Showing papers on "Currency published in 1985"

Real Exchange Rate Risk, Expectations, and the Level of Direct Investment

Abstract: Four models of direct investment are analyzed assuming various relationships between foreign and domestic production. The direct effect of risk-adjusted expected real foreign currency appreciation is to lower foreign capital cost, thus stimulating direct investment. However, when costs of other inputs are also affected, induced productivity changes or output price changes may offset the direct effect, reducing direct investment. Pooled estimation results for U.S. annual, bilateral direct investment flows to five industrialized countries show significant reductions associated with expected appreciation of real foreign currency and significant increases associated with risk. These results are consistent with the model where, in response to risk, the multinational firm reduces exports to the foreign country but offsets this somewhat by increasing foreign capital input and production.

Exchange Rates and Economic Recovery in the 1930s

Abstract: Currency depreciation in the 1930s is almost universally dismissed or condemned. This paper advances a different interpretation of these policies. It documents first that depreciation benefited the initiating countries. It shows next that there can be no presumption that depreciation was beggar-thy-neighbor. While empirical analysis indicates that the foreign repercussions of individual devaluations were in fact negative, it does not imply that competitive devaluations taken by a group of countries were without mutual benefit. To the contrary, similar policies, had they been even more widely adopted and coordinated internationally, would have hastened recovery from the Great Depression.

Staple Finance, Wealth Finance, and Storage in the Inka Political Economy [and Comments and Reply]

Abstract: The development of the regionally integrated institutions of an expanding state society is predicated on the growth of systems of economic support. Both expansion of existing systems of finance and the development of alternative systems of revenue, such as tribute, administered exchange, and centralized taxation, may be of central importance to the state political economy. This paper examines the reorganization of the economic systems of the Inka state and the development of new forms of finance. State finance is dichotomized as staple finance, the direct or indirect mobilization of subsistence and utilitarian goods, and wealth finance, the manufacture and procurement of valuables, primitive money, and currency. It is argued that the requirements of production and management of goods were as important as the social relations of labor and exchange that are the focus of current discussions of the state political economy. The organization of the massive state storage system, specifically in the Upper Mantaro...

Chapter 15 The specification and influence of asset markets

Abstract: Publisher Summary This chapter discusses portfolio balance models with postulated asset demands, asset demands broadly consistent with but not directly implied by microeconomic theory. The demand for the sum of assets denominated in each currency is homogeneous of degree one in nominal wealth, and the demand for money in each country depends on the return on the security denominated in that country's currency but not on the return on securities denominated in other currencies. However, under these same assumptions the demand for money depends on real wealth. Because the conclusions of macroeconomic analysis often depend crucially on the form of asset demand functions, it is important to continue to explore the implications of the microeconomic theory and other microeconomic approaches. The chapter discusses that the consumer arrives at his or her asset demands by maximizing his or her utility given interest rates and the parameters of the distributions of prices and exchange rates. The distributions of prices and exchange rates are not invariant to changes in the distributions of policy variables and stochastic components of tastes and technology. It has been recognized that a very important item on the research agenda is imbedding consumer's asset demands based on utility maximization in a general equilibrium model in which the distributions of prices and exchange rates are determined endogenously.

Portfolio Theory and Currency Substitution

Abstract: ONE OF THE MAJOR REASONS Friedman (1953) and Johnson (1972) advocated flexible exchange rates was to eliminate supply side monetary substitutability, which can incapacitate domestic monetary policy. However contributors to the currency substitution literature, including Miles (1978), Girton and Roper (1981), and McKinnon (1982) have argued that when economic agents hold both domestic and foreign monies, variations in foreign interest rates or expected future exchange rates can make domestic money demand functions unstable as economic agents shift resources in response to changes in prospective relative returns. As a result, they and others have claimed that flexible exchange rates may not secure domestic monetary autonomy.l The major purpose of this paper is to demonstrate the conditions under which foreign and domestic monies are substitutes in demand, when economic agents have motives to hold both, and to contrast the determinants of currency substitutability with those of the more general concept of asset substitutability. Importantly, it is demonstrated that the usual portfolio-theoretic justification for including opportunity cost variables such as foreign interest rates, foreign inflation rates, or expected

How to Manage a Repressed Economy

Abstract: Chile from 1974 to the present is one of the few recent examples of a sustained economic liberalisation; fiscal, exchange-rate and monetary policies were manipulated more or less correctly (with the possible exception of wage indexing) to secure free trade, an unrestricted domestic capital market, rapid real growth and a stable currency.

