on cross border bank credit and the u s financial crisis transmission to equity markets this paper examines the role played by cross border equity bond and bank credit flows versus international trade in the transmission of the u s financial crisis to equity markets worldwide we estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries the results from an eclectic methodology that includes causality tests generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade the results are robust to altering the exogenous versus endogenous vectors of variables to measuring equity prices in u s dollars or local currency to averaging the data across countries versus averaging the parameters from individual country estimation and to redefining the start date of the crisis the findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability

why the middle is unstable the political economy of exchange rate regimes and currency crises the contribution of sticky exchange rates to the rash of currency crises over the past decade has become a major topic of international monetary analysis and policy discussion while there is widespread agreement among economists that the middle of the exchange rate spectrum adjustable pegs is highly crisis prone in a world of substantial capital mobility jeffrey frankel has recently argued that surprisingly we lack a clear theoretical rationale for why this is so this paper attempts to fill that void it argues that frankel is correct in terms of economic analysis alone but that when political economy considerations are introduced then a satisfactory explanation is at hand key aspects of this political economy perspective are laid out and implications for exchange rate policy are considered the analysis suggests that for promoting currency stability the traditionally debated distinctions between crawling bands and managed floats are likely less important than the political environments in which they are operated

can leading indicators assess country vulnerability evidence from the 2008 09 global financial crisis abstract we investigate whether leading indicators can help explain the cross country incidence of the 2008 09 financial crisis rather than looking for indicators with specific relevance to the recent crisis the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators our motivation is to address suspicions that indicators found to be useful predictors in one round of crises are typically not useful to predict the next round the review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and episodes in the past for the 2008 09 crisis we use six different variables to measure crisis incidence drops in gdp and industrial production currency depreciation stock market performance reserve losses and participation in an imf program we find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008 09 crisis in line with the conclusions of the pre 2008 literature in addition to reserves recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis we define the period of the global financial shock as running from late 2008 to early 2009 which probably explains why we find stronger results than earlier papers such as obstfeld et al 2009 2010 and rose and spiegel 2009a b 2010 2011 which use annual data

post mortem examination of the international financial network abstract as the recent crisis has forcefully suggested understanding financial market interconnectedness is of a paramount importance to explain systemic risk stability and economic dynamics in this paper we address these issues along two related perspectives first we explore the statistical properties of the international financial network ifn defined as a weighted directed graph where nodes are countries and links represent debtor creditor relationships in equities and short long run debt we investigate whether the 2008 financial crisis has resulted in a significant change in the topological properties of the ifn our findings suggest that the crisis caused not only a reduction in the amount of securities traded but also induced changes in the topology of the network and in the time evolution of its statistical properties this has happened however without changing the disassortative core periphery structure of the ifn architecture second we perform an econometric study to examine the ability of network based measures to explain cross country differences in crisis intensity we investigate whether the conclusion of previous studies showing that international connectedness is not a relevant predictor of crisis intensity may be reversed once one explicitly accounts for the position of each country within the ifn we show that higher interconnectedness reduces the severity of the crisis as it allows adverse shocks to dissipate quicker however being central in the network may make countries that are not members of a rich club more vulnerable in times of crisis finally we find strong evidence of nonlinear effects once the high degree of heterogeneity that characterizes the ifn is taken into account

the effects of inflation and real wages on employment this paper considers the effects of inflation on employment the absence of index linked loans and the possibility that errors are committed in times of inflation lead to a higher probability of bankruptcy during inflation if firms care about bankruptcy this implies a lower level of employment empirical results confirming this are presented and suggest that higher inflation has substantially contributed to the fall in employment in the united kingdom the authors also demonstrate that a negative real wage elasticity is not robust to changes in specification copyright 1987 by the review of economic studies limited

the rise of fund managers in foreign exchange will fundamentals ultimately dominate this paper analyses the behaviour and motivation of fund managers in foreign exchange markets reflected in questionnaire evidence we find that fund managers and fx dealers differ significantly fund managers rely more on fundamentals basically due to their longer forecasting horizons and reject non fundamental influences on exchange rates more than fx dealers however neither can fund managers be considered as pure fundamentalists non fundamentalist positions markedly influence short term decision making they inspire ambivalent views about market imperfections and these views seem to become stronger over time this latter change counterbalances the strengthening fundamental influences resulting from the rise of fund managers

