Showing papers on "Currency published in 1986"

Persistent Trade Effects of Large Exchage Rate Shocks

Abstract: This paper presents a theoretical basis fcr the srgunent that large exchange rate shocks - such as the rise of the dollar from 1980 to 1985 - may shift historical relationships between exchange rates and trade flows. We begin with partial models in which large exchange rate fluctuations lead to entry or exit decisions that are not reversed when the currency returns to its previous level. When we develop a simple model of the feedback from "hysteresis" in trade to the exchange rate itself. Here we see that a large capital inflow, which leads to an initial appreciation, can result in a persistent reduction in the exchange rate consistent with trade balance.

Estimating the Size of the Danish Shadow Economy using the Currency Demand Approach: An Attempt

Abstract: The currency demand approach provides some insight into the size and development of the shadow economy in Denmark. Currency demand is statistically affected by tax rates. The difference in currency demand is calculated by comparing the actual tax burden over time to the lowest tax burden in the period 1952-82. The shadow economy grew steadily to 10 per cent (of GNP) in 1977 and then fluctuated between 7-10 per cent (of GNP) for the period 1978-82. The calculated size fits nicely with the results obtained using the same

The Use of Interest Rate Futures and Options by Corporate Financial Managers

Abstract: existence as currency futures began trading on the International Monetary Market of the Chicago Mercantile Exchange. By 1975, the definition of financial futures was greatly expanded when interest rate futures on GNMA certificates were initiated on the Chicago Board of Trade. By early 1976, the Chicago Mercantile Exchange quickly countered with interest rate futures on 90-day U.S. Treasury bills. A number of other products rapidly followed. Futures contracts were introduced for Treasury bonds, Treasury notes, commercial paper, certificates of deposit, and other interest-related instruments. The enthusiasm eventually spread to the equity markets in the early 1980s with the introduction of stock index futures on the Value Line Index by the Kansas City Board of Trade. The Chicago Mercantile Exchange quickly came into the equity picture with the Standard and Poor's 500 Index futures contract as did the New York S ock Exchange with the NYSE Composite Index futures.

Recent developments in corporate finance: Costs to crossborder investment and international equity market equilibrium

Abstract: Introduction The Sharpe–Lintner Capital Asset Pricing Model (CAPM), which is based upon mutual fund theorems applied to a single domestic capital market, suggests that with homogeneous expectations and opportunity sets, all investors will hold identical portfolios of risky assets. Aggregation of investors' portfolios to get a market equilibrium implies that all individuals will choose their portfolios from two funds: the market portfolio of risky assets and the risk free asset, or a zero beta portfolio if there is no riskless asset. The CAPM cannot be extended into an international CAPM by simply extending the opportunity set to include the world market portfolio, since the international capital markets differ from the domestic capital markets in certain important aspects, such as different currency areas, different socio–economic systems, taxes and barriers to capital flows. Several international capital market models have been developed to capture these complexities of the international capital markets. Most of these models treat exchange risk as the prime factor making international capital market equilibrium different from domestic equilibrium. For instance, Grauer, Litzenberger and Stehle (1976) assume that exchange risk is due to different stochastic national inflation rates, while on the other hand Solnik (1974), Sercu (1980) and Adler and Dumas (1983) assume that exchange risk stems from differences in consumption baskets between investors of different origin.

Sorting and stacking apparatus

Abstract: A sorting and stacking apparatus has a currency note feeding section for feeding currency notes one at a time; and a currency note inspecting section for inspecting the denomination of a currency note, a normal note, a damaged note, an obverse-presented note and a reverse-presented note. The currency notes of a predetermined denomination among the currency notes fed by the currency note feeding section are fed to a first stacking section having first and second pockets while currency notes of other denominations are fed to the second stacking section. When the first pocket of the first stacking section is filled with the currency notes, the transport path of the currency note is automatically switched toward the second pocket. Subsequent currency notes are thus stacked in the second pocket of the first stacking section.

