Showing papers on "Currency published in 1972"

Economic Interdependence and Foreign Policy in the Seventies

Abstract: A Casual reading of contemporary news reports suggests that during the past decade economic issues have taken on growing importance in the relations of non-Communist developed countries. The disputes between the United States and Japan over textiles, between the United States and the European Economic Community over agricultural trade, and between France and Germany over currency alignments come readily to mind. It is perhaps symbolic of the enormous success of early postwar foreign policy that issues no graver than these play such a prominent part in relations among countries that, earlier in the century, were sporadically at each other's throats.

The Trade Effects of the 1971 Currency Realignments

Abstract: THE YEAR 1971 SAW A MAJOR realignment of exchange rates among the world's important currencies. The basic cause of these changes was the continuing deterioration of the U.S. trade and payments position, and their proximate cause the massive speculation against the dollar throughout he year and suspension of convertibility by the United States in August. The changes in exchange rates against the dollar-the dollar price of foreign currencies-are expected to initiate a major swing toward surplus in the U.S. trade balance and consequently to reduce substantially the surpluses of some other countries. This paper attempts to provide reasonable and consistent estimates of the effects of the realignment on the trade balances of the major countries, based on current knowledge of the theoretical and empirical relationships involved. No new empirical evidence is produced here; I try rather to

Manager in the international economy

Abstract: The International Economy: A Manager's Perspective. THE ENTERPRISE FROM WITHIN. Going Multinational: Firm Motives and Characteristics. Case. Lotus Development Corporation: Entering International Markets. Managing the Multinational: Goals and Strategies. Case. Gerber Products Company: Investing in the New Poland. Managing the Multinational: Organizations and Networks. Case. Xerox and Fuji-Xerox. National Units in Multinational Networks. Case. Shell Brasil S.A.: Performance Evaluation in the Oil Products Division. THE ENTERPRISE AND THE NATION. Comparing National Economies. Case. Global Computer Industry. Exploring National Policies. Case. Collision Course in Commercial Aircraft: Boeing-Airbus-McDonnell Douglas (A). THE INTERNATIONAL ENVIRONMENT. The National Economy in an International Setting. Case. Volkswagen de Mexico North American Strategy (A). International Money Markets. Case. CIBA-GEIGY AG: Impact of Inflation and Currency. The International Rules of the Game: Money. Case. Fluctuations. The International Rules of the Game: Goods and Services. Case. Pfizer: Protecting Intellectual Property in a Global Marketplace. Balance of Payments Exercises (TBD) The Foreign Exchange Market: Problem Set (TBD).

The Exchange Risks of Foreign Operations

Abstract: Firms that engage in foreign operations are subject to a special type of risk. A foreign operation is obliged to hold assets, incur operating costs, and/or receive revenues whose domestic currency value will change when foreign price levels and the exchange rate change. Investors and corporate financial officers would like to know how such price changes affect the value of foreign operations. Changes in the present discounted value (PDV) of a foreign income stream due to price changes are calculated for a "typical" foreign operation. The PDV technique indicates potential capital gains and losses which are substantially different from those measured by the traditional accounting techniques.' Traditional accounting practices ignore changes in the terms of trade. The PDV technique reveals that fluctuations in the terms of trade may give rise to substantial capital gains or losses. The PDV approach yields results which are applicable to a wide variety of foreign operations. It is applicable to holdings of common stock in any foreign firm; the presence of American management or "control" is not a relevant consideration. The valuation technique also can be used to determine capital gains or losses for export-import operations located either in the United States or in a foreign country. One of the more interesting results is that a firm which produces in the United States for the foreign market may have a greater exposure to the risk of exchange rate and/or price change than an operation which supplies the foreign market from production facilities located abroad.

The East African Community

Abstract: It is claimed by many students of economic organizations that the East African Community is unique in the whole world and is one of the most integrated and most advanced of regional organizations for economic and political co-operation. This may well be so if it is compared with thoseorganizations which have sprung up during recent decades in an effort to stem military conflicts. To the many generations of East Africans who have grown up with the idea of co-operation through common services of railways, posts and telegraphs, airways, currency, customs and numerous others, this is not unique. In fact, considering the long period over which the States have been co-operating, the people had expected much more in 1967 than a mere “common market”—they wanted, and still want, a federation, at the least.