how central banks prepare for financial crises an empirical analysis of the effects of crises and globalisation on international reserves central banks international reserve holdings have increased significantly in the recent past while traditional models fail to explain this accumulation of reserves the more recent literature argues that reserves are used as a lifejacket against currency crises however research so far has neglected the question whether and how central banks change their precautionary reserve holdings after the country was affected by a currency crisis this paper tests the hypothesis that central banks revise their reserve policy in the aftermath of currency crises a dynamic panel data model is estimated for developing and industrial countries covering the period from 1975 to 2003 the evidence suggests that currency crises induce a permanent increase of reserves this effect is particularly strong for recent currency crises since the asian financial crisis

endogenous changes in the exchange rate regime a bureaucratic incentive model public choice submits that legal changes can be endogenous in such a way that they are manipulated by bureaucrats who want to maximize rents from transactions with various interest groups this paper takes the change in exchange rate regimes to empirically examine the premise it offers a two stage method in which we first show that the exchange rate is influenced by interest group pressures and subsequently that the 1990 market average regime mar as a phase in policy in korea was introduced mainly to serve bureaucratic incentives this method is expected to be useful to a host of countries for various studies attempting to test a possible existence of bureaucratic or other hidden motivations behind any isolated event of policy change

predicting currency fluctuations and crises do resident firms have an informational advantage the authors investigate whether resident enterprise managers have an informational advantage about the countries in which they work they propose a method for extracting information available to resident managers but unknown to investors and forecasters they rest their hypothesis of informational advantage using a unique data set the global competitiveness survey the survey asks local managers about their outlook for the country in which they reside they find that local managers do have useful private information local managers responses improve on conventional forecasts of future volatility and changes in the exchange rate which are based on economic fundamentals or interest rate differentials they find that the local business community perceived in advance the recent crises in the republic of korea russia and thailand but not those in indonesia and malaysia markets have had limited success predicting crises and might do better by drawing on private information available to resident enterprise managers who seem to know better than markets about future movements in exchange rates

currency crises and institutions abstract this study furthers recent literature on currency crises and institutions the main objective is to re evaluate the causes of currency crises by focusing on the role played by a broader array of institutional factors and crisis episodes than have previously been considered while at the same time controlling for economic factors our dataset consists of over 30 countries covering 13 institutional factors for the period 1984 2002 two questions are addressed they are 1 what mix of institutions may contribute to or set the stage for a currency crisis and 2 what mix of institutions may affect the depth of currency crises as measured by a decline in output our findings reveal that institutional as well as economic factors affect the probability of currency crises and that worse institutions are associated with bigger contractions in output during the crisis in general our strongest results regarding institutions show that corruption a de facto fixed exchange rate regime weak government stability and weak law and order increase the probability of a currency crisis we find mixed evidence that deposit insurance the removal of capital controls a lack of central bank independence financial liberalization and civil law increase the chance of crisis we find a similar set of factors worsens the contraction in output during a crisis except for deposit insurance which we find moderates the contraction in output

alert at maradi preventing food crises by using price signals national early warning systems of sahelian countries are mainly based on biophysics models to predict agricultural production shortages and prevent food crisis the objective of this paper is to show that cereal market prices also bring useful information on future food availability that could complete current early warning disposals indeed at any point in time prices are informative not only on the state of present food availability but also on agents expectations about future availability the research is based on the exploitation of the statistical properties of price series it aims at detecting movements in the prices trend signalling a coming crisis we first identify markets playing a leading role in price formation at the national and regional level through the estimation of var models the second step consists in identifying crisis periods and then the price shocks characterises during the period which precedes a crisis this analysis leads to the identification of early warning indicators whose relevance is tested using panel data qualitative choice models the data set encompasses 50 markets belonging to three countries mali burkina faso and niger over the period 1990 2008 the results show that past price shocks on a few number of leading marketplaces can help preventing coming crises