Hidden and Repressed Inflation in Soviet-Type Economies - Definitions, Measurements and Stabilization

Abstract: Official price trends in the USSR and in the Soviet-type economies have changed markedly through time but have followed a roughly uniform general pattern: hyperinflation at times of war, systemic transition and reconstruction; inflation at times of accelerated industrialization; stabilization through currency reform and fiscal measures, followed by modest deflation and a record of substantial price stability, recently broken by the spreading — with fewer and fewer exceptions — of renewed open inflation. This general pattern is due to fairly uniform trends in both policy stances and objective conditions: in theory central planning of both physical and financial flows should enable Soviet-type economies to achieve price stability; in practice the persistence of downward rigidity of money wages, the ambitious growth and accumulation targets, as well as adverse exogenous and systemic factors, have frequently necessitated planned or unplanned price increases.

A Re-Examination of the 'Underground Economy' in the United States; A Comment on Tanzi

Abstract: This paper examines alternative specifications of a general currency ratio (GCR)model used to obtain macroeconomic estimates of the size and growth of the 'underground economy'. Tanzi's approach to estimating the underground economy is shown to be a variation of the GCR model. However both his conceptual specification and his empirical implementation of the model are shown to flawed, leading to significant underestimation of the size and growth of unreported income in the US economy. The paper appears in the International Monetary Fund Staff Papers, Vol. 33 No. 4 December, 1986(This abstract was borrowed from another version of this item.)

Valuation of Foreign Currency Options: Some Empirical Tests

Abstract: This paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the Black-Scholes model. The evidence in the expost tests is inconsistent with this hypothesis since we find a large number of opportunities for abnor? mal profits. A second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution ofthe strategy is delayed by one day. The evidence from these tests provides more support for the hypothesis of market effi? ciency.

Efficiency Tests of the Foreign Currency Options Market

Abstract: Based on a new options transactions data base from the Philadelphia Stock Exchange Foreign Currency Options Market, this paper examines the importance of the effect of nonsynchronous prices and transaction costs on the usual option market efficiency tests. The tests conducted are based on the transaction cost adjusted early exercise and put-call parity pricing boundaries applicable to the American foreign currency options market. The test results show that the put-call parity boundary tests are sensitive to both nonsynchronous prices and transaction costs. The early exercise boundary tests are sensitive to transaction costs but are not very sensitive to simultaneity of the option price and the underlying spot price. Under the no-transaction costs scenario, a large number of early exercise boundary violations is found even when simultaneous spot and option prices are used. These violations disappear when actual transaction costs are taken into account.

Persistent Trade Effects of Large Exchage Rate Shocks

Abstract: This paper presents a theoretical basis fcr the srgunent that large exchange rate shocks - such as the rise of the dollar from 1980 to 1985 - may shift historical relationships between exchange rates and trade flows. We begin with partial models in which large exchange rate fluctuations lead to entry or exit decisions that are not reversed when the currency returns to its previous level. When we develop a simple model of the feedback from "hysteresis" in trade to the exchange rate itself. Here we see that a large capital inflow, which leads to an initial appreciation, can result in a persistent reduction in the exchange rate consistent with trade balance.

