proximities defined using the approach of the product-space literature. Simulations of positive export price shocks show that, the higher the proximities, the stronger the labor reallocation and the welfare gains.
Computable General Equilibrium Models --- Development Planning And Policy --- Factor Mobility --- Labor Mobility --- Wage Differentials
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The paper examines the role of credibility in the conduct of exchange rate policy in developing countries, The analysis is based on a model in which policymakers are concerned about inflation and external competitiveness. Price setters in the nontraded goods sector of the economy adjust prices in reaction to anticipated fluctuations in the domestic price of tradable goods. This type of model is showm to generate a “devaluation bias” which undermines the credibility of a fixed exchange rate. The effect of reputational factors, signaling considerations, and joining a currency union as possible solutions to this bias is examined.
Foreign Exchange --- Inflation --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Price Level --- Deflation --- Currency --- Foreign exchange --- Macroeconomics --- Exchange rates --- Conventional peg --- Real exchange rates --- Exchange rate policy --- Prices --- United Kingdom
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After 25 years, the Colombian authorities decided to abandon the crawling peg exchange rate policy and implement a regime of nominal exchange rate bands. Initial conditions in Colombia contrast sharply with those of other cases in which bands were part of an ongoing effort to reduce high inflation. This paper argues that the change in regime was motivated by a change in policy objectives. Starting from a policy whose rationale implied targeting stable inflation, a simple analytical model of optimal policy is presented; initial results with the new regime suggest that inflation is now considered costlier and that policy implementation has been consistent with this new view.
Foreign Exchange --- Inflation --- Open Economy Macroeconomics --- Price Level --- Deflation --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Currency --- Foreign exchange --- Macroeconomics --- Real exchange rates --- Exchange rates --- Crawling peg --- Exchange rate policy --- Prices --- Colombia
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Traditionally the choice of exchange rate regime has been seen as a second-best policy choice, which can be directed toward mitigating the distortionary effects of price or information rigidities. In this paradigm the optimal degree of exchange rate flexibility is found to depend of the source and nature of shocks hitting an economy. More recent literature views the exchange rate as a widely and frequently seen manifestation of government policy with careful exchange-rate management emerging as a tool that can enhance shaky policy credibility.
Foreign Exchange --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- International Monetary Arrangements and Institutions --- Currency --- Foreign exchange --- Exchange rate arrangements --- Exchange rate flexibility --- Exchange rate adjustments --- Exchange rate policy --- Conventional peg --- Germany
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In the past two decades, insights from behavioral sciences, particularly behavioral economics, have been widely applied in the design of social programs such as pensions, social security, and taxation. This paper provides a survey of the existing literature in economics on the application of behavioral insights to infrastructure sectors, focusing on water and energy. Various applications of behavioral insights in the literature are examined from the perspectives of the three main actors in the infrastructure sectors: policy makers, service providers, and consumers. Evidence is presented from the literature on how behavioral regularities, such as imperfect optimization, limited self-control, and nonstandard preferences, affect the strategies, decisions, and actions of policy makers, service providers, and consumers, often leading to suboptimal outcomes for service investment, delivery, access, and use. The paper also highlights how behavioral interventions such as anchoring, framing, nonpecuniary incentives, and altering the choice architecture can lead to improvements in performance, adoption, consumption, and other outcomes of interest in the infrastructure sectors.
Behavioral Economics --- Development Planning and Policy --- Energy --- Energy and Economic Development --- Infrastructure --- Infrastructure Economics --- Infrastructure Economics and Finance --- Publicly-Provided Goods --- Water --- Water Economics --- Water Resources --- Water Supply and Sanitation Economics
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Since 1996, the Bank of Jamaica (BoJ) has sought to limit changes in the exchange rate for the Jamaican dollar in the context of its efforts to maintain low inflation. However, with a persistently high public sector deficit, real interest rates have remained generally high, which partly explains the slow pace of growth. This paper discusses an alternative monetary policy mix for achieving low variance for inflation and output through the prism of an empirical macroeconomic model. The simulation results suggest that a monetary policy mix that takes into account the impact of policy on both inflation and output achieves lower variance for inflation and output compared with the current policy mix, which tilts somewhat toward exchange rate stabilization. A case, therefore, can be made for the BoJ to move to a soft inflation targeting regime supported by fiscal consolidation.
