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Economic Review

Economic Review
C O N T E N T S
Second Quarter 1999/Volume 84, Number 2

Economic Review articles are posted on the Web as they become available. Page numbers in the PDF file posted here may not reflect the page numbers of the printed version.

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Editors' Note 5
Understanding Recent Crises in Emerging Markets The Role of External Shocks in the Asian Financial Crisis
Roberto Chang 6 Joseph Whitt 18

The world economy is going through a difficult and dangerous period. The recent Brazilian currency meltdown is one more in a series of events that includes the Asian crises of 1997–98 and the Mexican crash in 1994, and there is uncertainty about whether other emerging economies will be infected with the Brazilian virus.

Dealing with crises in emerging economies is, therefore, an urgent matter. However, what to do about these crises is a source of heated debate. According to the author of this article, much of the confusion arises from the fact that accumulated knowledge about crises in emerging markets has proven inadequate for analyzing recent events. As a consequence, economists have developed new theories intended to shed light on current debates.

In this article the author classifies the new theories into two main positions. The first, the bad policy view, argues that inappropriate government intervention provided incentives for the private sector to borrow too much and to invest in socially unproductive or excessively risky activities. The second category, the financial panic view, argues that the key issue was a maturity mismatch of assets and liabilities in national financial systems. The article compares the two viewpoints and concludes that the financial panic view has a more solid theoretical foundation and is consistent with a wider range of observations than the bad policy view.

Within a few months in late 1997, a number of East Asian countries were hit by financial and exchange rate crises. Much analysis of this episode has emphasized either internal financial weaknesses or a process of contagion that converted a financial problem in one country into a regionwide crisis. The author of this article explores an alternative possibility: that some external shock common to all these countries triggered the crisis. The Chinese devaluation of 1994 and the prolonged Japanese recession are sometimes cited as factors, but the article concludes that they were probably only minor contributors. Evidence does suggest that the sharp rise in the value of the dollar that began about two years before the crisis itself may have had a major impact.

The rising dollar induced substantial exchange rate appreciation for the crisis countries because, as estimates of basket weights indicate, they were tying their currencies closely to the dollar by giving the dollar heavy weight. The result was significant slowdowns in export growth that probably contributed to the regionwide crisis. The author suggests that for the future these countries might find it advantageous to peg their exchange rates to a diversified basket of currencies that would help ensure that their exports to their three largest developed-country customers—the United States, Japan, and the euro area—would not all drop off simultaneously.

Are Money Growth and Inflation Still Related? Unions and the Wage-Productivity Gap
Gerald P. Dwyer Jr. and R.W. Hafer 32 Madeline Zavodny 44

Despite the long history and the substantial evidence supporting the conclusion that persistent changes in the price level are associated with changes in the money supply, the predicted association remains disputed. Is it debated because the empirical relationship holds over time periods so long that it may be uninformative for practitioners and policymakers, who are more concerned about inflation next month or next year? If it takes a generation for the relationship between money growth and inflation to become apparent, it would not be surprising that central bankers and practitioners put little weight on recent money growth.

It is not clear, though, that it takes a generation. The authors of this article reconsider the link between money growth and inflation, using two types of evidence. The first, based on the behavior of five countries' price levels and money stocks over much of the twentieth century, provides a perspective over time. The second uses two recent five-year periods for a number of countries for which collecting comparable data covering long periods is not feasible. A positive, proportional relationship between the price level and money relative to real income is evident in data over long periods of time and over shorter periods for many countries.

Does the behavior of inflation justify ignoring money growth when attempting to estimate future inflation? The evidence in this article indicates not.

Although both real wages and productivity have been growing at relatively slow rates during the last two decades, some measures indicate that earnings have failed to keep up with productivity growth. The slowdown in real wage growth is important to workers and their families because their purchasing power is not rising if earnings are not increasing faster than prices. The failure of growth in real wages to match productivity gains also has critical implications for workers.

A substantial decline in the unionization rate since the 1960s has been cited as underlying the wage-productivity gap. This article explores the trends in productivity, pay, and the unionization rate, analyzing data over the 1974–94 period. The author concludes that the decline in the unionization rate does not explain a significant portion of the rise in the wage-productivity gap in the manufacturing sector. A resurgence of unions might help workers reap more benefits from productivity gains, but it appears unlikely that an increase in the unionization rate alone would cause compensation increases to fully match productivity gains.