STAFF PAPERS PETER HOLE Chair, Editorial Committee lAN S. McDoNALD Editor and Deputy Chair MARINA PRIMORAC Assistant Editor Editorial Committee F. Charles Adams Malcolm D. Knight Mario I. Blejer Pau 1 R. Masson David Burton Donald J. Mathieson Daniel A. Citrin Susan M. Schadler David J. Goldsbrough Subhash M. Thakur Peter Isard Howell H. Zee G. Russell Kincaid Among the responsibilities of the International Monetary Fund, as set fonh in its Anicles of Agreement, is the obligation to "act as a centre for the collection and exchange of information on monetary and financial problems." Staff Papers makes available to a wider audience papers prepared by the members of the Fund staff. The views presented in the papers are those of the authors and are not to be interpreted as necessarily indicating the position of the Executive Board or of the Fund. To facilitate electronic storage and retrieval of bibliographic data. StaffPapers has adopted the subject classification scheme developed by the Journal of Economic Literature. Subscription: US$54.00a volume or the approximate equivalent in the currencies of most countries. Four numbers constitute a volume. Single copies may be purchased at $18.00. Individual academic rate to full-time professors and students of universities and colleges: $27 a volume. Subscriptions and orders should be sent to: International Monetary Fund Publication Services 700 19th Street. N.W. Washington, D.C. 20431, U.S.A. Telephone: (202) 623-7430 Telefax: (202) 623-7201 Internet: [email protected] ©International Monetary Fund. Not for Redistribution INTERNATIONAL MONETARY FUND STAFF PAPERS Vol. 42 No. 4 DECEMBER 1995 ©International Monetary Fund. Not for Redistribution EDITOR'S NOTE TI1e Editor invites from contributors outside the Fund brief comments (not more than 1 ,000 words) on published articles in StaffPapers. These com­ ments should be addressed to the Editor. who will forward them to the author of the original article for reply. Both the comments and the reply will be considered for publication. The term "country," as used in this publication, may not refer to a territorial entity that is a state as understood by inter­ national law and practice; the term may also cover some ter­ ritorial entities that are not states but for which statistical data are maintained and provided internationally on a separate and independent basis. © 1995 by the International Monetary Fund International Standard Serial Number: ISSN 0020-8027 The U.S. Library of Congress has cataloged this serial publication as follows: International Monetary Fund Staff papers - Imernational Monetary Fund. v. 1- Feb. 1950- [Washington] International Monetary Fund. v. tables. diagrs. 23 cm. Threeno. a year, 1950-1977; four no. a year. 1978- lndexes: Vols. 1-27, 1950-80. I v. ISSN 0020-8027 - Staff papers- lmemationaJ Moncwry Fund. I. Foreign exchange-Periodicals. 2. Commerce-Periodicals. 3. Currency question-Periodicals. HG3810.15 332.082 53-35483 ©International Monetary Fund. Not for Redistribution CONTENTS Vol. 42 No. 4 December 1995 SPECIAL SECTION Celebrating Fifty Years of the InternationaJ Monetary Fund Early Contributions of StaffPapers to lntemational Economics MARIO I. BLEJER, MOHSIN S. KHAN, and PAUL R. MASSON • 707 Fifty Years of Exchange Rate Research and Policy At the lntemational Monetary Fund JACQUES J. POLAK • 734 The Historical Development of the Principle of Surveillance HAROLD JAMES • 762 Conditionality: Past, Present, Future MANUEL GUITIAN • 792 Wage Structures in the Transition of the Czech Economy ROBERT J. FLANAGAN • 836 Pricing to Market and the Real Exchange Rate HAMID FARUQEE • 855 Shorter Paper and Comment Unemployment Hysteresis, Wage Determination, and Labor Market Flexibility: The Case of Belgium REZA MOGHADAM and CAROLINE VAN RIJCKEGHEM • 882 German Unification and Asymmetry in the ERM: Comment on Gardner and Perraudin JEROME HENRY and JENS WEIDMANN • 894 IMF Working Papers • 903 Volume 42 Index • 905 iii ©International Monetary Fund. Not for Redistribution Thispage intentionallyleft blank ©International Monetary Fund. Not for Redistribution Foreword To mark the fiftieth anniversary of the International Monetary Fund, the Editorial Committee of Staff Papers commissioned four articles look­ ing back on the evolution of thought, research, and practice in the Fund in core areas of the institution's responsibilities and concerns. These papers are presented in this issue. The first paper provides a historical assessment of the Fund's research activities by analyzing the contribution of seminal articles published in StaffPapers in the journal's early decades. It was written by Mario Blejer, Mohsin Khan, and Paul Masson, three current staff members ofthe IMF. The second paper, on exchange rate policy and research, was contributed by a former Economic Counsellor of the Fund, Jacques Polak, who spent 33 of the institution's first 50 years as a staff member and remains closely associated with the institution to this day. The third paper, on the histor­ ical development of the principle of surveillance, was written by an outside observer, Harold James, Professor