Showing papers on "Currency published in 1987"

Dynamic Macroeconomic Theory

Abstract: Introduction References and Suggested Readings PART I REAL DYNAMIC MACROECONOMIC MODELS 1. Dynamic Programming A General Intertemporal Problem A Recursive Problem Bellman's Equations Nonstochastic Examples The Optimal Linear Regulator Problem Stochastic Control Problems Examples of Stochastic Control Problems The Stochastic Linear Optimal Regulator Problem Dynamic Programming and Lucas's Critique Dynamic Games and the Time Inconsistency Phenomenon Conclusions Exercises References and Suggested Readings 2. Search Nonnegative Random Variables Stigler's Model of Search Sequential Search for the Lowest Price Mean-Preserving Spreads Increases in Risk and the Reservation Price Intertemporal Job Search Waiting Times Firing Jovanovic's Matching Model Conclusions Exercises References and Suggested Readings 3. Asset Prices and Consumption Hall's Random Walk Theory of Consumption The Random Walk Theory of Stock Prices Lucas's Model of Asset Prices Mehra and Prescott's Finite-State Version of Lucas's Model Asset Pricing More Generally The Modigliani-Miller Theorem Government Debt and the Ricardian Proposition Remarks on Testing and Estimation Conclusions Exercises References and Suggested Readings PART II MONETARY ECONOMICS AND GOVERNMENT FINANCE 4. Currency in the Utility Function The Price of Inconvertible Government Currency in Lucas's Tree Model Issues and Models in Monetary Economics Government Debt in the Utility Function Government Currency in the Utility Function Seignorage and the Optimum Quantity of Currency A Neutrality Proposition Conclusions References and Suggested Readings 5. Cash-in-Advance Models A One-Country Model Fisher Equations Inflation-Indexed Government Debt Interactions of Monetary and Fiscal Policies Interest on Reserves A Two-Country Model Exchange Rate Indeterminacy Conclusions Exercises References and Suggested Readings 6. Credit and Currency with Long-Lived Agents The Physical Setup Optimal Allocations Competitive Equilibrium A Digression on the Balances of Trade and Payments The Ricardian Doctrine about Taxes and Government Debt The Model with Valued Currency and No Private Debt An Interventionist Optimal Monetary Equilibrium Townsend's "Turnpike" Interpretation Conclusions Exercises References and Suggested Readings 7. Credit and Currency with Overlapping Generations The Overlapping-Generations Model The Ricardian Doctrine about Taxes and Government Debt Again A Ricardian Proposition Currency, Bonds, and Open-Market Operations Computing Equilibria Interpretations as Currency Equilibria Optimality Four Examples on Inflation and Its Causes Seignorage and the Laffer Curve Dynamics of Seignorage Forced Saving International Exchange Rates Conclusions Exercises References and Suggested Readings 8. Government Finance in Stochastic Overlapping-Generations Models The Economy Some Examples A General Irrelevance Theorem Wallace's Modigliani-Miller Theorem for Open-Market Operations Chamley and Polemarchakis's Neutrality Theorem Interpretation as a Constant Fiscal Policy Indexed Government Bonds A Ricardian Proposition Further Irrelevance Theorems Conclusions Exercises References and Suggested Readings Appendix. Functional Analysis for Macroeconomics Metric Spaces and Operators First-Order Linear Difference Equations A Formula of Hansen and Sargent A Quadratic Optimization Problem in R A Discounted Quadratic Optimization Problem Predicting a Geometric Distributed Lead of a Stochastic Process Discounted Dynamic Programming A Search Problem Exercises References and Suggested Readings Index

Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries

Abstract: Different approaches to quantifying the degree of capital mobility for a cross-section of currencies -- particularly saving-investment correlations and tests of real interest parity - have appeared to show a surprisingly low degree of financial market integration. We use a new data set, forward rate data for 24 countries, including many small industrialized countries and seven LDCs, to decompose the real interest differential into two parts: the covered interest differential, or political premium, and the real forward discount, or currency premium. The latter in turn can be decomposed into the exchange risk premium and expected real depreciation. We find a high degree of capital mobility across political boundaries for most of the 011 countries, plus Hong Kong and Singapore, for our sample period of 1982 to 1987. Even for most of the other LDCs and smaller industrialized countries, for which covered interest parity clearly fails, the political premium is not as big a component of the real interest differential as the currency premium. France would appear to have higher capital mobility than most by the criterion of real interest differentials, but is seen in fact to have low capital mobility by the criterion of covered interest differentials, a clear example of the superiority of the latter criterion.

Was the Bank Holiday of 1933 Caused by a Run on the Dollar

Abstract: International, rather than domestic, causes of both the Bank Holiday of 1933 and the calm in the banking system that followed are emphasized here. New information on gold losses by the New York Federal Reserve, rather than domestic currency hoarding, serve to explain the Bank Holiday's specific timing. Expectations that Roosevelt would devalue the dollar stimulated much of the gold loss. I also argue that Roosevelt's restrictions on gold holdings and foreign exchange dealings and his devaluation of the dollar by 60 percent were more important to the stability of the banking system after the Bank Holiday than was deposit insurance.

Irrelevance of Open-Market Operations in Some Economies With Government Currency Being Dominated in Rate of Return

Abstract: This paper describes an environment in which government-issued currency is dominated in rate of return and in which there obtains a Modigliani-Miller theorem for government open market operations. Earlier Modigliani-Miller theorems for government finance have been stated for environments in which government-issued currency is not dominated in rate of return in equilibrium. Since government-issued currency is widely observed to be dominated in return, it is useful to study how Modigliani-Miller theorems hinge on absence of rate of return dominance.

The Medieval Market Economy

Abstract: This volume comprises ten essays, six of which are published in English for the first time. The author considers the development of medieval capitalism from the vantage point of international merchants and merchant-bankers. He reconsiders the much discussed "Great Depression" of the 14th and 15th centuries, and is particularly concerned with the active and often destabilizing role played by money in the medieval economy at a time when the money supply consisted overwhelmingly of metallic currency. It includes an account of how a money shortage of critical proportions resulted from the decline of mine production and the steady drain of precious metal to the eastern Mediterranean. The book contains numerous tables and charts of mint production, prices and wages, foreign trade and other selected economic indicators for different countries of Europe in the late Middle Ages.

Accounting for Non-interest-bearing Currency: A Critique of the Legal Restrictions Theory of Money

Abstract: The legal restrictions theory of money, developed by Neil Wallace and others, implies that all noncommodity currency would be interest bear ing under laissez faire (if the interest rate on bonds is positive). This note cites historical evidence to the contrary. It then analyzes the source of the legal restrictions theory's inapplicability, and o ffers an alternative computation-cost-based explanation for nonintere st-bearing currency. Copyright 1987 by Ohio State University Press.

Recent Developments in International Banking and Finance

Abstract: Overview (S.J. Khoury). Innovation in the Financial Markets (S.A. Ross). Corporate Takeovers: Winners, Losers, and Some Remaining Issues (E. Han Kim). Current Structure and Recent Developments in Foreign Exchange Markets (J.B. Burnham). On Political Risk - The Turnover Tax on the Swedish Money and Bond Markets or How to Kill a Market without really Trying (J.A. Lybeck). Time-Varying Risks Premiums in Forward Exchange Rates and Deviations from PPP (H.B. Kazemi). Currency Movements and Corporate Pricing Strategy (A.K. Sundaram and V. Mishra). Technical Strategies in Foreign Exchange Markets: An Interim Report (R.J. Sweeney). Should International Portfolios be Permanently Hedged? (M. Adler and M.R. Granito). A Reexamination of the Benefits to International Diversification (R.D. Marcus, D. Solberg and T.L. Zivney). Linkages of National Stock Markets: Statistical Evidence Before, During and After the October 1987 Crash (A.G. Malliaris and J.L. Urrutia). Information and Price Adjustment Processes: A Comparison of U.S. and Japanese Stocks (A. Damodaran). Valuation of Swaps (S. Sundaresan). Exchange Rate Jumps and Currency Options Pricing (A.L. Tucker). Exchange Rate Uncertainty and Precommitment in Symmetric Duopoly: A New Theory of Multinational Production (S.J. Khoury, D. Nickerson and V. Sadanand). Debt Over Hang and the Efficiency of International Rescheduling (R.M. Giammarino and E. Nosal).

