Showing papers on "Currency published in 1989"

On Money as a Medium of Exchange

Abstract: We analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo Nash equilibria in trading strategies are characterized Certain goods emerge endogenously as media of exchange, or commodity money, depending both on their intrinsic properties and on extrinsic beliefs There are also equilibria with genuine fiat currency circulating as the general medium of exchange We find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare Velocity, acceptability, and liquidity are discussed

Pricing European Currency Options: A Comparison of the Modified Black-Scholes Model and a Random Variance Model

Abstract: We use the modified Black-Scholes model and a random variance option pricing model to study prices of European currency options traded in Geneva. The options, which cannot be exercised early, include calls and puts on the dollar/Swiss franc exchange rate. In the empirical analysis, we examine the model fit and the biases with respect to the strike price, time to maturity, and volatility. There is some evidence of mispricing and there are small gains available by trading with the random variance model.

Quantifying International Capital Mobility in the 1980s

Abstract: The Feldstein-Horioka finding, that national saving and investment have been highly correlated in the past, has not been primarily due to econometric problems such as endogenous fiscal policy; it has held up equally well when instrumental variables are used. But the inflow of capital to the United States has been so large in recent years that an updating of the sample period to 1987 produces a coefficient on national saving that is lower than in past studies. This decline in the degree of crowding out of investment can be attributed to the increased degree of financial market integration in the 1980s. Capital controls and other bathers to the movement of capital across national borders remained for such countries as the United Kingdom and Japan as recently as 1979, and France and Italy as recently as 1986. But a new data set of forward exchange rates for 25 countries shows that a continuing worldwide trend of integration of financial markets in the 1980s had all but eliminated short-term interest differentials for major industrialized countries by 1988. It is only the country premium that has been eliminated however, this means that only covered interest differentials are small. Nominal and real exchange rate variability remain, and indeed were larger in the 1980s than in the 1970s. The result is that a currency premium remains, consisting of an exchange risk premium plus expected real currency depreciation. The popular null hypothesis that expected real depreciation is constant at zero is tested, and rejected, with a 119-year sample. (Post-1973 data sets do not allow enough observations to provide a useful test of this null hypothesis.) The existence of expected real depreciation means that, even if interest rates are equalized internationally when expressed in a common currency, large differentials in j interest rates remain. Investors have no incentive to arbitrage away such differentials. Because there is no force tying the domestic real interest rate to the world real interest rate, it follows that there is no reason to expect any country's shortfalls of national saving to be completely financed by borrowing from abroad.

Adult Development and Aging

Abstract: This revision of Cavanaugh's best-selling text is written within a biopsychosocial framework and covers the specific age-stages of adult development and aging. The book's currency of research and theories cited and the connections developed between research and application contribute to its excellent reputation. The book's focus on the gains and losses people experience across adulthood distinguishes it from its competitors. The new edition features a complete reworking of its organization and a thorough updating of citations, including hundreds from 1997 through the present. A new separate chapter on Social Cognition, Chapter 9 (the research area of the new co-author, Fredda Blanchard-Fields), offers expanded coverage of this exciting area.

The Nature of Money

Abstract: This chapter deals with two problems: the economic justification of the use of money and the institutional framework of a money economy. The two are closely interrelated. We shall analyze both in terms of the concepts of institutional economics developed in the preceding chapter. In particular, we shall use, in addition to the traditional transaction costs approach, the concepts of a legitimate order and its guarantee to explain the use of money. First it will be useful to describe and systematize the institutional framework of a money economy. Next we shall give reasons for the use of money and the existence of its institutional framework - the currency order. Finally we shall deal with the guarantee of the currency order, i.e., with the relation between the state and the currency.

Currency and Credit in a Private Information Economy

Abstract: In an environment with private information, spatial separation, and limited communication, a currency-like object and more standard named credits can be distinguished. The credit objects can be used among agents in an enduring relationship, that is, among agents with known trading histories, whereas the currency-like object must be used among relative strangers. In this environment, collectively determined Pareto-optimal rules make the level of the currency-like object and the mix of currency to named credits responsive to individual needs and to economywide states. Total indebtedness is determined by the number of lenders, that is, by preference or demand shocks, and the mix of currency to credits is determined by transaction patterns among the agents.

