Editors' Summary

This volume of Economía consists of four papers. The first paper, by Nick Barr and Peter Diamond, discusses the lessons from economic theory for the design of pension funds. This article is based on a book written by the same authors, and according to Diamond, this is perhaps the last paper they will write on pension funds. We are honored and ecstatic that they decided to publish this piece in Economía. From pension design, we move to the current subprime crisis. The second paper, "Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform" by Augusto de la Torre and Alain Ize, offers new institutions for dealing with the global financial crises. The third paper, "Labor Market Rigidities and Informality in Colombia" by Camilo Mondragón-Vélez, Ximena Peña, and Daniel Wills, studies how labor market rigidities such as minimum wage regulations affect the size of the informal sector. The paper finds that labor market rigidities tend to increase informality, and it has a larger impact on unskilled workers than on skilled workers. Finally, the fourth paper studies the impact of central bank communications on the performance of the economy. The paper, "Communicational Bias in Monetary Policy: Can Words Forecast Deeds?" by Pablo Pincheira and Mauricio Calani, studies how central bank communications actually predict the path of future monetary policy.

In 2008 Nicholas Barr and Peter Diamond published a book entitled Reforming Pensions: Principles and Policy Choices. From that extensive research and experience, they decided to summarize the main policy lessons for designing pensions for Latin America. The key lessons that arise from the theory are the following: First, pension systems have multiple objectives. Although this might sound trivial, it is rarely recognized when a pension system is to be designed. Second, different pension designs have very different risk-sharing implications for the participants. Some systems put more of the burden on the individuals, others on the government, others on the young, and so forth. Third, there is no single pension system that is the best for all countries, at all times. Again, this might sound trivial, but few bureaucrats have ever even [Begin Page vii] considered the possibility that their country's pension system might not be the perfect one. Fourth, because of the existence of clear market failures, a pension system should be designed in the context of the second-best option. Finally, and almost a corollary of the previous four, moving to a funded system might not be appropriate given the specific conditions in which the system operates. After summarizing the lessons, the paper explores the policy implications for high- and middle-income countries. The paper reduces the complexity of all possible choices to a smaller set, concentrating on those aspects of the design that are particularly relevant.

Augusto de la Torre and Alain Ize discuss the possible institutional arrangements needed in international financial markets to deal with the global crisis caused by the subprime collapse. The paper starts by considering the four possible financial paradigms that govern banking and financial regulation: costly enforcement, collective action, asymmetric information, and collective cognition. Each of these paradigms has an associated market failure, such as rational bubbles, coordination failures, moral hazard, and cascades, respectively. After discussing the framework for analyzing the problem of regulation, in which all paradigms need to be contemplated, the authors proceed to their recommendations for improving the current regulatory environment.

Camilo Mondragón-Vélez, Ximena Peña, and Daniel Wills study the evolution of labor market informality in Colombia between 1984 and 2006. This period is particularly interesting because it has booms and recessions, as well as changes in labor market regulation. In particular, there are significant changes in nonwage costs and minimum wages. The authors use the time heterogeneity in these variables to disentangle their effects. As expected, they find that when there are high nonwage costs and high minimum wages, "the formal sector must adjust to the economic cycle through quantities rather than wages, cutting back on mostly low-skilled jobs." This also implies a decrease in wages in the informal sector. In their regressions, it is clear...