Money for the Gods

Abstract: In Taiwan's temples, village courtyards, and old city lanes, women prepare for the flames the coarse, printed papers that serve as money for the gods. Folded into stacks with the deftness much practice brings, they burn quickly, transformed into mystical currency for the invisible other world. It is such a common sight that one soon overlooks the paradoxical symbolism of the cash-conscious, frugal Taiwanese burning money; the people who burn the most money do not have money to burn. In their lives, the intersection of this world and another is marked by the transfer of funds, linking the heavenly and earthly economies into a single system. What homologies exist between these economies that allow us to discern the structure of each? How does this financial ritual reveal the nature of the capitalist hegemony in its practitioners' lives? For answers, we must look first at the social and historical setting of these acts, and at the place of money in, and the commoditization of, recent Chinese culture. My field researches, and my conclusions here, focus on the class culture of Taiwan's numerous petty capitalists, who by now include virtually all its highly market-oriented rural population,

Exchange Rate Management: The Role of Target Zones

Abstract: The essence of the regime of unmanaged floating that prevailed among the major currencies from March 1973 until the Plaza Agreement in 1985 was that the exchange rate was treated as a residual in the process of macroeconomic policy determination. Admittedly there were occasions-such as October 1976 in the case of the pound sterling and October 1978 in the cases of both the U.S. dollar and the Swiss franc-when particular countries became so concerned with a misalignment of their currency that they were forced to abandon "benign (or malign) neglect," but such incidents were episodic. Views about a proper or desirable level of the exchange rate played no systematic role in policy formulation. Section I explains why I judge the performance of unmanaged floating to have been unsatisfactory. Section II lists the real social benefits that exchange rate flexibility can afford, which should be preserved by any reformed system. Section III describes the target zone proposal and explains why it would preserve the real benefits of flexibility while overcoming the weaknesses of unmanaged floating. Section IV sketches a possible set of comprehensive principles for policy coordination of which target zones would be one natural element.

Private Production of Scrip-Money in the Isolated Community

Abstract: This paper examines the appearance of one type of privately-produced currency, which had the generic label "scrip." This money appeared at widely different times and places in the United States between 1820 and 1940 in spite of federal laws prohibiting its issue. The most sophistic ated and best developed example of scrip seems to have occurred in th e coal mining regions of Appalachia, especially in West Virginia. Thi s experience and its implications for monetary behavior are examined here. Copyright 1987 by Ohio State University Press.

Unit Roots Tests: Evidence from the Foreign Exchange Futures Market

Abstract: In this paper, tests are conducted for the presence of unit roots in the autoregression representation of foreign exchange currency futures price series. The results obtained from five different currency futures over the 1977–1983 period suggestthat foreign currency futures rates have autoregressive representations with a singleunit root (i.e., borderline nonstationarity). In view of this result, it appears thatthe process generating the natural logarithm of foreign currency futures rates may well be approximated by random walks.