The Dollar and the Policy Mix: 1985

Abstract: In 1971, Robert Mundell proposed a stunning solution to the three problems then affecting the U.S. economy: high inflation and unemployment, and a weak currency. Mundell suggested that the policy mix of fiscal expansion and monetary contraction could work to raise output, reduce inflation, and strengthen the currency at the same time. This policy mix has been pursued under the Reagan administration since 1981. The paper investigates the contributions of this policy mix to disinflation and output growth. It finds that the policy mix has contributed as much as three percentage points of the reduction in inflation during 1981-84, but that the gains against inflation due to the mix will likely be lost, or more than lost, in the future.

Bank Deregulation, Accounting Systems of Exchange, and the Unit of Account: a Critical Review

Abstract: This paper reviews a specific group of recent publications by Black, Fama, Hall, and Greenfield and Yeager that (i) encourage the relaxation of government controls on the banking industry, (ii) emphasize the possibility of an economy in which most transactions are carried out through an accounting system rather than any tangible medium of exchange, and (iii)suggest that improved monetary performance could be induced by separating the unit of account from the medium of exchange.The main substantive conclusions are as follows. First, a system with an unregulated banking sector and a government-issued currency would be viable and might reduce inefficiencies resulting from reserve requirements, a point that has been recognized by neoclassical monetary economists.The second main class of systems discussed in the reviewed papers -- one with a composite-commodity medium of account and no convertibility provision -- is quite different. If there were literally no medium of exchange, the non-coercive government designation of the unit of account would encounter no inconsistency but would be extremely fragile. More realistically, with some circulating private currency the latter would tend to become the medium of account as well as the medium of exchange and would tend to be issued in excess, thereby separating the unit of account from the officially-designated bundle of commodities. Several conclusions regarding analytical approach are also developed.

American colonial monetary regimes: the failure of the quantity theory and some evidence in favour of an alternate view

Abstract: Recent developments in monetary economics suggest that the manner in which money is introduced is more important, even for price level movements, than the quantity of money. Colonial American experience provides a laboratory for testing this view. It is shown that the nature of backing, rather than the quantity of money, determined its value. Large secular inflations were ended by changing the nature of backing, despite continued large note issues (and despite the absence of a metallic standard). Extremely large note issues and note withdrawals are shown not to have produced inflation (currency depreciation) or deflation (currency appreciation).

A financial model of foreign exchange exposure

Abstract: The paper describes a model of foreign exchange exposure. This is defined as the sensitivity of a specific investment's value in reference currency to changes in exchange rate forecasts. This sensitivity may result because some share of the investment cash flows are denominated in foreign currency. Alternatively, a share of cash flows denominated in reference currency which are affected by future exchange rates can also generate sensitivity.

Corporate Management Lobbying on FAS No. 8: Some Further Evidence

Abstract: On December 31, 1974, the Financial Accounting Standards Board (FASB) issued an exposure draft for Statement of Financial Accounting Standards (FAS) No. 8, Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements. The intent of the standard was to bring uniformity to accounting for the translation of foreign currency transactions and foreign subsidiaries. Firms were required to use the temporal method of translation and to include unrealized foreign exchange gains and losses in income. Most managements expected this latter provision to increase the volatility of their reported earnings. The study reported in this paper examined the extent to which firms' debt contracts and managements' degrees of ownership in their firms were associated with managements' decisions to lobby the FASB in the form of comment letters regarding the proposed standard. Managements' lobbying activities provide a basis for predicting the consequences of a proposed accounting policy change on firms. That is, lobbying positions can assist the FASB in assessing potential opposition to a standard, as well as subsequent attempts to circumvent reporting requirements, subvert the standard, and/or discredit the policymaker. The issue studied

The Dollar and the Policy Mix; 1985

Abstract: In 1971, Robert Mundell proposed a stunning solution to the three problems then affecting the U.S. economy: high inflation and unemployment, and a weak currency. Mundell suggested that the policy mix of fiscal expansion and monetary contraction could work to raise output, reduce inflation, and strengthen the currency at the same time. This policy mix has been pursued under the Reagan administration since 1981. The paper investigates the contributions of this policy mix to disinflation and output growth. It finds that the policy mix has contributed as much as three percentage points of the reduction in inflation during 1981-84, but that the gains against inflation due to the mix will likely be lost, or more than lost, in the future.