A technique for estimating income trends from currency data and an application to nineteenth‐century brazil

Abstract: This paper develops a method for estimating long-run trends in income growth from the data available on a country's currency stock. The method is applied to nineteenth-centry Brazil. The results indicate that contrary to earlier beliefs, the country as a whole probably experienced only moderate growth in per-capita income during the nineteenth century. The approach may also be useful for other countries where data shortages preclude estimates of national income by conventional methods.

Decision analysis for exchange risk management

Abstract: One of the factors which complicates financial decision making in a multinational enterprise is currency devaluations or revaluations in countries where subsidiaries are located. Since exchange rate changes affect the reported earnings, value of financial assets, and future earnings of the multinational corporation, it is imperative that the financial decision maker of such a firm develop a strategy to manage the foreign exchange risk assumed by the firm. It is the purpose of this article to develop relatively formal decision rules for managing the risk of exchange rate change. These rules are based on an analysis of a theoretical decision model of the exchange management process. The inherent uncertainty involved in exchange rate movements is the basic feature of the exchange risk situation. The nature of an optimal decision thus will depend on the attitudes of management toward risk and uncertainty. Four common attitudes will be assumed and examined: minimum variance, minimax, expected monetary value, and expected utility. Each yields a particular set of optimal rules for exchange risk adjustment. Three techniques are available for adjusting the exchange risk posture of the firm. These are (1) adjustment of funds flows, (2) forward contracts, and (3) exposure netting. Adjustment-of-funds-flow techniques involve an alteration in the planned funds flows of parent and/or subsidiaries, in amount and/or currency of denomination, with the view of reducing (or increasing) the local currency accounting exposure of the corporation. This exposure is defined as the difference in local currency assets translated to domestic currency at the current exchange rate and local currency liabilities translated at the same exchange rate. If the objective of management is to decrease exposure, the technique must increase local currency denominated liabilities or decrease local currency denominated assets. Techniques for increasing liabilities include local borrowing and stretching payables. Techniques for decreasing assets include reduction of cash balances and other liquid assets, reduction in investment in accounts receivable (either by tightening credit terms or factoring), and reduction in inventory investment (if inventories are translated at the current exchange rate). Each of these techniques generates local currency funds. If exposure is to be reduced, these funds must be used to acquire assets which are not exposed to the exchange risk. For example, if the parent corporation had planned to provide domestic currency funds to the subsidiary, locally generated funds can replace funds from the parent. Alternatively,

Labour Costs and International Competitiveness

Abstract: Figures published recently in Sweden illustrate the implications of Britain's failure to improve product ivity in the 1960s as quickly as continental Western Europe, <9 Though wage costs per unit of output in manufacturing industry have risen faster in Britain than in other major industrial countries, the statistics show that employers' total payments per hour of work are now lower here than in almost any industrial country except Japan. One reason why total labour costs are compara tively low in Britain is that employers pay much less here than in most other countries by way of social security charges. But so they did in 1960, and then the Scandinavian countries (apart from Finland) were the only ones in Europe where labour costs were as high as in Britain. The big change since then in Britain's relative position is mainly due to a much slower rise than in continental Europe in the value of hourly wage earnings compared either at official rates of exchange or, it would seem, in terms of domestic purchasing power.'2' It has occurred partly because, even in terms of national currencies, wages have risen rather more slowly in Britain than elsewhere, but it is partly due also to the decline in the international value of the pound. The disparity in rates of increase in wages (in national currency terms) has been far exceeded by the disparity in rates of increase of productivity. And since the price of raw materials is largely determined in world markets and affects production costs in much the same way in all countries, it is not surprising that, with wage costs per unit of output rising faster in Britain than in other countries, export prices in national currency terms have risen faster also. Inevitably, in the long run, the result has been a decline in the external value of the pound, with the consequent increases in import prices leading to a further inflation of costs. While British product ivity continues to lag by international standards, so too, in all probability, will British real wages.