worldwide economic recoveries from financial crises through the decades abstract the profiles of economic recoveries after a financial crisis are identified through a self organizing map covering 104 countries during 1973 2017 first and surprisingly only 55 of the 276 events belong to the usual v u l classification new s shaped bounce back recoveries d oomed ones and double dip m occur in 23 18 and 4 of the cases respectively second the frequencies of profiles vary with the crisis type countries development and location and over time third unlike government spending supporting domestic credit liquidity foreign trade or else the exchange rate after the crisis may help activity bounce back

currency crashes in emerging markets an empirical treatment we use a panel of annual data for over 100 developing countries from 1971 through 1992 to characterize currency crashes we define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation we examine the composition of the debt as well as its level and a variety of other macroeconomic factors external and foreign crashes tend to occur when output growth is low the growth of domestic credit is high and the level of foreign interest rates are high a low ratio of fdi to debt is consistently associated with a high likelihood of a crash

explaining the duration of exchange rate pegs abstract this paper is an empirical investigation of the duration of exchange rate pegs in 16 latin american countries and jamaica we identify factors that influence peg duration using logit analysis the real exchange rate and the level of international liquidity are significant determinants of the monthly likelihood of devaluation structural variables such as the openness of an economy and its geographical trade concentration and political variables such as changes in the executive also significantly affect the likelihood of a devaluation there is some evidence that the likelihood of a devaluation first rises and subsequently declines during the first year of a peg

reserve accumulation and financial crises from individual protection to systemic risk abstract this paper provides a new perspective on the relationship between countries international reserve holdings and financial crises while the local view holds that reserves may prevent domestic crises it overlooks that the accumulation of reserves relaxes the financing constraint of the reserve currency country and may cause a financial crisis in the centre which is transmitted globally according to this global view reserve accumulation might destabilize the international financial system since the crisis affects all countries alike the accumulation of reserves imposes a negative externality on non accumulating countries we integrate this idea in a theoretical model of the optimal amount of reserves and illustrate the gap between local and global optimality the consideration of systemic risk lowers the demand for reserves moreover if a supranational authority determines the optimal level of reserves it internalizes the negative externality and accumulates fewer reserves a macroprudential tax on reserve hoardings might implement the socially optimal solution our calibration analysis shows that these considerations are economically significant they lower the optimal amount of reserves in the benchmark case by 45

cross country experiences and policy implications from the global financial crisis the financial crisis of 2007 2008 is rooted in a number of factors some common to previous financial crises others new analysis of post crisis macroeconomic and financial sector performance for 58 advanced countries and emerging markets shows a differential impact of old and new factors factors common to other crises like asset price bubbles and current account deficits help to explain cross country differences in the severity of real economic impacts new factors such as increased financial integration and dependence on wholesale funding help to account for the amplification and global spread of the financial crisis our findings point to vulnerabilities to be monitored and areas of needed national and international reforms to reduce risk of future crises and cross border spillovers they also reinforce a sad state of knowledge much of how crises start and spread remains unknown stijn claessens giovanni dell ariccia deniz igan and luc laeven

the employment financing nexus evidence from a panel of west german firms the objective of the paper is to investigate the linkage between financial factors and employment decisions of west german firms the underlying model is based upon rational expectations and convex adjustment costs the time series cross section estimates for the period 1989 1994 are obtained using information on individual firms contained in business surveys we find that financial constraints can indeed restrain the level of employment in small firms on the contrary there is no evidence that this result applies to larger firms as well

famines and economics famines have happened with and without crop failures or wars but they invariably entail a collapse in the command over food of vulnerable subgroups within a society whether through loss of endowment or a contraction in the amount of food that can be acquired from given endowments thus economic analysis can help understand famines viewed as tragic aperiodic magnifications of normal market and governmental failures recent literature in economics and other fields has reflected this change in the conceptualization of famines and it has come with policy implications for famine relieve and prevention

inflation and central bank independence conventional wisdom redux until recently there existed a broad consensus that an important institution for combating inflation is a central bank insulated from political influence this conventional wisdom has been challenged by among others campillo and miron 1997 who present evidence purporting to show that if an inflation regression equation is expanded to include not only their proxy for central bank independence cbi but other regressors as well then the negative correlation between inflation and cbi vanishes the present paper argues that allegations of the demise of this nexus should not be accepted uncritically this paper which reports the results of an analysis of covariance structures finds a strong negative relationship between inflation and cbi

