Anne-Marie Gulde

Banking Crises and Bank Resolution: Experiences in Some Transition Economies

It has been estimated that in the past 20 years over half the members of the IMF have experienced banking crises.2 Among these, much attention has been paid to the Nordic banking crises of the early 1990s;3 more recently the focus has been on the crises that hit several Asian countries in the late 1990s.4 Between these two well-recorded episodes was a set of major banking crises that critically affected economic developments in a further group of countries: the transition economies. During the 1990s, most of the countries that were undertaking the difficult transition from a centrally planned to a market economy experienced banking crises of varying severity. These crises reflected in part factors specific to countries emerging from state socialism. Banks in transition economies were characterized by linkages to loss-making public and private enterprises, insider lending, absence of sound prudential practices, and legacy problems from the earlier regimes in their countries, all of which characteristics helped undermine the soundness of banking systems in these countries.5 To a surprising extent, however, the experiences of the transition economies reflected factors common to banking crises across all types of economies—transition economies were clearly more vulnerable than others to the emergence of banking problems, but overall the factors contributing to systematic banking sector problems in these countries had a great deal in common with those found elsewhere. Similarly, the lessons that can be learned, in particular on how the authorities handled the crises, may also be of wider applicability.

Currency Boards in Retrospect and Prospect

Currency boards, more so than other exchange rate regimes, have come in and out of fashion. Defined by a fixed exchange rate with full convertibility, central bank liabilities backed with foreign exchange reserves, and a high cost of exiting the regime, currency boards were common in colonial times--until most were cast off as countries gained independence after World War II. In the 1990s, currency boards enjoyed a revival as the cornerstone of various macroeconomic stabilization programs--including many in central and eastern European transition economies--only to fall into disfavor again with the collapse of the Argentine regime in 2002. The authors of Currency Boards in Retrospect and Prospect take a balanced look at the effects of currency board regimes on inflation, output growth, and macroeconomic performance more generally. Drawing on historical experience, economic theory, cross-country empirical analysis, and case studies of currency boards in Argentina, Estonia, Lithuania, Bulgaria, and Bosnia and Herzegovina, the authors conclude that currency boards deliver significant reductions in inflation compared to other regimes and do not seem to result in slower growth or a markedly higher vulnerability to crisis.

European Labor Markets: Sectoral Versus Spatial Shocks

European economic discourse in the mid-1990s is dominated by two themes, persistent unemployment and European Monetary Union (EMU). As the recent French elections illustrated, the two are increasingly viewed as linked in the popular debate. Two concerns have been voiced in this regard. The first is temporary: Passing the fiscal entry hurdles has led to a joint European fiscal retrenchment, with the associated negative consequences for labor demand. The second concern is structural in nature: Will the institutional changes brought about by EMU permanently reduce national governments’ ability to offset domestic labor market disturbances, leading to permanently higher “natural” rates of unemployment?

The Causes of Real Exchange Rate Variability: A Heretic View from the Interwar Period

Historically, real exchange rate variability has been higher under flexible than under fixed exchange rates. Two explanations have been put forward. The neo-Keynesian view focuses on the interaction of volatile nominal exchange rates with sticky prices. The neoclassical approach maintains the flexible price assumption and regards an increased incidence of real shocks as the culprit. Using spectral decomposition, we examine the evidence on sticky prices for the interwar period. Prices and exchange rates are found to be equally flexible, contrary to the sticky price view and consistent with the instantaneous equilibrium approach.