The Pure Theory of Devaluation

Abstract: The purpose of this paper is to present a simple theory of devaluation for a world economy in which all prices are flexible. The principal theorem of the analysis is that a devaluation and particular changes in the various money stocks have exactly equivalent effects on the current and future equilibrium values of all of the variables of the model. This means that the theory of devaluation is just a particular case of the theory of money. It is assumed that there is no technical progress or changes in tastes over time, that all economic agents have one-period horizons, that all countries in the world have fiat moneys which are the only durable goods traded, that no individual holds the money of any country other than his own, and that there exist exchange authorities which maintain fixed exchange rates. In addition we assume that, except for the changes mentioned in Proposition III.1, each country allows the increments in its stock of money to be entirely determined by currency flows across the exchanges. Under these assumptions there is no loss of generality in working with a two-economy model; and this we do. The devaluing economy will be referred to as Inland and the rest of the world as Outland. Any currency in the latter sector may be used as its numeraire. In addition to Inland's and Outland's fiat moneys, it is assumed that there are n (non-durable) commodities in the world economy, making a total of (n + 2) goods. All commodity excess demand functions are homogeneous of degree zero in money prices, and initial money balances and all demand functions for money are homogeneous of degree one in those variables. We assume also that there is perfect competition and free trade, although the latter of these assumptions is not at all necessary. Finally, we shall allow the model to include both traded and non-traded goods. The model is made dynamic by letting each individual's end-of-period money balance become his initial balance for the next period and by letting his original endowments of commodities be constant over time. We shall assume throughout that this dynamic process is stable, so that beginning with any arbitrary distribution of money stocks in the world ' The first draft of this material was written in 1968, and by now too many

Time Deposits in the Definition of Money: Further Cross Country Inflation Evidence*

Abstract: Publisher Summary This chapter discusses the concept of time deposits in the definition of money and presents cross country inflation evidence. In the June 1970 issue of the Economic Rccord, J. Conlisk presented some cross country inflation evidence on the moneyness of time and savings deposits. He concluded that the evidence there is indicates that savings and time deposits are better left out of the definition of money than included equally with currency and demand deposits. His sample consisted of average observations over the period 1950–1963 for most countries; results by development groups and for all countries were obtained. The chapter presents contrasting evidence based on average values over the period 1955–1968; immediate postwar reconstruction years were eliminated and the series was extended to more recent years.

The Foreign-Exchange Bottleneck Revisited: A Geometric Note

Abstract: In the recent literature on economic development, the notion that the growth of developing countries is limited by a foreign-exchange constraint which is independent of a savings constraint has gained wide currency.' This view implies that for many developing countries there is a redundancy of "ex ante" domestic savings, imposed by the limited availability of foreign exchange to the economy. The resulting two-gap analysis in terms of independent savings and foreign-exchange constraints has been enshrined in the UNCTAD philosophy as presented by Prebisch in "Towards a New Trade Policy for Development,"2 and has formed the basis of the theoretical models of McKinnon3 and Chenery and Strout.4 More recently, the basic assumptions of these models have come under attack.' The purpose of this note is to integrate these criticisms in terms of a simple model which (a) rigorously shows the minimal assumptions needed to give rise to an independent foreign-exchange bottleneck, (b) distinguishes between

Yugoslav Trade with EEC and COMECON Countries

Abstract: In I97I the economic relations with EEC countries were significantly affected by both internal and external factors. During that year the negative trade balance with all of the EEC countries rose steadily, owing to a decrease in Yugoslav exports (to all countries except to the Federal German Republic), and to a considerable increase in imports. This unfavorable development is particularly disconcerting since one of the most dynamic regions of the world is involved-a region which is responsible for approximately 33 per cent of all exports from, and 40 per cent of all imports to, Yugoslavia. In short, the primary importance of the EEC as a market, so far as Yugoslavia is concerned, is that it provides an outlet for a relatively high percentage of Yugoslav exports, and thus is an important source of convertible currency. Such currency is required to settle the negative balance of trade, as well as the balance of payments deficit in general. Not all EEC countries participate equally in trade with Yugoslavia. As has been true in the past, Italy and the Federal German Republic continue to be the most active Yugoslav trade partners, as regards both imports and exports. As indicated in Tables I and II, commodity exchange has been dynamic only with respect to these two, and even here, most activity was on the import side. So far as exports were concerned, an increase over previous years was noted only in deliveries to the West German market.