Consumer Subsidy Cuts, Violence, and Political Stability

Abstract: Many observers have predicted that developing countries accept IMF conditions for new loans at the risk of their political stability. The Fund's conditions, which include devaluing a currency, restraining money supply, and cutting the government deficit, are seen as leading to economic austerity that in turn will provoke political instability.' We have argued that the IMF often provides resources that make adjustment easier and thus may lessen the chances of instability and that the IMF's conditions may lead to policy changes that are more likely to generate economic success than those policies many governments have been implementing.2 We, and other analysts, have argued that instability arises from many factors, not just from economic austerity. Moreover, the complicated interactions of external and internal political and economic factors are not captured by overarching frameworks such as dependency theory or world-system theory. We start with the assumption that countries must adjust to balance-of-payments imbalances and that their adjustment strategies are constrained by both international and domestic factors. At this stage of our knowledge, case studies are needed to build confidence in specific propositions about benefits and costs to different groups that follow the imposition of IMF conditions. Extensive analyses of a number of cases also throw light on the implications of specific tactics that governments employ when they implement austerity measures such as the speed and scope of adjustment and the sequences in which policies are implemented. Such studies can also illuminate which political factors seem crucial to success or failure of a government's adjustment attempts: elite unity; strength of specific constituencies such as labor unions or the armed forces; the capacity of government to implement policies in the face of oppositions.3 Here we examine an idea that seems to be especially widespread but relatively unexamined empirically. It is the view that decreases in consumer subsidies, in particular, lead to political instability in developing countries. Well-publicized violent opposition to these government actions have contributed to this view. In addition, there are reasons to think that subsidy cuts have immediate and significant effects on political stability. First, these changes affect food, fuel, and transport, basic goods that loom large in the budgets of consumers in developing countries. Second, most subsidy programs benefit urban dwellers, and the presumed volatility of urban politics leads observers to think that subsidy cuts will be destabilizing. Third, governments are directly involved in the changes and therefore may be held responsible for price rises. For many countries in Latin America and Africa, however, subsidy cuts may provoke discontent, but they do not appear to be more fundamental as a cause of instability than many other short-run factors which are at work leading to social and political instability, not to say long-run trends in society. Indeed, protests against subsidy cuts appear to be chronic

The Resource Cost of Irredeemable Paper Money

Abstract: Since 1971, no major currency has a formal link to a commodity. For the first time in history, every currency is wholly irredeemable, not as a temporary expedient but as a permanent matter. Monetary economists have generally treated irredeemable paper money as involving negligible real resource costs compared with a commodity currency. To judge from recent experience, that view is clearly false as a result of the decline in long-term price predictability. A key question for the future is, What if any substitute for a commodity standard will emerge as a long-term anchor for the price level?

Autonomy and the choice of policy in asymmetrically dependent economies

Abstract: OFFICIAL concern at the multiplying problems faced by policy makers is clearly recognisable in Prime Minister Muldoon's remark: "1983 was the year that interdependence leapt out of the textbooks and landed on ministers' desks everywhere" .' Persistent recessions since 1974, two oil price shocks and an international debt crisis, have made policy makers all too aware of the links between their economies, and that mutual dependence through trade and capital movements also makes their policy choices interdependent. The problem is serious enough; the average OECD country now exports about 30% of its GNP, so that the "spillover" effects of policy changes from one country to another can be very powerful. Even the US is 20% dependent on foreign activity. How should policy be designed in these circumstances, and could the international coordination of policy lead to better results? The fact that foreign reactions often interfere with domestic policies has persuaded many politicians to call for coordinated economic policies. Competitive devaluations used to be the standard example, but nowadays few countries can divorce their monetary policies from foreign monetary conditions. Thus not all countries can reduce inflation simultaneously by tight money, high interest rates, or currency appreciation. But if all countries do tighten their policies simultaneously, the losses of output and employment are likely to be larger than any of them planned because of the adverse spillovers between economies. Similarly budget reductions abroad may frustrate domestic reflation plans, while foreign budget deficits can crowd out domestic investment. Given the degree of their interdependence, the European economies have an obvious incentive to export their inflation and unemployment-yet if they all do that, no country will benefit. Similarly, if they all expand together the inflation gains may well be larger, and the employment gains smaller, than expected because of the spillovers. The problem here is clear enough; uncoordinated policies may actually limit our ability to control individual economies. It therefore seems odd that, after a decade of annual economic summit meetings, there is so little evidence on how interdependence should affect policy design. Similarly, although economic theory has shown that coordinated policies can bring gains, there is no evidence on either whether these gains will be significant over a period of time, nor on how they would be distributed between 1 Sir Robert Muldoon at an OECD meeting.

