Publisher Summary This chapter discusses history of international transactions and relationships that were introduced into macroeconomic models and policy in the twenty-five years following the Second World War. Modern models of exchange-rate determination focus sharply on money and bond markets. The chapter discusses the Marshall–Lerner–Robinson that was developed to show how a change in the exchange rate affects the current-account balance. The Keynesian multiplier has been used to show how changes in domestic activity affect the balance of payments and to trace the propagation of business fluctuations. The chapter focuses on the aims and instruments of economic policy. It discusses fixed and flexible exchange rates that are dealt mainly with the best technique for altering rates promptly. The ways in which exchange-rate changes can influence wages and prices, nominal rates of return on financial instruments, or the demand for real balances are also discussed in the chapter. Finally, it reviews that the actors within any economic model base their own decisions on experience. The ways in which households, firms, and governments respond to information are conditioned by earlier successes and mistakes. They may be maximizing something or other, but their strategies are almost always based on imperfect information and imperfect methods for collecting and assessing it. The institutional framework within which they operate is itself a product of experience. Economists design their own models to fit certain sets of facts, frequently subsets of “stylized facts” distilled from recollection and observation by methods that lead to build models that fit the recent facts most closely.

Round Table on Exchange Rate Policy

Chapter 13 Macroeconomic theory and policy: How the closed economy was opened

espanolMediante aplicacion del analisis espectral se descompone el ciclo empirico de los terminos de intercambio en ciclos teoricos periodicos, para un grupo de paises que denominamos "de extrema abundancia de tierra". Para Argentina, Australia, Nueva Zelanda y Uruguay en el periodo 1870-2009 las funciones de densidad espectral identifican picos correspondientes a ciclos de largo plazo de sus terminos de intercambio de entre 24 y 56 anos, con una media de 28 anos. La descomposicion de la varianza indica que tales movimientos ciclicos de largo plazo explican una fraccion sustancial de entre el 68% y el 83% de la varianza total. Los resultados estadisticos son robustos a la eleccion de los parametros y del tipo de ventana espectral, Parzen o Bartlett, aplicada en las estimaciones. Implicancias de politica apuntan a las restricciones que impone la abundancia de recursos idiosincrasica, al grado de diversificacion de exportaciones, y la advertencia que al menos parte de los shocks de terminos de intercambio debe ser ajustado. EnglishSpectral analysis is applied to the empirical identification of terms of trade cycles, in the secular evolution, 1870-2009, of a group of extreme-land-abundant countries: Argentina, Australia, Canada, New Zealand, and Uruguay. Estimates of the power density spectrum functions produce statistically significant spectral peaks associated with long-run cycle periods between 24 and 56 years, with a mode of about 28 years for all five countries, and the variance decomposition shows that these long-run cycles account for a very substantial fraction, between 68% and 83%, of the TOT total variance. These results are very robust to changes in the choice of truncation lag, as well as to the type of spectral window (Parzen and Bartlett) used in the estimations.

Terms of trade cycles in extreme land abundant countries, 1870-2009. Spectral analysis

We conjecture that extreme land abundant endowment constitutes a structural restriction driving sectoral specialization and terms of trade volatility. We estimate and compare several volatility indicators for Argentina, Australia and New Zealand in 870-2009 finding co-movements, structural breaks in variability, significant cross correlations between TOT cycles, and in some cases heteroskedasticity. If "first nature" land-abundance is a long-term structural restriction, development policies for this type of economies must balance reductions in TOT volatility through export diversification (ay rising costs) and a combination of efficiency improvements and internal flexibility to manage volatility effects.

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Co-movements in terms of trade volatility in land-abundant countries

In conclusion, I would like to suggest that theoretical analysis of the problems of the international monetary system has been dominated and excessively restricted by concern with the mechanics of analysis, and the time has come for introducing some elements of welfare economics into the study of international monetary problems. For example, how should the welfare costs and benefits of disequilibrium be specified, so as to permit analysis of the welfare implications of varying the speed of adjustment of policy instruments; to deviations of actual from target levels of the indicators of policy objectives? Or to permit the development of rules for sharing the burden of adjustment between deficit and surplus countries? What can be said in theory about the welfare aspects of financing a deficit by borrowing, or suppressing it by controls, instead of eliminating it by deflation as rapidly as required by the limitation of the reserves available? These are problems of great concern to practical policy-makers, with respect to which rigorous economic theory should be capable of contributing much more than it has done so far.

Round Table on Exchange Rate Policy

Citations

Chapter 13 Macroeconomic theory and policy: How the closed economy was opened

Terms of trade cycles in extreme land abundant countries, 1870-2009. Spectral analysis

Co-movements in terms of trade volatility in land-abundant countries

The welfare economics of international adjustment

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