nontraded food commodity spatial price transmission evidence from the niger millet market using an augmented factor vector autoregressive favar model this study analyzes spatial millet prices transmission in niger our results did not find condition for millet markets integration existence however the granger causality tests and impulse response functions from the estimated short term dynamic as favar model revealed the existence of leading markets whose millet prices affect a maximum number of other regional millet prices while some regions seem to be isolated from trade or information flows furthermore the significance of a shock depends also on the characteristics of the region where it originates in terms of millet demand or supply indicating that the region to target and where the price shock originated matter for the policies success

the performance of rice markets in bangladesh during the 1974 famine recent discussions have further emphasised the role of speculation in foodgrains as a cause of famine hartmann and boyce i 979 sobhan i 980 rashid i 980 sen i98i greenough i982 by this reasoning famine is attributed to the expectation on the part of foodgrain stockholders of a substantial future price increase or future rationing there is a weakness in this explanation as arrow remarks in his review of sen i98i

fertilizer subsidies political influence and local food prices in sub saharan africa evidence from nigeria abstract the last decade has seen a resurgence in the use of fertilizer subsidies in sub saharan africa however there is limited empirical evidence on the effects of fertilizer subsidy programs on local food prices using an instrumental variables approach we explore the effect of a fertilizer subsidy program on the seasonal growth rates of grain prices in nigeria our results suggest that the fertilizer subsidy program had very small effects on the growth rates of grain prices between the post planting and post harvesting seasons we also find that political influence played a role in the distribution of subsidized fertilizer we discuss how the weak effects on the price growth rates may be caused by low market orientation output market structures greater focus on farmers incomes low marginal productivity of fertilizer and politically influenced targeting

do weak institutions prolong crises on the identification characteristics and duration of declines during economic slumps this paper studies periods of prolonged contractions in output per capita in a sample of 145 countries from 1950 to 2014 economic slumps are defined as abrupt interruptions of a period of growth by several regime switches slumps start with a sharp contraction along with a trend break which is followed by another switch when growth stabilizes again the paper then analyzes the correlates of these slumps focusing on the length and depth of the contraction from the beginning of the slump to its trough the results establish three new stylized facts i weak political institutions predate crises whereas political reforms tend to follow them ii the length and depth of economic declines are robustly correlated with executive constraints and ethnic heterogeneity and iii there is a robust interaction between these two variables suggesting that institutions constraining leaders are important for stabilizing growth this is particularly relevant for sub saharan africa where politics are often ethnic and decision makers are comparatively unconstrained

wage interdependence through decentralized bargaining abstract the idea that sector specific unions are influenced by the wages obtained by other unions has mainly been used to support the empirical observation that wages are highly correlated among industries the sources of wage interdependence can mainly be found in unions preferences in the nature of technology and in price and demand determination the presence of externalities and of strategic complementarity among unions leads to suboptimal equilibria which generates non desired inflation unemployment and possibly also trade balance deficit this enforces the idea that part of current unemployment can be eliminated by improving the cooperation between social actors