AUTONOMY AND THE CHOICE OF POLICY IN ASYMMETRICALLY DEPENDENT ECONOMIES An investigation of the gains from international policy co-ordination

Abstract: shocks and an international debt crisis, have made policy makers all too aware of the links between their economies, and that mutual dependence through trade and capital movements also makes their policy choices interdependent. The problem is serious enough; the average OECD country now exports about 30% of its GNP, so that the "spillover" effects of policy changes from one country to another can be very powerful. Even the US is 20% dependent on foreign activity. How should policy be designed in these circumstances, and could the international coordination of policy lead to better results? The fact that foreign reactions often interfere with domestic policies has persuaded many politicians to call for coordinated economic policies. Competitive devaluations used to be the standard example, but nowadays few countries can divorce their monetary policies from foreign monetary conditions. Thus not all countries can reduce inflation simultaneously by tight money, high interest rates, or currency appreciation. But if all countries do tighten their policies simultaneously, the losses of output and employment are likely to be larger than any of them planned because of the adverse spillovers between economies. Similarly budget reductions abroad may frustrate domestic reflation plans, while foreign budget deficits can crowd out domestic investment. Given the degree of their interdependence, the European economies have an obvious incentive to export their inflation and unemployment-yet if they all do that, no country will benefit. Similarly, if they all expand together the inflation gains may well be larger, and the employment gains smaller, than expected because of the spillovers. The problem here is clear enough; uncoordinated policies may actually limit our ability to control individual economies. It therefore seems odd that, after a decade of annual economic summit meetings, there is so little evidence on how interdependence should affect policy design. Similarly, although economic theory has shown that coordinated policies can bring gains, there is no evidence on either whether these gains will be significant over a period of time, nor on how they would be distributed between

Interest Rate Seasonals and the Federal Reserve

Abstract: It is widely believed that one of the Federal Reserve's first important monetary policy achievements was the deseasonalization of interest rates. The Federal Reserve supposedly accomplished this by introducing appropriate seasonal movements into the supplies of currency and high-powered money. This view implicitly assumes that there was no interaction between American and foreign financial markets. Two findings are reported that challenge this conventional view. First, interest rate seasonals disappeared in the United States and other countries at approximately the same time. Second, interest rate seasonal ended approximately 3 years before the seasonal movements of currency and high-powered money changed.

Dollars, debts, and deficits

Abstract: This interesting and provocative collection of essays addresses most if not all of the key current policy issues in open economy macroeconomics: the strong dollar, LDC debt problems, and deficit financing. Although these three areas involve widely different policy problems, Dornbusch brings a common political economy perspective to bear on the issues, giving the essays a coherent perspective and revealing that more than ever, modern macroeconomics is useful as a framework for active policy. Professionals interested in the world economy and students of international finance will appreciate the author's strong analytical approach and the clear, cogent defense of his viewpoints.Three chapters in the book's first part, Exchange Rate Theory and the Overvalued Dollar, cover the rise in the dollar, equilibrium and disequilibrium exchange rates, and flexible exchange rates and interdependence. Those in the second part, The Debt Problems of Less Developed Countries, present three case studies in overborrowing, and discuss the world debt problem from 1980 to 1984 and beyond, and what we have learned from stabilization policy in developing countries. A concluding part, Europe's Problems of Growth and Budget Deficits, takes up public debt and fiscal responsibility, and sound currency and full employment.Rudiger Dornbusch is Ford International Professor of Economics at MIT. "Dollars, Debts, and Deficits" is based on three related lectures he gave in 1984 at the University of Leuven in the Gaston Eyskens Lecture Series. Dornbusch is the editor with Mario Henrique Simonsen of "Inflation, Debt, and Indexation," available in paperback from The MIT Press.

