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Mr. Alejandro D Guerson
This paper explores inflation dynamics and monetary policy in Bolivia. Bolivia’s monetary policy framework has been effective in stabilizing inflation in recent times. This has been a challenging task given high price volatility of key consumer goods subject to recurrent supply shocks, especially food items. Empirical testing indicates that the monetary policy framework has contributed to the stabilization of inflation, with effective transmission through the bank lending channel, while the defacto dollar peg has also played a role. Looking ahead, the current framework will be tested by the new commodity price normal and a potentially permanent adjustment in relative prices. Against this background, consideration could be given to a more flexible exchange rate policy arrangement, with short term interest rates as the main policy instrument.
Mr. Serhan Cevik and Vibha Nanda
Fiscal sustainability remains a paramount challenge for small economies with high debt and greater vulnerability to climate change. This paper applies the model-based sustainability test for fiscal policy in a panel of 16 Caribbean countries during the period 1980–2018. The results indicate that the coefficient on lagged government debt is positive and statistically significant, implying that fiscal policy in the Caribbean takes corrective actions to counteract an increase in the debt-to-GDP ratio. Nonlinear estimations, however, show that the quadratic debt parameter is negative, which indicates that fiscal policy response is not adequate to ensure sustainability at higher levels of debt. We also find that the fiscal stance tends to be countercyclical on average during the sample period. These empirical results confirm that maintaining prudent fiscal policies and implementing growth-enhancing structural reforms are necessary to build fiscal buffers and ensure debt sustainability with high probability even when negative shocks occur over the long term.
Mr. Serhan Cevik and Vibha Nanda

find that the coefficient on government debt is positive and statistically significant, which is an indication of fiscal behavior that takes into account the government’s intertemporal budget constraint and, therefore, long-term fiscal solvency concerns. Its magnitude, however, is not economically large. In our sample of Caribbean countries, the fiscal policy reaction to an increase of one percentage point in the lagged debt-to-GDP ratio is limited to about 0.02 percentage point, after controlling for other relevant factors, during the period 1980–2018. 6

Mr. Alejandro D Guerson

Front Matter Page Western Hemisphere Department Contents I. Introduction and Background II. Empirical Strategy III. Monetary Policy Power IV. Monetary Policy Reaction Function V. Monetary Policy Transmission and Impact VI. Conclusions and Challenges Ahead Figures 1. Financial System Developments 2. Determinants of Consumer Price Variability 3. Central Bank Reaction to an Increase in Consumer Prices 4. Central Bank Reaction to an Increase in Core Prices 5. Central Bank Reaction to an Increase in Food Prices 6. Central Bank

Mr. Alejandro D Guerson

in higher interest rates of 91 day bills, indicating a tightening of the monetary policy stance. Figure 3. Central Bank Reaction to an Increase in Consumer Prices (Impulse-response functions to a 1 std. dev. shock to consumer prices) Source: author’s calculations based on data from the Central Bank of Bolivia. The policy reaction to an increase in the price level also includes an appreciation of the central bank nominal exchange rate . This is consistent with the use of the exchange rate as an instrument to control inflation. However, the amount of

International Monetary Fund. Research Dept.

Mexico V. Hugo Juan-Ramón During the late 1980s and early 1990s Mexico enjoyed strong capital inflows in response to an effective stabilization program, privatizations, structural reforms, and the Brady Plan. In 1994, in reaction to an increase in interest rates abroad and domestic political strife, capital began to flow out of the country and a financial crisis erupted on December 20, 1994. In response, Mexico adopted a floating exchange rate regime; prevented a collapse in the payments system; and implemented reforms to the pension system, and to the

Mr. Bas B. Bakker
This paper argues that the sharp increase in unemployment in a number of advanced countries during the Great Recession was not just cyclical (the result of a lack of aggregate demand); the degree of adjustment of real wages and the impact this had on labor productivity also played a role. In many countries, post-2007 employment losses were modest, as real wages adjusted when the economy slowed down. But in some countries real wage growth stayed too high for too long. The result was large-scale labor shedding, which boosted labor productivity but also contributed to a sharp rise in unemployment. In this context, the paper discusses the different experiences of the UK (where employment increased) and Spain (where it fell sharply), and finds that almost two thirds of the employment losses in Spain resulted from the failure of real wages to adjust adequately.
Mr. Bas B. Bakker

employment rate will fall, while if it rises less fast, the employment rate will rise. What would make labor productivity rise faster than GDP per working age capita? A likely candidate is that wages are growing “too fast”. To see this, note that labor productivity can rise for two reasons: because of labor-augmenting technological progress, or because firms replace labor by capital in reaction to an increase in the relative price of labor. If labor-productivity rises because of labor-augmenting technological progress, it is likely that the increase in labor

Mr. Helge Berger, Mr. Carsten Hefeker, and Ronnie Schöb

c { > = < } 0 ⇔ V w c { > = < } 0. ( 9 ) As the trade union is a Stackelberg leader with respect to the central bank, the equilibrium effect dw/dc is equal to the union’s wage-setting reaction to an increase in conservatism. With w c identified, the sign of the employment effect depends inversely on the real wage reaction (by substituting in equations (5) , (8) , and (9) ): d