exchange rate regimes and the cross country distribution of the 1997 financial crisis robin m grier we study variations in the severity of the 1997 financial crisis in a sample of 25 developing countries we use both currency depreciation and stock market returns as crisis measures our key findings are that countries that started 1997 with an exchange rate peg experienced significantly greater currency depreciation and significantly lower stock returns than would be predicted from the levels of various macroeconomic indicators jel f3 f4 i introduction the asian financial crisis of 1997 is still a very hot topic a recent search of econlit turned up 243 articles in the system with asian crisis in the subject field 1 several recent articles attempt to explain variations in the severity of the crisis across developing countries using macroeconomic and financial variables and show that the distribution of the crisis is somewhat predictable our article extends this literature in two directions first we examine whether the initial exchange rate regime in place at the beginning of 1997 had any effect on the distribution of the financial crisis once the relevant macro and financial indicators are included in the model second given that a real crisis followed on the heels of the financial one we study the relationship between exchange rate regime currency depreciation and stock market performance in 1997 our sample consists of 25 developing countries in 1997 2 though a cross sectional approach limits the generality of our results we believe we can ask and answer two interesting questions about the average performance of different exchange rate regimes in 1997 the first question is controlling for economic indicators what was the average effect of having an initially pegged exchange rate on currency depreciation there are theoretical arguments presented in section ii that can justify either positive negative or zero effects we find that on average countries with a pegged regime at the beginning of the year experienced more depreciation than what was predicted by their macro indicators the second question we study is what was the average effect of currency depreciation on stock market performance in 1997 again there are arguments presented in section iii supporting either a positive negative or neutral relationship we find that on average depreciation has a marginally significant negative impact on stock returns however in the 12 countries that began 1997 with a floating exchange rate currency depreciation had a significantly positive effect on stock returns whereas the effect of depreciation on stock returns was negative and significant for the 13 countries that started the year with a pegged currency this relationship holds for stock returns measured either in u s dollars or in local currencies the papers most similar to ours in the literature are tornell and velasco 1995 edwards 1993 corsetti et al 1999 hereafter cpr and tornell 1999 tornell and velasco and edwards study whether or not the choice of exchange rate regime affects economic outcomes 3 cpr and tornell study the asian financial crisis of 1997 in the broader context of developing country performance they create a crisis index and estimate several regressions using macro and financial indicators to predict the extent of the crisis in a sample of developing countries our article applies the idea that the choice of exchange rate regime can affect macroeconomic and financial outcomes to the study of the determinants of the severity of the 1997 crisis in a model similar to those of cpr and tornell in what follows below section ii studies the relationship between macro and financial indicators the initial exchange rate regime and currency depreciation in 1997 section iii considers the depreciation exchange rate regime stock market connection in 1997 section iv presents our conclusions ii macro indicators currency depreciation and exchange rate regime in 1997 the question of what exactly determines the value of the exchange rate is an important unsolved issue in open economy macroeconomics and we are not going to settle it here

cross country causes and consequences of the crisis an update abstract we update rose and spiegel forthcoming rose and spiegel 2010 and search for simple quantitative models of macroeconomic and financial indicators of the great recession of 2008 09 we use a cross country approach and examine a number of potential causes that have been found to be successful indicators of crisis intensity by other scholars we check a number of different indicators of crisis intensity and a variety of different country samples while countries with higher income and looser credit market regulation seemed to suffer worse crises we find few clear reliable indicators in the pre crisis data of the incidence of the great recession countries with current account surpluses seemed better insulated from slowdowns

predicting currency crises abstract in recent years a number of researchers have claimed success in systematically predicting which countries are more likely to suffer currency crises most notably kaminsky lizondo and reinhart 1998 this paper evaluates the klr approach to anticipating currency crises and develops and tests an alternative first we try to answer the question if we had been using the klr model in late 1996 how well armed would we have been to predict the asia crisis second we analyze a more general probit based model of predicting currency crises in the process we test several basic assumptions underlying the indicators approach

exchange rate regimes and wage comovements in a ricardian model with money we construct a ricardian model of trade with money and trade costs the model predicts that the nominal wages of the trading countries exhibit stronger positive comovements when the countries fix their bilateral exchange rates while comovements of real wages are not affected by exchange rate regimes our numerical experiments suggest that a reduction in trade costs increases both nominal and real wage comovements regardless of regimes when downward nominal wage rigidity is introduced nominal wage comovements under the fixed regime remain stronger than under the flexible regime and the difference is smaller on the shorter time horizon while a slight difference in real wage comovements between the two regimes shows up and is larger on the shorter time horizon when we consider membership in the economic and monetary union of the european union as a fixed exchange rate regime panel regression results based on data from oecd countries are broadly consistent with our model and numerical experiments

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

are currency crises predictable abstract this paper studies whether exchange rate expectations and overvaluations are predictors of currency crises the results suggest that overvaluation has predictive power in explaining the crises however although expected depreciation obtained from survey data partially takes different exchange rate misalignment measures into consideration expectations fail to anticipate currency crises

foreign effects of higher u s interest rates abstract this paper analyzes the spillovers of higher u s interest rates on economic activity in a large panel of 50 advanced and emerging economies we allow the response of gdp in each country to vary according to its exchange rate regime trade openness and a vulnerability index that includes current account foreign reserves inflation and external debt we document large heterogeneity in the response of advanced and emerging economies to u s interest rate surprises in response to a u s monetary tightening gdp in foreign economies drops about as much as it does in the united states with a larger decline in emerging economies than in advanced economies in advanced economies trade openness with the united states and the exchange rate regime account for a large portion of the contraction in activity in emerging economies the responses do not depend on the exchange rate regime or trade openness but are larger when vulnerability is high