of History at Princeton Uni­ versity, who recently completed a comprehensive study of the man­ agement of the postwar international monetary system, International Monetary Cooperation Since Bretton Woods, published jointly by the IMF and Oxford University Press. In the fourth paper, Manuel Guitian, Director of the IMF's Monetary and Exchange Affairs Department, discusses the history of, present challenges to, and future prospects for lMF conditionality. The papers deal variously with conceptual and operational aspects of the Fund's work. There are, of course, linkages and overlaps between the activities covered in the four papers, and the demarcation between them is, in some respects, necessarily somewhat arbitrary. This reflects the complementarity of these activities as instruments that enable the Fund to fulfil) its assigned purposes, namely, to promote international mon­ etary cooperation, to facilitate the expansion and balanced growth of international trade, to promote exchange stability, to assist in the estab­ lishment of a multilateral system of payments, to give confidence to members by making resources available to them under adequate safe­ guards, and to shorten the duration and lessen the degree of disequi­ librium in the balances of payments of member countries. As the papers bring out, these purposes are still as relevant today as they were when the IMF was established. V ©International Monetary Fund. Not for Redistribution Thispage intentionallyleft blank ©International Monetary Fund. Not for Redistribution IMF StaffPapers No. 4 Vol. 42,International (December Monetary 1995) Fund (' 1995 Early Contributions of Staff Papers to International Economics MARIO I. BLEJER, MOHSIN S. KHAN, and PAUL R. MASSON* Staff Papers has, since its inception in 1950, been an important vehicle for the dissemination of research done by staff of the IM The paper discusses three areas in which articles published in Staff PapersF. up until the 1970s made major contributions to the literature in intemational eco­ nomics. The areas covered are: first, the absorption app roach and the monetary theory of the balance ofpayments; second, the Munde/1-Fieming model; and third, foreign trade modeling. The nature of the contributions and their relationship with further developments in the respective fields are detailed. (JEL B20] HE INTERNATIONAL MONETARY FUND'S StaffPap ers first appeared in T1950, apparently in response to a suggestion by Dennis Robertson that such a journal would prevent the premature burial of bright young economists in "an anonymous international bureaucracy" (Polak (1995)). Especially in its early days, the journal served as the main outlet for publication of economic research done by the staff. As such, it reflected-and continues to reflect-the preoccupations and operational needs of the Fund. 1 In particular, a large number of articles in the journal • Mario I. Blejer is Senior Advisor in the Monetary and Exchange Affairs Department. He is a graduate of the Hebrew University of Jerusalem and holds a Ph.D. from the Umversity of Chicago. Mohsin S. Khan is Deputy Director of the Research Department. He is a graduate of Columbia University and the London School of Economics and Political Science. Paul R. Masson is Assistant Director in the Research Department and was educated at McGill University (B.A.) and the London School of Economics (Ph.D.). The authors are grateful to Manuel Guitian, Jacques Polak, Assaf Razin, as well as other colleagues in the IMF for helpful comments. 1 At the same time, the articles in have also closely reflected the prevailing trends in the profession atStaff large.Papers 707 ©International Monetary Fund. Not for Redistribution MARIO I. BLEJER, MOHSIN S. KHAN, PAUL R. MASSON 708 and have been devoted to international monetary economics in its various aspects, to the transmission mechanisms of economic policies, and to practical questions relating to macroeconomic, particularly monetary and fiscal, policies in both industrial and developing economies. It has differed from academic journals in that most articles in Staff Papers are generally grounded in the IMF's operational work and reveal the expe­ rience gained by the staff in the course of their work. Despite this focus on the practical aspects of economic policy, Staff Papers articles have also made major empirical and theoretical contributions to the economics literature. One way to assess the impact of Staff Papers articles on the literature is through a numerical tabulation of citations. A recent article in the Economic Journa/2 uses this technique to rank journals, while making adjustments for "inputs'' (e.g., the number of articles in an issue and the number of issues), and finds that Staff Papers is one of the "core jour­ nals." In one ranking, it appears just above the Journal of Economic Theory, and just below the Journal of International Economics. 3 While such exercises should only be taken as indicative, since the conclusions that result are quite sensitive to methodology, these findings do suggest an important role for Staff Papers in the economics profession.