Is the European Community an Optimal Currency Area? : Optimal Tax Smoothing versus the Cost of Multiple Currencies

Abstract: The authors propose a view of optimal currency areas that is based on the principles of public finance. Inflation taxes are distortionary, and an optimal spreading of tax distortions may require high inflation in one region and low inflation in another. Each region would need its own currency to do this. On the other hand, multiple currencies imply valuation and currency conversion costs, which impede trade between regions. This tradeoff is explored in the context of the European Community's debate over a common currency, using a two-country variant of Robert Lucas and Nancy Stokey's cash-in-advance model. Copyright 1990 by American Economic Association.

The Currency Composition of Foreign Exchange Reserves

Abstract: Determinants of the currency composition of foreign exchange reserves are examined for both industrial and developing countries. Empirical results indicate that the currency composition of reserves during the period 1976-85 has been influenced by each country's exchange rate arrangements, trade flows with reserve-currency countries, and the currency in which its debt service payments are denominated. The evidence suggests 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.

Free Banking and Monetary Reform

Abstract: The power of the state to issue currency and control the monetary system is so entrenched, and the presumption among economists that money must be supplied monopolistically by a central authority is so widespread, that the notion that money could be supplied competitively has rarely been taken seriously. This book boldly challenges the conventional view that the state must play a dominant role in the monetary system. Part I explores the historical evidence and examines how a well-developed monetary system might have developed without any special role for the state. Part II offers a theory for a competitive supply of money and uses it to shed light on the development of monetary theory and the course of monetary history over the past two centuries. In Part III the author outlines new proposals for monetary reform that will protect the financial system against instability and will ensure macroeconomic stability.

Competition and Currency: Essays on Free Banking and Money

Abstract: "Lawrence H. White deals with a major issue of the 1990s--reprivatization of money. He makes a cogent argument and presents evidence that private, competing currencies would provide more monetary stability than do central banks. Surprisingly enough, modern private money may emerge first in Eastern Europe, where the gap between the economy's need and the government's money is greates." --Richard Rahn, Vice President and Chief Economists, U.S. Chamber of Commerce. "Boldly, White makes a persuasive case for free banking...In time, we may well look back and regard Competition and Currency as crucial in the development of the economy and economic thought of the future." -- The New York City Tribune "White is a leading analyst of a laissez-faire monetary system featuring a privately issued money supply. HIs perceptive insights force a rethinking of our present regulated monetary system and of what kind of reforms will remedy its defects. Avery worthwhile collection of essays for all students of monetary theory." --Philip Cagan, Columbia University "White is a leading analyst of a laissez-faire monetary system featuring a privately issued money supply. HIs perceptive insights force a rethinking of our present regulated monetary system and of what kind of reforms will remedy its defects. A very worthwhile collection of essays for all students of monetary theory." --Phillip Cagan, Columbia University "Newcomers to the literature...would be recommended to start with White's volume, where each paper is self-contained in its handling of particular aspects of free banking...Highly recommended as clear, well-argued expositions of the case for free banking, challenging assumptions common to much of monetary economics. It is particularly apposite that these assumptions be questioned at a time when institutional reform is so much on the agenda." --Sheila C. Dow, The Economic Journal

Credibility, debt and unemployment: Ireland's failed stabilization

Abstract: Ireland's disinflation Rudiger Dornbusch Disinflation requires a switch to tough policies. If these are fully and immediately reflected in expectations and actual prices, there need be little output cost of disinflation. This paper analyses the stabilization programme in Ireland in the 1980s. It may be that EMS membership offers a credibility bonus: by joining the EMS, playing by the rules of fixed exchange rates and tying the currency to German price stability, a country can achieve a dramatic turnaround in expectations, inflation, and long interest rates. But the evidence shows international disinflation in the 1980s was not limited to EMS members. The Irish example demonstrates a second lesson. Disinflation and tight money have been accompanied by a serious public debt problem and soaring unemployment. Unless these problems can be tackled it may become necessary in future to resort once more to inflation and the printing press. Long interest rates suggest that the bond market does not yet take such fear seriously.

Transactions Costs and Vehicle Currencies

Abstract: Using a simple model of transactions costs in the interbank foreign exchange market and a model of vehicle currency use, the interaction between transactions costs and vehicle currency use is explored. The impact of volume on bid-ask spreads is estimated from cross-section time series data on seven currencies. Data on transactions costs and the currency denomination of trade and capital flows is used to estimate changes in the attractiveness of using the U.S. dollar as a vehicle between 1980 and 1987. The data suggest a modest reduction in the attractiveness of the dollar as a vehicle.