Money Supply and Common Stock Prices

Abstract: Beginning in the 1930s there developed a widespread misconception-in sharp contrast with the previous beliefs of classical economists -that money didn't matter. The Keynesians ruled the world of economic thought until a hardy band of economists at the University of Chicago, led principally by Milton Friedman, uncovered evidence suggesting that: One. the great depression of 1929-33 was caused, not by some inherent defect of capitalism, but by misguided actions of the Federal Reserve Board that caused the supply of money to contract by a third.' Two, 30 years of Keynesian promise had not been fulfilled; the economy danced to the tune of the supply of money, not to the discordant rhythm of a mysterious fiscal multiplier. These contributions have fueled a tremendous rekindling of interest in money. The rekindling has been accompanied by growing interest in the effect of monetary policy on the level of the stock market. Beryl Sprinkel, Michael Keran and James Meigs have all argued for the existence of a long-term relationship between money and stock prices.2'3'4 My own interest, inspired by the writings of Milton Friedman, became serious when, in 1966, I started to plot weekly changes in the money supply. The short-term correlations between changes in the money supply and changes in the level of stock prices, which are the subject of this article, first became apparent to me in 1967. In view of their short-term nature, I believe these correlations represent a new discovery in the continuing investigation into the relationship between money and s.tock prices With one exception (noted below), the money supply (M) used in the charts below consists of time and demand deposits of all commercial banks in the country plus currency in the hands of the

Uncertainty, Currency Areas and the Exchange Rate System

Abstract: The uniqueness of international finance reflects the multitude of national currencies. Both benefits and costs are attached to separate national currencies. Each country with its own currency can pursue an independent monetary policy. Various costs are incurred with the foreign transactions associated with international payments. These costs are avoided in a unified currency world, since there is no exchange market, but the advantages of independent monetary policies are not attained. The trade-off between the advantages of independent monetary policies and the costs of exchange markets involves optimization, both of the number and scope of national currency areas and also (of greater immediacy) in the type of exchange rate system-the choice between pegged rates and floating rates and among various types of pegged systems. The frequent exchange crises in recent years have indicated that the International Monetary Fund system of adjustable pegs has not been functioning well. National authorities have been reluctant to change the parities; variations in ad hoc controls on foreign payments have compensated for sticky exchange pegs. These controls constitute selective changes in exchange rates, so that a system of multiple exchange rates has resulted. The rationale for the commercial policy approach to international adjustment is that the political costs associated with changes in the exchange rate are avoided. Floating exchange rates are sometimes viewed as a way to attain greater flexibility and yet avoid the political costs associated with changes in parities. Other proposals for increased flexibility seek to retain elements of the pegged system so as to minimize uncertainty in the exchange market and the likelihood of disorderly national behaviour in it. The proposals for wider support limits, crawling pegs and sliding bands differ in terms of the frequency and method by which the parity is changed and the width of the support limits around the parity.' This paper identifies economic criteria which provide a basis for

The 1969 franc devaluation and the Ivory Coast economy

Abstract: As a member of the franc zone, the devaluation of the Ivory Coast currency – the C.F.A. franc – was automatic upon the French devaluation of August 1969. The purpose of this short article is to analyse the implications and consequences of the French action for the Ivory Coast, in the hope that this will throw some light on the pros and cons of such a centre–periphery monetary union.

Harmonization of economic policies in customs unions: the andean group*

Abstract: The payer examines the conditions under which the formation of a customs union or free trade area makes some degree of harmonization of economic policies desirable, and the extent to which these conditions apply in the Andean Group customs union recently formed by Bolivia, Chile, Colombia, Ecuador and Peru. The policies analysed are those concerning tariffs, export subsidies, indirect taxes, exchange rates, planning and macro scabilization, intra-union factor movements, foreign capital, and currency unification. Different conclusions as to the desirability of harmonizing the policies are derived depending on the specific type of harmonization considered and the assumptions which are made concerning concurrent harmonization of other policies.