Target Zones and the Management of the Dollar

Abstract: BY March 1986 the dollar had fallen about 25 percent from its peak level in February 1985.1 According to the model of Stephen Marris, perpetuation of the rates prevailing last March would leave the U.S. trade deficit well above $100 billion until 1989, when it would start to increase again.2 A further decline in the dollar will thus be necessary to produce a sustainable current account. My own estimate is that the dollar must fall another 10 percent or so to reach what I term "fundamental equilibrium."3 While it is important that the dollar complete its realignment, it is also important that it avoid overshooting, for too low a value would renew inflationary pressure in the United States and increase pressures on employment and the tradable goods industries in other industrial countries. In my view the way to pursue the goal of completing the realignment while avoiding overshooting is by prompt introduction of a system of target zones for the major currencies. In the first section of this paper I outline such a system. In the second section I describe eight factors that lead me to favor this approach. In the final section I examine the relevance of prospects for the U.S. fiscal deficit to the advisability of adopting a target zone approach to currency management.

The Household and Relations of Production in Southern Peru

Abstract: The household as a unit of analysis has achieved wide currency in social science circles in recent years. Researchers have shown that in many contexts, both rural and urban, the household is the locus of important productive processes. It has also been demonstrated to be the context within which many decisions related to productive strategies are made and where income is pooled and then allocated. Testimony to the growth of interest in household-based analyses is provided by the recent appearance of a number of edited volumes (Netting et al. 1984; Smith et al. 1984) and review articles (Yanagisako 1979; Guyer 1981; Schmink 1984) on the topic.

The Open Economy: Implications for Monetary and Fiscal Policy

Abstract: The exchange rate has by 1984 become as central to United States economic policy discussions as it has long been in the rest of the world. In this paper we show how the standard closed-economy macroeconomic model -- the Phillips curve augmented IS-LM analysis -- has to be modified for the United States to take account of the economy's international interactions. The only key structural equation that goes unamended is the money demand equation. Foreign prices,foreign activity, and foreign asset yields in the goods and asset markets appearas important determinants of domestic activity, prices, and interest rates. We show that international interactions exert an important effect on the manner in which monetary and fiscal policies operate. The Phillips curve is much steeper under flexible than fixed interest rates. A tight money policy leads to appreciation under flexible rates, and thus to more rapid disinflation. Fiscal expansion, because it induces currency appreciation, is less inflationary under flexible than fixed exchange rates, but it also involves more crowding out. We show that these effects are in practice significantly large for the United States economy.

The Demand for Currency in the United States

Abstract: The idea of totally deregulating the financial system and implementing monetary policy through currency control has received renewed attention. An important aspect concerning the desirability of using currency as the instrument of policy is the behavior of the demand for currency. If currency demand is not well behaved, then a policy of controlling the nominal supply of currency could produce drastic swings in the price level and interest rates. The adverse consequence of such effects could outweigh the benefits of deregulation. It is therefore crucial that the behavior of currency demand be well understood before unequivocally advocating total financial deregulation and currency control. This paper takes a step in that direction by analyzing the demand for currency over the period 1921-1980.

Economic policy in an interdependent world

Abstract: These eleven essays written over the past fifteen years continue and develop Richard Cooper's central theme of interdependence, reflecting his experience in government in the Council of Economic Advisers and as Undersecretary of State for Economic Affairs. They focus in particular on the opportunities and constraints for national economic policy in an environment where goods, services, capital, and even labor are increasingly mobile. The first four chapters are informal, discursive treatments of economic and foreign policies in the face of growing interdependence among nations. The remaining chapters cover such specialist topics as optimal regional integration, the integration of world capital markets, the impact of greater interdependence on the effectiveness of domestic economic policy, the comparison of monetary and fiscal policy under fixed and flexible exchange rates, currency evaluation in developing countries, and the appropriate size and composition of a developing country's external debt. A concluding chapter surveys the preceding essays in terms of coordinating macroeconomic policymaking in an interdependent world economy. Richard N. Cooper is Maurits C. Boas Professor of International Economy at Harvard University.

