Financial Liberalization and Inflationary Dynamics in the Context of a Small Open Economy

The paper develops a short-run model of a small open financially repressed economy characterized by unorganized money markets, capital good imports, capital mobility, wage indexation, and flexible exchange rates. The analysis shows that financial liberalization, in the form of an increased rate of interest on deposits and tight monetary policy, unambiguously and unconditionally causes deflation. Moreover, the results do not depend on the degree of capital mobility and structure of wage setting. The paper recommends that a small open developing economy should deregulate interest rates and tighten monetary policy if reducing inflation is a priority. The pre-requisite for such a policy, however, requires the establishment of a flexible exchange rate regime.

Job Matching and Wage Growth in the U.S. and Germany

This paper examines the contribution of job matching to wage growth in the U.S. and Germany using data drawn from the Panel Study of Income Dynamics and the German Socio-Economic Panel from 1984 through 1992. Using a symmetrical set of variables and data handling procedures, real wage growth is found to be higher in the U.S. than in Germany during this period. Also, using two different estimators, job matches are found to enhance wage growth in the U.S. and retard it in Germany. The relationship of general skills to employment in each country appears responsible for this result.