Exchange Market Pressure in Korean: An Application of the Girton-Roper Monetary Model: Note

Abstract: Korea's exchange rates have been changing daily since its adoption of the flexible exchange rate system in February 1980. The purpose of this paper is to examine the simultaneous adjustment of both exchange rates and the balance of payments in Korea. The Girton-Roper (1977) model of exchange market pressure is applied. The model draws on a combination of the monetary approach to the balance of payments (Johnson 1972) and to exchange rate determination (Frenkel and Johnson 1978). The main theoretical proposition of the Girton-Roper (hereafter, G-R) model states that an excess domestic supply of money will cause some combination of currency depreciation and an outflow of foreign reserves. The G-R model of exchange market pressure was designed for the Canadian managed float during the period from 1952 to 1962. Connolly and Silveira (1979) took the G-R model and applied it to the Brazilian experience for the period from 1955 to 1975. Modeste (1981) used the same model to explain the monetary experience of Argentina in the 1970s. Korean experience provides another good opportunity to test theoretical propositions of the G-R version of the monetary approach to managed floating. First of all, Korea fits the model of exchange market pressure because the country can be treated as a small open economy which takes foreign prices as given. In addition, changes in Korea's exchange rates can be considered to be the product of market pressure since the Korean won is linked to a multicurrency basket. The exchange rate of the Korean won is determined largely by the exchange rate formula which relies on both the special drawing right (SDR) basket and Korea's own currency basket. It is according to this formula that the Bank of Korea establishes daily the exchange rate in terms of the intervention currency, the U.S. dollar.l

Exchange Controls, Capital Controls, and International Financial Markets

Abstract: This paper examines the effects of restrictions on international financial markets. We analyze a general equilibrium, rational expectations model of a two-country world in which well-functioning international financial markets premit trade in all state-contingent securities except insofar as governments restrict these markets. The restrictions we examine take the form of taxes or quantitative controls on purchases of foreign currency and on the income from foreign assets. State-contingent financial markets allow households to allocate wealth optimally across states so that the imposition of exchange and capital controls has, roughly speaking, only substitution effects but no wealth effect. These restrictions reduce international trade in goods and lower ex-post welfare in the country in which they are imposed. Nominal prices and exchange rate are nonmonotonic functions of these restrictions.

A Reinterpretation of Classical Monetary Theory

Abstract: This chapter suggests that a model of a costlessly produced, competitively supplied, convertible money is compatible with a macroeconomic model with a determinate price level, a classical dichotomy between the real and monetary sectors, in which Say’s Law (Identity) is valid, the latter being equivalent to the law of reflux upheld by the Banking School. Such a model differs from the naive quantity theory often attributed to the classical economists. The chapter also suggests that Smith, Say, Ricardo, Mill, and the Banking School had an intuitive understanding of such a model in contrast to David Hume and the Currency School who espoused the quantity theory.

Foundations of United States International Financial Power: Gold Standard Diplomacy, 1900–1905

Abstract: From 1900 to 1905 the United States government, working with a small group within the emerging profession of economics, developed—for the first time—a financial policy toward foreign dependent areas. The policy devised and carried out by this first generation of experts in foreign currency reform—who included Charles Conant, Jeremiah Jenks, and Edwin Kemmerer—sought to bring nations onto a gold-exchange standard, with their gold funds deposited in New York and their coinage denominated on American money. In this article, Professor Rosenberg describes this gold standard diplomacy, suggesting that it reflected the nation's growing economic power; its increasing stake in maintaining an integrated, stable, and accessible international order; the emergence of a new profession of foreign financial advising; and the government's new desire to play a leading role in international currency matters. She concludes that policymakers and economists would build on this foundation in developing the gold-exchange standard and currency stabilization programs of the 1920s.

Exchange Controls, Capital Controls, and International Financial Markets

Abstract: This paper examines the effects of restrictions on international financial m arkets in a general equilibrium, rational expectations model of a two -country world. State-contingent financial markets allow households t o allocate wealth optimally across states so that the imposition of e xchange and capital controls has, roughly speaking, only substitution effects but no wealth effect. Taxes or quantitative controls on purc hases of foreign currency and on the income from foreign assets reduc e international trade in goods, lower ex post welfare in the country in which they are imposed, and affect nominal prices and the exchange rate. Copyright 1988 by American Economic Association.

Currency Risk and Country Risk in International Banking

Abstract: This paper focuses on the conditions under which banks are subject to currency and country risks on their dollar-denominated loans to foreign firms and governments. We conclude that currency risk is a function of the rates of domestic and foreign inflation, deviations from purchasing power parity, and the effect of these deviations on the firm's and the nation's dollar-equivalent cash flows. Country risk is largely determined by the variability of the nation's terms of trade and the government's willingness to allow the national economy to adjust rapidly to changing economic fortunes. BANKS TYPICALLY TRY TO cope with currency risk when lending to foreign firms and governments either by both denominating and funding their loans in the foreign currency or, failing that, by denominating their foreign loans in dollars. The latter practice appears to protect the banks by shifting any risk associated with exchange rate fluctuations to the borrowers. Yet to the extent that changes in currency values affected the ability and/or willingness of foreign borrowers to repay their dollar loans, the exchange risk on these loans is converted into credit risk. This is the element of "currency risk" referred to in the paper's title.' When the government is the borrower, credit risk becomes "country risk." The objective of this paper is to explore the conditions under which banks are subject to currency and country risks on their dollar-denominated foreign loans. Section I analyzes the sources of currency risk for firms, while Section II extends the analysis to study the riskiness of dollar loans to foreign firms under several currency scenarios. The political/economic circumstances under which dollar loans to foreign governments could be subject to currency and country risk are the subject of Section III. Section IV discusses in more detail the various political and economic indicators of country risk. Section V summarizes the paper's key points.