Foreign Exchange --- Inflation --- Money and Monetary Policy --- Price Level --- Deflation --- Monetary Policy --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Currency --- Foreign exchange --- Macroeconomics --- Monetary economics --- Exchange rates --- Inflation targeting --- Real exchange rates --- Exchange rate policy --- Prices --- Monetary policy --- Jamaica
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This study extends the research on balance-of-payments crises by investigating the dynamics of the collapse of a crawling exchange rate in the presence of an explicit link between the fiscal deficit and domestic credit. It shows that such an exchange rate regime is characterized by two potential steady-state equilibria. This introduces an ex-ante indeterminacy regarding the timing and magnitude of the speculative attack on international reserves in the event of a sustained inconsistency between the country’s fiscal and exchange rate policies. The paper discusses the conditions that would define the actual timing of the regime’s breakdown.
Foreign Exchange --- Money and Monetary Policy --- Public Finance --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Debt --- Debt Management --- Sovereign Debt --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Currency --- Foreign exchange --- Monetary economics --- Public finance & taxation --- Domestic credit --- Exchange rate arrangements --- Government debt management --- Managed exchange rates --- Exchange rate policy --- Credit --- Debts, Public
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The paper identifies the contemporaneous relationship between exchange rate policy and liability dollarization using three different definitions of dollarization. The presence of endogeneity makes the empirical identification elusive. We use identification through heteroskedasticity to solve the endogeneity problem in the present context (Rigobon, 2003). While we find that countries with high liability dollarization (external, public, or financial) tend to be more actively involved in exchange rate stabilization operations, we do not find evidence that floating, by itself, promotes de-dollarization.
Foreign Exchange --- Money and Monetary Policy --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Currency --- Foreign exchange --- Monetary economics --- Exchange rates --- Exchange rate policy --- Currencies --- Dollarization --- Exchange rate arrangements --- Money --- Monetary policy --- United States
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We explore a model intended to capture the interaction between exchange rate policy, fiscal policy, and outright default on foreign-currency denominated debt. We examine how the exchange rate affects the supply of short-term debt facing the government. We show that under a credible hard peg (currency board), default is a more likely outcome, even without an exceptionally large short-term debt, precisely because a devaluation is not an option. In a more conventional fixed peg, it can be optimal for the government to choose a level of the exchange rate that would be likely to result in partial or complete debt default. Depending on the exchange rate regime, multiple equilibria exist, in one of which the interest rate is high, the exchange rate is overvalued, output is low, and default is high. Under a hard peg, there is a unique equilibrium.
Exports and Imports --- Foreign Exchange --- Central Banks and Their Policies --- Fiscal Policy --- International Monetary Arrangements and Institutions --- International Lending and Debt Problems --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Currency --- Foreign exchange --- International economics --- Exchange rates --- Exchange rate policy --- Real exchange rates --- Debt default --- Exchange rate adjustments --- External debt --- Debts, External --- Mexico
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This paper examines the reaction of the bilateral Ch$/US$ exchange rate to monetary policy actions in Chile and the United States. The approach is to regress the change in the exchange rate following a policy announcement on changes in market interest rates in response to the same announcement. U.S. monetary policy actions that raise the three-month treasury bill rate by 1 percentage point lead to depreciations of the Chilean peso by about 1.5 to 2 percent. The exchange rate also reacts to monetary policy actions in Chile, but the response appears to be smaller, and cannot be estimated with much precision on the available sample.
Banks and Banking --- Foreign Exchange --- Monetary Policy --- Central Banks and Their Policies --- Open Economy Macroeconomics --- Interest Rates: Determination, Term Structure, and Effects --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Currency --- Foreign exchange --- Finance --- Banking --- Exchange rates --- Exchange rate policy --- Central bank policy rate --- Market interest rates --- Deposit rates --- Financial services --- Interest rates --- United States
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