The J‐Curve

Abstract: If a country with a balance of payments problem, that is, insufficient foreign exchange receipts to meet foreign exchange requirements, seeks to remedy the situation by currency devaluation, things may get worse before they get better. This so-called J-curve effect occurs if the domestic-currency prices of exports are sticky, whether because they are cost based or subject to longer term contracts, so that export prices in foreign currency fall. Until favourable volume effects outweigh the unfavourable price effect, the balance of payments deteriorates. Such a J-curve effect should be distinguished both from the longer term erosion of the beneficial effects of devaluation as domestic costs and the prices of non-tradables rise and from the apparent J-curve due to the ‘valuation effect’. If the current account is in deficit before devaluation, as will usually be the case, devaluation will widen the deficit in domestic currency because domestic-currency imports rise by a larger amount than exports. This is a pure valuation effect, of no significance for external balance. But it is liable to lead to unduly pessimistic judgements about the effectiveness of devaluation. In Australia during 1985–86, the current account deficit increased by $A3.5 billion, despite substantial depreciation of the $A. The main reason was a sharp deterioration in the terms of trade which is estimated to have worsened the current account by $A4.25 billion. Most of this was exogenous, though J-curve effects may have made a contribution. In addition, the valuation effect contributed a further, illusory, widening of the deficit, valued in domestic currency, by over $A1 billion. To avoid misleading inferences from the valuation effect, it is suggested that the balance of payments should, if possible, be presented in foreign currency.

Currency Incontrovertibility, Trade Taxes and Smuggling

Abstract: In the classic analysis of smuggling importers choose the optimal mix of legal and illegal trade, given trade taxes and the technology of detection. This paper introduces an inconvertible currency in the framework, so that illegal trade is valued at a rate higher than the (fixed) official exchange rate. Sections 1 and 2 show how the smuggling ratio and the domestic price markup for the import and export good are simultaneously determined. With balanced legal and illegal trade, changes in the (long-run) black market premium are a weighted average of changes in trade taxes, whereas changes in the smuggling ratios depend on the ratio of trade taxes. Thus, an import tariff and an export subsidy rising at the same rate would keep smuggling ratios constant but imply a rising black market premium (section 3 and 4). To determine the quantity of exports and imports, a model of the economy is presented in section 5, featuring the production of exports and non-traded goods and the consumption of imports and non-traded goods, as well as a government confiscating the amounts of traded goods unsuccessfully smuggled. Then export production may fall, and welfare may rise, if trade taxes have a negative effect on the relative price of exports and imports stronger than the positive effect on smuggled exports and imports, which is always welfare-reducing. Section 6 introduces the short-run determination of the black market premium via portfolio balance. In this case, rising rade taxes may be associated with a premium rising even faster if there is unreported capital flight and conversely.

Valuation of American options on foreign currency

Abstract: Pricing models for American call and put options on foreign currency are derived herein. These models are used to investigate the efficiency of the market for foreign currency options. The evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices. In addition, it is shown that a hedging strategy executed at transaction prices can be used to translate an observed deviation of market from model prices into positive excess profits. However, these profits are eliminated if the strategy is executed at bid and offer prices.

