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Mr. Pietro Garibaldi and Ms. Zuzana Brixiova

shocks that reduce the present discounted value of state sector jobs. We show that job-worker pairs select a reservation productivity level below which the job is immediately destroyed. Since wages and productivity are intrinsically linked, negative shocks are conducive to lower wages, and. in equilibrium, a higher reservation productivity implies a higher average wage. Finally, as the reallocation of jobs from the state to the private sector is completed, the economy converges to a traditional matching model, in the spirit of Pissarides (1990) . Since the

Mr. Pietro Garibaldi and Ms. Zuzana Brixiova
This paper studies interactions between labor market institutions and unemployment dynamics in transition economies. It presents a dynamic matching model in which state sector firms endogenously shed labor and private job creation takes time. Two main conclusions arises. First, higher unemployment benefits increase steady-state unemployment, and, during the transition, they reduce the fall in real wages and speed up closure of state enterprises. Second, higher minimum wages can theoretically speed up the elimination of state sector jobs without affecting steady-state unemployment. These results are broadly consistent with existing evidence on the dynamics of unemployment and real wages in transition economies.
Mr. Pietro Garibaldi
This paper proposes and solves a search model in which job separation requires mandatory notice. When jobs are subject to idiosyncratic uncertainty, firms would issue advance notice even with good business conditions. We show that such precautionary policy is not pursued if it entails sufficiently high productivity losses. If workers can search on the job, an increase in advance notice increases job to job movements, reduces unemployment flows, and has ambiguous effects on unemployment. Results are consistent with the fact that North American and European labor markets, despite their differences in job security provisions, experience similar turnover rates and dissimilar unemployment flows.
Mr. Pietro Garibaldi and Ms. Zuzana Brixiova

) = m ( u , v ) v ;   where   ∂ q ( θ ) ∂ θ < 0 Similarly, the probability that an unemployed job seeker meets a vacant job is θ q ( θ ) = m ( u , v ) u ;   where   ∂ θ q ( θ ) ∂ θ < 0 The presence of the matching function and the fact that posting a vacancy is costly give rise to a pure economic rent to be split between job-worker pairs. In this paper, and similarly to Mortensen and

Mr. Pietro Garibaldi

corresponding unemployment flows much smaller. We introduce mandatory notice in a search-unemployment environment, and we assume that employer-initiated job separation can take place only when workers are given an institutionally determined advance notice. If issuing notice were completely costless, firms would continuously give advance notice to workers, just to ask them to ignore such notices if business conditions remain favorable. In reality, however, when firing notices are given, job-worker pairs are likely to suffer productivity losses. The worker is likely to reduce

International Monetary Fund. Research Dept.
This paper analyzes contagion and volatility with imperfect credit markets. The paper interprets contagion effects as an increase in the volatility of shocks impinging on the economy. The implications of this approach are analyzed in a model in which domestic banks borrow at a premium on world capital markets, and domestic producers borrow at a premium from domestic banks. Financial spreads depend on a markup that compensates lenders, in particular, for the expected cost of contract enforcement. Higher volatility increases financial spreads and the producers’ cost of capital.