Singapore: Resources and Growth

Abstract: Singapore is one the fastest growing economies in the world. Its outstanding performance is reflected not only in its per capita income growth, but also in terms of the reduction of its unemployment rate, the clearance of urban slums, the investment in social and economic infrastructure, the strength of its currency, and the accumulation of foreign reserves. This text identifies the sources of such growth.

Some Political Economy Aspects of Macroeconomic Linkages with Agriculture

Abstract: Though the political process leading to the 1985 farm bill has shunned proposals for significant policy change, commentators on U.S. food and agricultural policy continue to characterize the current policy environment as arriving at a turning point where fundamental realignment of policy is possible. Among the factors indicating a need for change, macroeconomic linkages have been singled out as primary sources of increasing difficulty in agricultural policy management. Implicit in this view is the idea that a heightened importance of macroeconomic factors represents a structural change in long-term patterns of development for the sector that has rendered current policies anachronistic. To advance such an idea is to ignore the historical record. Macroeconomic disturbances and their links to the agriculture sector are central in any historical account of the policy developments leading to direct federal government intervention in the agriculture sector. For example, the organized agricultural interest groups that emerged during the Populist protest of the late nineteenth century were motivated, in part, in response to the monetary restriction associated with the Greenback period and the return to fixed exchange rates under the gold standard in 1879 (Friedman and Schwartz). Continued price deflation into the mid-1890s and real interest rates that are estimated to have averaged 8.5% in the period 1870-89 (Summers, p. 212) proved particularly burdensome to debtridden farmers. The demands of the various farmer movements thus consisted of easy money (or an "elastic currency") created by government action, government funds for farm mortgages, and the subtreasury scheme for creation of government paper money with stored crops as collateral. The discontent voiced by farmers over the macroeconomic policies of the nineteenth century can be associated with later institutional changes that organized the Federal Reserve in 1913 and created the Federal Land Banks in 1916. Agricultural price support through provision of loans against crops was not achieved until 1933 with the creation of the Commodity Credit Corporation (Reiter and Hughes, pp. 1415-16). That policy change, along with other provisions for federal government intervention included in the Agricultural Adjustment Act, followed a farm crisis that had its origins in macroeconomic adjustments after World War I. Exports of agricultural products had expanded rapidly in the United States to supply the wartime needs of Europe. Rapid inflation accompanied the export expansion, and land prices and farm mortgage debt increased. This exacerbated farm sector adjustments when production was restored in Europe and when world liquidity was restricted as U.S. lending to Europe was curtailed. Overcapacity in world primary-product markets persisted and the combination of raw material overproduction and monetary deflation that occurred has been cited as a factor generating the broader economic collapse of the 1930s (Kindleberger, pp. 98-107). Unified political activity by farmers was also intense in the aftermath of World War I. The congressional farm bloc coalition of Republicans and Democrats came into existence in 1921 and sponsored legislation (e.g., the Capper-Volstead Act of 1922 and the Agricultural Credit Acts of 1923) aimed at improving farm conditions through promotion of cooperatives and expansion of credit. However, as the relative purchasing power of farmers continued to decline through the 1920s, the farm lobby organized around the theme of equality for agriculture and demanded more Margaret S. Andrews is a resident fellow, National Center for Food and Agricultural Policy, Resources for the Future; Gordon Rausser is a professor, Department of Agricultdral and Resource Economics, University of California, Berkeley. Giannini Foundation Paper No. 785.

Prices, Activity, and Machinery Exports: An Analysis Based on New PriceData

Abstract: New data for the export prices of the United States, Germany, and Japan produced price elasticities for exports of machinery and transport equipment that were highest for the United States and lowest (well below 1) for Germany. The effects of price changes on exports lasted at least two years in all three countries and possibly four years in the United States. Only in Germany would most effects of price changes take place in the year of the change. U.S. export income in foreign currency would not exceed its pre-depreciation level until the third year after a depreciation.