structural determinants of spatial labour markets a case study of the netherlands van der laan l 1992 structural determinants of spatial labour markets a case study of the netherlands reg studies 26 485 498 this research analyses the causal structure of the regional differentiation of labour markets in the netherlands in the period 1975 85 a heterodox model is constructed with the help of various economic labour market theories based on a latent variable partial least squares model the analysis shows the relatively minor effect of regulation variables on the labour market and the importance of both the socio economic environment and the production process it also shows the strong integration of demand supply and commuting total incoming and outgoing migration though showed up to be unimportant for the regional differentiation of labour markets the research points to a continuing regional disequilibrium of demand and supply in relation to government policies this is based on the decreasing mobility of capital to the lagging regions an increase of the importance of

did established early warning signals predict the 2008 crises abstract over the past 60 years a voluminous literature has painstakingly developed crises theories and their associated early warning signals the hallmark of this literature is the consistency with which selected early warning signals such as the level of reserves and exchange rate appreciations are presumed to predict different types of crises across countries and time the diversity of crises theories that motivate early warning signals presents however a challenge to empirical implementations given that the true model of early warning signals is unknown omitted variable bias contaminates estimates and confidence levels when the uncertainty surrounding a particular theory has been ignored after addressing model uncertainty in early warning signal regressions using an extended version of frankel and saravelos 2012 j int econ 87 216 231 dataset we do not find a single early warning signal that alerts to all dimensions of the 2008 crisis instead distinct sets of early warning signals identify different dimensions of the crisis banking balance of payments exchange rate pressure and recession

financial instability reserves and central bank swap lines in the panic of 2008 in this paper we connect the events of the last twelve months the panic of 2008 as it has been called to the demand for international reserves in previous work we have shown that international reserve demand can be rationalized by a central bank s desire to backstop the broad money supply to avert the possibility of an internal external double drain a bank run combined with capital flight thus simply looking at trade or short term debt as motivations for reserve holdings is insufficient one must also consider the size of the banking system m2 here we show that a country s reserve holdings just before the current crisis relative to their predicted holdings based on these financial motives can significantly predict exchange rate movements of both emerging and advanced countries in 2008 countries with large war chests did not depreciate and some appreciated meanwhile those who held insufficient reserves based on our metric were likely to depreciate current account balances and short term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account our model s typically high predicted reserve levels provide important context for the unprecedented u s dollar swap lines recently provided to many countries by the federal reserve this abstract was borrowed from another version of this item

bargaining with outside options wages and employment in uk manufacturing 1974 1982 this paper studies the determinants of wages and employment at the firm level the question which is addressed is the extent to which external market pressures are important relative to economic variables which are specific to the firm one can interpret the former set of factors as outsider variables and the latter as reflecting the importance of insider variables the research is therefore a microeconomic investigation on insider versus outsider factors in wage and employment determination it can thus provide some evidence on the role played by the currently incumbent workers in affecting the economic conditions at the workplace see e g lindbeck and snower i986 i988 the issue has recently attracted considerable attention in view of its alleged capability of explaining the high and persistent levels of unemployment in western countries see also blanchard and summers i986 i987 and layard and bean i989 the theoretical model developed in the first part of the paper section i and then tested in the second part sections ii iv is a variant of the efficient bargains model of the labour market modified in accordance to recent developments in non cooperative game theory the classical model of labour bargaining is set out in mcdonald and solow i98i the firm and the union bargain over wages and employment simultaneously and the outcome is thus efficient in the sense of leontief 1946 traditional axiomatic bargaining

do unions contract for added employment the efficient contract model predicts unions will contract for added employment that is a level of employment higher than would be predicted by the demand curve for labor using three data sets on canadian industries in 1971 81 u s industries in 1972 and u s construction projects in 1973 74 and several estimation techniques the author estimates and compares labor demand equations for both union and nonunion firms some regressions that control for few variables support the added employment hypothesis but those with more complete specifications reject it