Currency Substitution: Theory and Evidence from Latin America

Abstract: 1. Introduction.- References.- 2. A General Equilibrium Theory of Exchange Rates and Managed Floating.- 1. Multiple Stochastic Exchange Rate Equilibria.- 1.1 The Model.- 1.2 Multiple Equilibria.- 1.3 Mathematical Appendix.- 2. Price Uncertainty and Flexible Exchange Rates.- 2.1 Additional Model Specification.- 2.2 Temporary Equilibrium.- 2.3 Remarks.- 3. A Welfare Analysis.- 3.1 Additional Model Specifications.- 3.2 Risk Sharing and R(FE,PA) Regimes.- 3.3 Loosely and Tightly Managed Float Regimes.- 3.4 A Word on Fixed Exchange Rates.- 3.5 Concluding Remarks.- 3.6 Mathematical Appendix.- References.- 3. Empirical Implementation of the Instability Hypothesis.- 1. Instability and Theoretical Models.- 2. Modelling Considerations.- 3. The Model.- 4. Equilibrium with Government Intervention.- 5. Dominican Currency Crises.- 6. Concluding Remarks.- References.- 4. Currency Substitution and Small Open Economies: The Case of the Dominican Republic.- 1. Stylized Institutional Features of the Dominican Republic Parallel Market.- 2. The Empirical Model.- 2.1 Solution to the Market Clearing Exchange Rate under Imperfect Information.- 3. Empirical Analysis.- 3.1 The Univariate ARIMA Models for the Different Variables.- 3.2 Causal Structure Between the Exchange Rate and Domestic Money Supply.- 3.3 The Transfer Function Model.- 4. Summary and Conclusions.- Notes.- References.- 5. Dominant Currencies and Monetarism in Argentina.- 1. Introduction.- 2. Basic Dominant Currency Modelling Considerations.- 3. A Summary of Argentina's Exchange Rate Systems 1956-82.- 4. The Case of Argentina.- 4.1 Nominal Exchange Rate, Domestic Money Supply Growth and Foreign Prices.- 4.2 Inflation and Money Supply Growth.- 4.3 Real Exchange Rates, Domestic Money Supply Growth and Foreign Prices.- 5. Evidence of One Way Currency Substitution.- 6. Money, Exchange Rates, and Prices.- References.- 6. Venezuela and Ecuador-Currency Substitution in Oil Economies.- 1. Stability and Homogeneity.- 2. Frequency Analysis of Money and Prices.- 3. Concluding Remarks.- References.- 7. Conclusion.

An Analysis of the Management of the Currency Composition of Reserve Assets and External Liabilities of Developing Countries

Abstract: Analyses of developing countries’ financial positions have generally focused on the growth and currency composition of their reserve assets. The theory of portfolio selection, however, is clearly relevant to net positions rather than to assets alone. For this reason it is inappropriate to interpret changes in developing countries’ net currency positions as having resulted from independent decisions concerning the currency composition of foreign exchange reserves and external debt. Such a decision-making process would be suboptimal, and we see no reason to ascribe such behavior to the countries studied.

Handbook of Financial Markets and Institutions

Abstract: Partial table of contents: The ''New'' Financial Environment of the United States (A. W. Sametz). Money and Capital Markets: Institutional Framework and Federal Reserve Control (J. Bench). U.S. Government Debt Obligations: Financial Deregulation and the Proliferation of Interest Rate Hedge Products (J. Bench). The Market for Tax-Exempt Securities (R. W. Forbes). The International Monetary System (J. Burtle). Exchange Rates and Currency Exposure (R. Levich). International Banking (I. H. Giddy). International Investment, Diversification, and Global Markets (C. Nowakowski & P. Ralli). Security Analysis (J. L. Farrel & J. P. Holmes). Asset Pricing Models (E. J. Elton & M. J. Gruber). The Bond Rating Process (L. Ederington & J. B. Yawitz). Microcomputers and Investing (K. Smith). Appendixes. Index.

From the Use to the Production of Money: Monetary Theory and Economic Institutions — Theme and Outline of the Conference

Abstract: Even today, when metallic currencies are for all practical purposes a memory of a not even very recent past, the chief obstacle to a correct understanding of monetary phenomena is the identification of money with a commodity. At least for what concerns the Anglo-American tradition, monetary theorists are still children of the metallic currency system. They oscillate between an ambiguous and reluctant acceptance that in a general equilibrium system there is no general theorem proving the existence of an equilibrium in which money has a positive value; and an inclination to follow Marshall’s own solution, treating money as a good like any other — a capital good, preferably — whose demand and supply conditions can be determined, even if they present peculiarities whose description and analysis are modern monetary theory. In this vein one can assemble names like Hicks, Keynes, Patinkin, and Friedman. Different though they are, their approaches are similar in that they all give the limelight in their analysis of money to the demand side, to the individual’s demand for money as a store of value. Money is a good, but an exogenously produced good whose supply conditions need not be investigated.