Showing papers on "Currency published in 1988"

The logic of currency crises

Abstract: Once one recognizes that governments borrow international reserves and exercise other policy options to defend fixed exchange rates during currency crises, the question arises: What factors determine a government’s decision to abandon a currency peg or hang on? In a setting of purposeful action by the authorities, the possibility of self-fulfilling crises becomes important. Speculative anticipations depend on conjectured government responses, which depend, in turn, on how price changes that are themselves fueled by expectations affect the government’s economic and political positions. This circular dynamic implies a potential for crises that need not have occurred, but that do because market participants expect them to. In contrast to this picture, most literature on balance-of-payments crises ignores the response of government behavior to markets. That literature, I argue, throws little light on events such as the European Exchange Rate Mechanism collapse of 1992–1993. This article presents two different models in which crisis and realignment result from the interaction of rational private economic actors and a government that pursues well-defined policy goals. In both, arbitrary expectational shifts can turn a fairly credible exchange-rate peg into a fragile one.

Exchange Rate Pass-Through When Market Share Matters

Abstract: We investigate pricing to market when the exchange rate changes in cases where firms' future demands depend on their current market shares. We show that i) profit maximizing foreign firms may either raise or lower their domestic currency export prices when the domestic exchange rate appreciates temporarily (i.e. the "pass-through" from exchange rate changes to import prices may be perverse); ii) current import prices may be more sensitive to the expected future exchange rate than to the current exchange rate; iii) current import prices fall in response to an increase in uncertainty about the future exchange rate. We present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling behavior of U.S. import prices during the 1980s.

The Free Lunch in Currency Hedging: Implications for Investment Policy and Peformance Standards

Abstract: (1988). The Free Lunch in Currency Hedging: Implications for Investment Policy and Peformance Standards. Financial Analysts Journal: Vol. 44, No. 3, pp. 45-50.

Monetary and Exchange Rate Policies for International Financial Stability: A Proposal

Abstract: W v ithout a common monetary standard, the remarkable integration of Western European, North American, and the industrialized Asian economies in both commodity trade and financial flows is less efficient, and becoming untenable. Dissatisfaction with wildly fluctuating relative currency values, euphemistically called " floating" or " flexible" exchange rates, is a prime cause of the resurgence in protectionism. In 1986-87, the overvalued yen forced Japanese industrialists to close factories, retire workers, and write off once valuable investments in plant and equipment. This parallels what their American counterparts were forced to do between 1981 and 1985, when the dollar suddenly became overvalued. Similarly, the paring down of the British manufacturing base was precipitated when the pound unexpectedly became a strong petrocurrency in 1979-81. In agriculture, Japan and European countries are determined to insulate their domestic prices of farm products from unsettling international influences, including volatile fluctuations in the yen/dollar or mark/dollar exchange rates. Thus, unless exchange stability is first achieved, the American government's attempt to broaden the General Agreement on Tariffs and Trade to encompass agriculture and services is likely to fail. But what keeps the three major industrial blocs from developing a common monetary standard to prevent exchange-rate fluctuations? Although many people

The Effectiveness of Foreign-Exchange Intervention: Recent Experience

Abstract: Since the September 1985 Plaza Hotel announcement by the Group of Five industrial countries, a substantial realignment of exchange rates has been achieved. At the same time, foreign exchange market intervention, much of it concerted and much of it sterilized, has been undertaken on a scale not seen since the early 1970s This paper takes a fresh look at the effectiveness of sterilized intervention in the light of recent experience. The paper concludes that sterilized intervention, in itself, has played an unimportant role in promoting exchange-rate realignment. Instead, clear shifts in patterns of monetary and fiscal policy appear to have been the main medium-term policy factors determining currency values. Over certain shorter time periods, intervention has influenced exchange markets through a signalling channel; but this signalling effect has been operative only as a result of authorities' frequent readiness to adjust monetary policies promptly to counteract unwelcome exchange-market pressures. The paper makes some progress in formalizing reasons why intervention might enhance the credibility of messages that governments could convey as well through simple verbal announcements.

Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental

Abstract: The efforts of some American colonials, who complained of monetary scarcity and advocated increased government involvement in supplying paper money, were valid attempts to improve economic welfare and facilitate transactions The potential for improvement depended crucially on the fiscal and monetary policies of colonial governments This approach to monetary scarcity is useful for explaining variation in the real supply of money across colonies and over time The role of fiscal and monetary policies in determining the changing value of the continental, and the consequences for real currency supply during and after the Revolution, are examined in detail

The Currency Composition of Foreign Exchange Reserves

Abstract: This study examines the determinants of the currency composition of foreign exchange reserves for both industrial and developing countries. During the period from 1976-85, our empirical results indicate that the currency composition of reserves has been influenced by each country`s exchange rate arrangements, its trade flows with reserve currency countries, and the currency of denomination of its debt-service payments. The evidence is consistent with the view that managing the currency composition of a country`s net foreign asset position is done more cheaply by altering the currency of denomination of assets and liabilities that are not held as reserve assets.

The Effectiveness of Foreign-Exchange Intervention: Recent Experience

Abstract: Since the September 1985 Plaza Hotel announcement by the Group of Five industrial countries, a substantial realignment of exchange rates has been achieved. At the same time, foreign exchange market intervention, much of it concerted and much of it sterilized, has been undertaken on a scale not seen since the early 1970s This paper takes a fresh look at the effectiveness of sterilized intervention in the light of recent experience. The paper concludes that sterilized intervention, in itself, has played an unimportant role in promoting exchange-rate realignment. Instead, clear shifts in patterns of monetary and fiscal policy appear to have been the main medium-term policy factors determining currency values. Over certain shorter time periods, intervention has influenced exchange markets through a signalling channel; but this signalling effect has been operative only as a result of authorities' frequent readiness to adjust monetary policies promptly to counteract unwelcome exchange-market pressures. The paper makes some progress in formalizing reasons why intervention might enhance the credibility of messages that governments could convey as well through simple verbal announcements.

Currency Substitution in Egypt and the Yemen Arab Republic: A Comparative Quantitative Analysis

Abstract: An empirical analysis of the determinants of currency substitution in Egypt and the Yemen Arab Republic is provided for the period 1980-86. During this period, residents exhibited a marked preference to substitute foreign money balances for domestic balances, as indicated by their holdings of foreign currency deposits. This preference reflects changes in the expected relative returns to, and liquidity of, holdings of foreign balances. Such changes, in turn, are shown to result from intensified financial and economic imbalances, increased political uncertainties, and changes in institutional factors that affect domestic channels for acquiring and using foreign exchange resources.

The Dollarization of Latin America as a Market-Enforced Monetary Reform: Evidence and Implications

Abstract: Monetary reforms are a response to past and present monetary conditions. Yet what happens when public confidence in the domestic currency is eroded, but the government does not declare an official monetary reform? It is likely that the public will substitute away from the low-confidence domestic currency into a high-confidence foreign currency to the extent that such substitutions are possible. In other words, as confidence in the domestic money declines, money demanders will tend to substitute away from domestic money in favor of foreign money. This is, in effect, a market-based monetary reform on the demand side in place of an official supply-side monetary reform. This paper will consider such demand-side substitutability in Latin America and the official response. Monetary historians have chronicled many instances of monetary reform-when an existing low-confidence currency is replaced by a new monetary unit. While historical episodes differ in regard to social and political circumstances, it is safe to say that the economic circumstances leading to reform can be traced to a high and unstable rate of growth of the money supply. For instance, on September 29, 1975, Chile replaced the escudo with the Chilean peso, where one peso was defined as being equal to 1,000 escudos. The Chilean money supply had grown at an annual rate of 121% from 1971 to the time of the reform. Argentina introduced a new monetary unit, the peso Argentino, on June 1, 1983, where one new peso Argentino was defined as being equal to 10,000 old pesos. The Argentine money supply had grown at an annual rate of 85% since 1979. These growth rates prior to monetary reform are substantially higher than the average Latin American money growth rate over the 1972-83 period of 40%.