Currency Substitution and Western European Monetary Unification

Abstract: The recent history of European monetary affairs may be interpreted as a slow movement towards the establishment of a European currency union characterized by fixed exchange rates and perhaps, eventually, a common European currency. Until very recently, the desirability of European monetary union was analysed in terms of the traditional optimum currency area framework.' In that analysis, the incentive for currency union comes from the potential improvements in efficiency in resource allocation from the use of a single money in a trade area. Recently, however, the question of the independence of monetary policy under flexible exchange rates has spawned a growing literature on currency substitution which includes implications for currency 2 union. The earlier work suggested that a major benefit of flexible rates would be the liberation of domestic monetary policy from external balance concerns, so that policy could be aimed singularly at internal balance.3 The currency substitution (CS) literature has demonstrated that, if the currencies of two countries are close substitutes to money-demanders, then the central banks of these countries cannot follow independent monetary policies even under flexible exchange rates.4 The degree of currency substitution is an important empirical question, and the analysis that follows should prove informative in determining the incentive for European monetary union. Is the European Monetary System (EMS) goal of reducing exchange rate fluctuations necessarily indicative of a European sensitivity to disturbances with "a substantial part of the problem coming from substitution between monies" (Girton and Roper, 1980, p. 157), or rather a result of the traditional drive towards integration as envisioned by optimum currency area theory? The following sections will suggest an answer.

Inflation and Currency Reform

Abstract: Expectations of currency reform are explicitly incorporated into a rational expectations version of the Cagan model of money market equilibrium, where expectations about the timing of reform are (lerived from a simple government rule for choosing when to reform the currency. The model is estimated for three of the episodes of hyperinflation that Cagan investigated, and the results support the hypothesis that expectations of reform were responsible for the apparent instability of the demand for money during the final months of these hyperinflations.

Empirical tests of the efficiency of the currency option market

Abstract: Tests of a hedge and a rational boundary of the efficiency of the currency option market are conducted in this study. These tests use transactions data and account for the effects of currency and option bid/ask spreads, synchronization of option prices and underlying exchange rates, market depth, execution lags, and transaction costs. Currency options, unlike domestic stock options, exhibit continuous dividends. The nature of the option and of the data set employed makes the immediate exercise lower bound test one of the purest tests of market efficiency to date. Results reported here indicate no ability to earn abnormal economic or riskless arbitrage profit for the period when these tests are conducted.

Experiments with the Optimal Currency Composite

Abstract: This paper addresses the issue of the determination of an optimal currency composite in the context of a world characterized by generalized exchange rate flexibility. The approach adopted here is macroeconomic in nature and stresses general equilibrium considerations. The emphasis upon both monetary and real considerations, capital mobility and rational expectations in the context of a multi-country framework is what sets this paper apart from previous attempts to address this issue. Empirically, the problem of choosing an optimal currency composite has, if anything, gained importance. According to the Annual Report on Exchange Arrangements issued by the International Monetary Fund, as many as 37 countries were reported to be practicing currency basket arrangements during 1980-81, while a year later (i.e., 1981-82), the number of such countries had increased to 53 (see Annual Report, June 3, 1983). As indicated in the Annual Report, this increase can be attributed to ".. . the movement away from single currency (dollar) pegs" in favor of ". . . increased use of currency composites, including the SDR" (pg. 9). The advantage of a composite peg over a single currency peg is clear; a composite peg embodies automatic and systematic adjustment of bilateral exchange rates whenever necessary, which may be preferable to an absolute peg against all currencies or to joint floating (as implied by a single currency peg). The latter arrangement may subject the economy in question to an undesirable degree of exchange rate volatility, while the former carries with it, heavy intervention costs. Thus, the composite currency peg has proved to be an acceptable middle-ground for economies as different as Sweden and India. In practice, the shares assigned to various currencies comprising the basket (where such arrangements have been maintained) have usually been determined on the basis of the currency composition of the economy's international trade. The Appendix provides some institutional details regarding the weighting practices of the 53 currency composite countries over the period 1981-82. As indicated here, 32 countries peg their currencies to a basket whose currency shares are determined in accordance with bilateral trade patterns of the economy in question. An additional 21 countries peg their currencies to the SDR which is itself, a 5-currency basket, with the weights being set by the IMF by reference to the currency denomination of world trade. Theoretical analysis of the composition of the optimal basket owes much to Flanders and Helpman [8;9], whose work is extended by