On the optimality of satiation in money balances

Abstract: ONE vrEw now rapidly gaining ground in economics is that since contemporary credit money costs society nothing to produce, people ought to be encouraged to hold money up to satiation. This goal presumably could be attained simply by compensating people for the opportunity cost of holding money, that is, by paying enough interest on money to cut the net opportunity cost of holding the good to zero.' Strangely enough, though, no one has ever properly explained the whole notion of a satiation level with regard to money. If money is viewed as a production good, as is common in respect to firms, satiation with money must refer to a zero marginal product, or more specifically, a point where additional money ceases to economize on transaction costs. Why should such a point exist? For example, is there any reason why a sufficient abundance of money relative to other factors should inhibit the productivity of the rest? Alternatively, is there any cause why input substitutability between money and other factors should cease at some point? Why not a marginal product of money asymptotic to zero? Further, if a zero marginal product exists, this point can only be one of unique equilibrium under standard assumptions if increases in money beyond it yield a negative marginal product. How would this be explained?2 In addition, the whole notion that a zero net opportunity cost of holding money would induce people to hold a satiation level of money balances depends on the assumption that all costs of storing and using money, such as safekeeping and check clearing, are independent of the money stock. That is, the storage of money and operation of the payment mechanism supposedly can be legitimately regarded as a social overhead cost. But it is certainly difficult to see why costs of safeguarding currency should be independent of the stock. Nor is it plain, and no one has ever tried to explain, why people should use the payment mechanism at the same frequency regardless of their demand deposits.3 Ordinarily physical rates of utilization are conceived as positively related to average stock size. Why not in the case of demand deposits?

The gold sovereign market in greece—an unusual speculative market

Abstract: A GREAT DEAL of theoretical and quantitative research into speculative markets has been concerned with the relationship between risk and return. It is generally accepted that it is possible, on the average, to obtain an above-normal return by taking extra risks. One of the basic concepts of this work has been that of a riskless asset. The most obvious riskless asset is cash, which has complete liquidity and zero return. In most situations superior "riskless" assets are available; assets which also have complete or near complete liquidity and also give a positive return. One example is a callable loan at a fixed rate of interest, such as a deposit in a Post Office or Government savings bonds. However, if there has been a period in the recent past when public confidence in cash has completely collapsed, as would occur during a period of hyper-inflation, cash may no longer be viewed as riskless and the public may need to look elsewhere for low-risk investments. Further, if one has retained any capital after a period of currency collapse, one may well become extremely risk averse. The kinds of investments that might be considered would include property or land but of course the traditional ones are silver and gold. In Greece there was a particularly well-developed market in gold sovereigns which was of considerable importance to the middle class. As it gave very small, or even negative returns over long periods we shall suggest that it survived entirely because its clientel was very risk adverse because of lack of confidence in the currency following earlier politically and economically troubled periods. In the next section the basic features of this market are described. Section three discusses the returns available on various investments. Section IV presents an analysis of the price series for gold sovereigns during a period of free movement. The final section contains some concluding comments.

The Contribution of Real Money Balances to the Level of Wealth

Abstract: MONETARY THEORISTS IN THE POST-KEYNESIAN PERIOD have been increasingly interested in the contributions that are made by a given real quantity of money to the level of an economy's wealth. Research on this subject has focused on the apparent contribution to wealth that arises from an excess of monetary assets over monetary liabilities in the portfolio of the private sector. The money supply has been designated as outside money and included in measures of wealth when, for example, it is currency directly issued by the government with no offsetting liability in the private sector's balance sheet. It has been designated as inside money, and omitted from many wealth aggregates, when money is the debt instrument of a private financial institution (see Johnson [7], and Patinkin [13] ). Unfortunately, phrasing the issue in this manner has resulted in neglect of the fact that any instrument that is money provides real flows of services independent of whether it is government debt or a liability of a private bank. A complete analysis must thus examine the relation between the real service flow emanating from the money stock and the real resource cost of producing this flow. When an economy opts to accept some debt instrument or commodity as money, it does so because it will be able to enjoy a larger flow of final output than would otherwise be possible; the opportunity set of the community is enlarged. For ex-

Currency Turmoil: From Chaos to an Interpretable Program in the Financial Environment

Abstract: The background for this article is the author's consulting activity during the last few years in various European countries. It outlines a procedure of systematic analysis for successfully meeting threats from currency turmoil. Almost all businesses are affected by currency uncertainties, but few have developed the expertise to optimize their situations. This article describes how it can be done economically and efficiently.