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.

Money Supply Announcements and the Ex Ante Volatility of Asset Prices

Abstract: Previous empirical studies have documented more volatile money grow th and money surprises, more volatile asset price changes, and increased responsiveness of asset prices to money surprises since the October 1 979 change in Fed policy. This paper studies the associations between money announcements and the ex ante volatility of asset prices in th e recent past. Results indicate that revisions of ex ante asset price volatility, as measured from prices of stock index, government debt, gold, and foreign currency options, are significantly correlated with the surprise component of the weekly M1 release. There is also evidence that money releases reduce volatility by resolving uncertainty. Copyright 1988 by Ohio State University Press.

Backing Theories and the Currencies of Eighteenth-Century America: A Comment

Abstract: Recently, a newly fashionable theory-the backing theory-has been used to explain the purchasing power of paper money during a number of historical episodes. The terminology is unfortunate, because the theory is different from traditional theories of backing. The backing referred to by the new theory consists of government tax revenues plus other government assets, not the traditional commodity backing. Accordingly, the new backing theory holds that the purchasing power of money is determined by government fiscal policy.' The new backing theorists claim that the price level will not be affected by changes in the quantity of money provided appropriate fiscal policies are followed. The theory has been used by Bruce Smith and Elmus Wicker to explain the purchasing power of American colonial currencies, and by Charles Calomiris, in a recent article in this JOURNAL, to explain the purchasing power of the continental currency issued during the American Revolution.2 The purpose of this comment is to address a new twist Calomiris has given to the backing theory, to review the evidence he presents, and to show some points of similarity between the colonial and revolutionary episodes. My position is that the backing theory has little or no explanatory value when applied to either the American colonial or revolutionary periods.3 Smith, Wicker, and Calomiris conclude that changes in prices were largely unrelated to changes in the money supply, but they overlook two important institutional facts. First, the measures of the money supply used by all three are seriously flawed. In the case of colonial America, the money supply data do not accurately measure even the amount of paper money in circulation

Collapsing Exchange Rate Regimes: Shocks and Biases

Abstract: Patterns in domestic credit creation stemming from inconsistent fiscal policies have received widespread attention for aggravating speculative attacks on central bank foreign exchange reserves and contributing to the collapse of exchange rate regimes. This paper acknowledges the importance of monetary and fiscal discipline, but also emphasizes the importance of other random shocks to the domestic money market, most notably shocks from external credit supplies and relative prices. Policies of the domestic fiscal authorities are only partial catalysts for speculative attacks on a currency. Expansion of domestic credit stemming from the monetization of fiscal imbalances may be dominated by involuntary domestic credit expansions necessitated by surprise shortages in supplies of external capital. Further, the unexpected availability of external capital translates into a lower net critical reserve floor, making the depletion of central bank reserves by a speculative attack more difficult to accomplish. Also of considerable importance are relative price shocks which directly influence the probability of collapse by randomizing the demand for nominal money balances. Empirical studies of exchange rate crises that neglect these considerations will produce biased estimates of both expected collapse probabilities and anticipated post-collapse exchange rates.

International Aspects of Fiscal Policies

Abstract: This volume brings together nine papers from a conference on international macroeconomics sponsored by the NBER in 1985. International economists as well as graduate students in the fields of global monetary economics, finance, and macroeconomics will find this an outstanding contribution to current research. It includes two commentaries for each paper, written by experts in the field, and Frenkel's detailed introduction, which serves as a reader's guide to the arguments made, the models employed, and the issues raised by each contributor. The studies analyze national fiscal policies within the context of the international economic order. Malcolm D. Knight and Paul R. Masson use an empirical model to show that fiscal changes in recent years in the United States, West Germany, and Japan have caused major disturbances in net savings and investment flows. Linda S. Kole uses a two-country simulation model to examine the effects of a large nation's expansion on exchange rates, interest rates, and the balance of payments. In other studies, Warwick J. McKibbin and Jeffrey D. Sachs discuss the influences of different currency regimes on the international transmission of inflation; Kent P. Kimbrough analyzes the interaction between optimal tax policies and international trade; Sweder van Wijnbergen investigates the interrelation of fiscal policies, trade intervention, and world interest rates; and Willem H. Buiter uses an analytical model to look at fiscal interdependence and optimal policy design. David Backus, Michael Devereux, and Douglas Purvis develop a theoretical model to investigate effects of different fiscal policies in an open economy. Alan C. Stockman looks at the influence of policy anticipation in the private sector, while Lawrence H. Summers shows the effects of differential tax policy on international competitiveness.

Mozambique: From Symbolic Socialism to Symbolic Reform

Abstract: In the four years since the signing of the Nkomati accord in March 1984, Mozambique has undergone a quiet but far-reaching process of policy reform. Faced with a major crisis caused by the Renamo insurgency and by economic mismanagement, the Government has apparently abandoned its ambitious programme of socialist transformation through the creation of state farms and the launching of large projects, adopting instead a package of market-oriented economic reforms. Having joined the World Bank and the International Monetary Fund in late 1984, Mozambique has been devaluing its currency, increasing the prices of agricultural produce, allowing peasants to sell commodities to private traders, and channelling some aid to the private sector, in keeping with the policies favoured by those organisations, The U.S. Agency for International Development, which has also become a donor since 1984, has likewise exerted pressure for policy reform, in particular for aid to the private commercial farms. While the socialist economic sector has not been dismantled, the Government is now stressing the importance of peasant and private agriculture, and the necessity of providing more support for both.1

Money Lending on the Periphery of London, 1300–1600*

Abstract: Money lending was an essential part of the local and regional economies of England during the later medieval and Tudor periods. Cash was required for purchases of goods, animals, or land, payment of rents and taxes, and the wages of hired workers. People who lacked money to cover these expenses between 1300 and 1600 commonly resorted to borrowing. Borrowing thus might be undertaken for purposes of either consumption or investment. Further, during much of the later medieval period and occasionally during the Tudor years specie was in short supply. Even a man of some wealth might find himself without sufficient currency on hand to cover his immediate needs. In nearly all cases late medieval and Tudor loans were for short terms, for periods ranging from a few weeks to six months. Interest was normally charged on local loans, although the amount was concealed due to the Church's prohibition of usury.Money lending was particularly important within commercialized areas—the major cities and their economic hinterlands. The region lying within a radius of about twenty miles from London formed one of the most thoroughly commercialized parts of the country. By the fourteenth century people living on the periphery of the capital were deeply involved in furnishing consumer goods to London. Agriculture among middling and larger tenants focused upon market sale; craftsmen sometimes sold to citizens as well as to their own neighbors. Late medieval London was surrounded by a ring of at least thirty-two market towns located within twenty miles of the capital. These markets served to channel grain, animals, fuel, and craft items into the city while also functioning as centers of trade for their own areas. In the market communities around London the extent of trade was unusually large and the economic sophistication of local people unusually high. Cash was the medium of accounting for all transactions and the medium of exchange for the great majority of them. It is not surprising that money lending played an especially significant role in this area.

International Aspects of Fiscal Policies

Abstract: This volume brings together nine papers from a conference on international macroeconomics sponsored by the NBER in 1985. International economists as well as graduate students in the fields of global monetary economics, finance, and macroeconomics will find this an outstanding contribution to current research. It includes two commentaries for each paper, written by experts in the field, and Frenkel's detailed introduction, which serves as a reader's guide to the arguments made, the models employed, and the issues raised by each contributor. The studies analyze national fiscal policies within the context of the international economic order. Malcolm D. Knight and Paul R. Masson use an empirical model to show that fiscal changes in recent years in the United States, West Germany, and Japan have caused major disturbances in net savings and investment flows. Linda S. Kole uses a two-country simulation model to examine the effects of a large nation's expansion on exchange rates, interest rates, and the balance of payments. In other studies, Warwick J. McKibbin and Jeffrey D. Sachs discuss the influences of different currency regimes on the international transmission of inflation; Kent P. Kimbrough analyzes the interaction between optimal tax policies and international trade; Sweder van Wijnbergen investigates the interrelation of fiscal policies, trade intervention, and world interest rates; and Willem H. Buiter uses an analytical model to look at fiscal interdependence and optimal policy design. David Backus, Michael Devereux, and Douglas Purvis develop a theoretical model to investigate effects of different fiscal policies in an open economy. Alan C. Stockman looks at the influence of policy anticipation in the private sector, while Lawrence H. Summers shows the effects of differential tax policy on international competitiveness.

How Do Fixed-Exchange-Rates Regimes Work: The Evidence From The Gold Standard, Bretton Woods and The EMS

Abstract: This paper defines two competing hypotheses on the working of fixed exchange rates. The "symmetry" hypothesis states that every country is concerned with the good functioning of the system, and cannot afford to deviate from world averages. Every country is just left to follow the rules of the game," that is to avoid sterilizing balance of payments flows. The world price level is pegged down either by an external numeraire like gold, or by cooperation among central banks, in a fiat currency system. The competing hypothesis states that fixed-exchange rates regimes are inherently asymmetric: they are characterized by a 'center country" which provides the nominal anchor for the others, either by managing the gold parity in a centralized fashion, or by arbitrarily setting some other nominal anchor. I discuss the empirical evidence to discriminate between the two hypotheses, by studying the institutional features and the data on three experiences of fixed rates: the International Gold Standard, the Bretton Woods regime, and the European Monetary System.

Foreign Exchange Gap, Structural Constraints, and the Political Economy of Exchange Rate Determination in Iran

Abstract: Foreign currency transactions have come under stringent controls in postrevolutionary Iran. This is a relapse into the prevailing conditions in the years preceding 1974, before the increase in oil revenues eliminated the foreign currency gap. Initially, the Islamic Republic of Iran (IRI) imposed exchange controls to stop the postrevolutionary capital flight. Soon, however, exchange controls became an integral policy instrument of the government for rationing the existing supply of foreign currency in the face of a widening foreign exchange gap.

A currency conversation calculator

Abstract: A currency conversion calculator comprises; keys 1, 2 for selecting currencies, keys 6 for inputting an amount of money of a selected currency, a key 3 for preliminarily setting one or more different currency rates in conjunction with keys 6, memory 14b for storing the currency rate(s) set, a CPU 14 for the conversion calculation, and a plurality of display units 5 of which at least one displays the amount of money converted into the different currency by said CPU.

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 concernin g the desirability of using currency as the instrument of policy is t he behavior of the demand for currency. This paper investigates the d emand for currency over the period 1921-80 and finds that currency be haves in a systematic and explainable manner over this period. Copyright 1988 by Ohio State University Press.

The Relationship Between Money and Prices: Some Historical Evidence Reconsidered

Abstract: This article describes a debate about the validity of the quantity theory of money and offers further evidence against it. The evidence is primarily from the North American colonies of Virginia, New York, and Pennsylvania and regards the issue of measuring the money supply. Studies have shown that changes in colonial money and inflation are inconsistent with the quantity theory. Some have argued that those studies measure money wrong: specie belongs in the measure because the colonies were on a fixed exchange rate system with Britain; changes in colonial paper money were offset by specie flows. When specie is counted, the quantity theory stands. This study responds with evidence that the critics are wrong: the colonies had no such fixed exchange rate regime, and movements in the stock of colonial paper currency cannot have been offset by specie flows.