Price Determination in Ireland: Effects of Changes in Exchange Rates and Exchange Rate Regimes

Abstract: This paper finds that the wholesale price of Irish manufacturing output is closely tied to foreign prices in the long run; domestic wage costs generally do not exert a significant influence. In the short run changes in foreign currency prices affect Irish prices more rapidly than do changes in exchange rates. There is evidence of a change in pricing behaviour on Ireland's entry into the EMS. German out­ put prices are now as important as UK prices in determining Irish prices.

A European Central Bank

Abstract: This volume, based on a conference held by the Italian Macroeconomic Policy Group and the centre for Economic Policy Research, examines the issues raised by European monetary unification. An introduction describes recent monetary developments and identifies the motivations for creating a European central bank. Theoretical papers analyse the interactions of capital controls, financial intermediation and seigniorage in open economies; the optimal design of centralized banks of issue by sovereign countries; and some new aspects of the 'optimal currency area' question. The empirical papers provide new evidence and interpretation of inflation experience across Europe and the attitudes of European central bankers about inflation and unemployment. The historical papers describe the experience of currency unification in Germany and Italy in the 19th century and the creation of the US Federal Reserve System. The volume concludes with a panel discussion on the feasibility of European monetary unification, featuring leading academics and central bankers.

Banking School, Currency School, Free Banking School

Abstract: Historians of economic thought conventionally represent British monetary debates from the 1820s on as centred on the question of whether policy should be governed by rules (espoused by adherents of the Currency School), or whether authorities should be allowed discretion (espoused by adherents of the Banking School). In fact many other questions were in dispute, including those raised by neglected or misidentified participants in the debates — adherents of the Free Banking School.

Currency Exchange Rates: Their Impact on Global Sourcing

Abstract: Currency Exchange Rates: Their Impact on Global Sourcing Exchange rate considerations are becoming an important facet of international sourcing. Not only can volatile exchange rates impact the supplier selection decision, they can also affect the volume-timing of purchases once the supplier is selected. The analyses presented in this article are intended to familiarize purchasing managers with two macro level exchange rate management strategies and demonstrate the potential benefits of using these strategies in international purchasing. As U.S. manufacturers strive to compete globally, effective management of the supply function is becoming increasingly important. It is widely acknowledged by procurement experts that supply management will play a major role in the restructuring and restoration of American industry as it attempts to regain U.S. and world market share. As stated by Davidow: The best manufacturers have superior suppliers--suppliers which save customers money, improve their quality, aid in design innovation, and reduce inventories.[1] "World class" suppliers cannot always be found within the United States. The growing movement by U.S. manufacturers toward foreign sourcing demonstrates that increasing numbers of purchasing managers are turning to nondomestic suppliers to satisfy their needs. While competitive advantage has diminished, customers have demanded increasing quality and value. The resultant concentration on cost and its containment has forced all of us to look to new sources and products as we struggle to satisfy needs--needs which now have become international in nature.[2] Global sourcing spawns a new set of opportunities and problems for the purchasing manager.[3] In the past, the problems involved in international sourcing were overshadowed by the strength of the U.S. dollar. Today, however, purchasing managers who source abroad are challenged by a complex and competitive world market. The falling value of the dollar, declining oil prices, dis-inflation, and pure deflation in some countries require purchasing managers to take a more selective approach to global sourcing. In today's environment, the process of locating and selecting capable foreign suppliers is more difficult. The decision is further complicated by volatile currency exchange rates, which impact the total cost of imported goods over the life of a requirements contract. THE IMPORTANCE OF EXCHANGE RATES IN INTERNATIONAL SOURCING Exchange rates impact the price paid for imported materials when payment is in the supplier's currency and there is a lag between the time the contract is signed and payment is made. Depending on the country of the supplier and the direction of the exchange rate movement, a buyer may be required to pay substantially more or less than the original contract price. For example, suppose that on January 3, 1986 a U.S. buyer entered into a one-year contractual agreement with a Japanese supplier that called for 12 equal monthly payments of 20.248 million yen each. Further assume that when the contract was signed on January 3 the prevailing exchange rate was 202.48 yen per U.S. dollar. Evaluated at that exchange rate, each monthly payment of yen was equivalent to $100,000 U.S. Depending on the exchange rate volatility of the yen with respect to the U.S. dollar over the duration of the contract, the total cost to the buyer could be higher or lower than the expected $1.2 million ($100,000 per month for 12 months). Table I presents data supporting an analysis of actual U.S. dollar expenditures over the 12-month life of this contract. Since the U.S. dollar lost buying power against the yen in 1986, the contract with the Japanese supplier would have cost a total of $1,433,230 U.S. over the 12-month period; that is, $233,230 U.S. more than the $1.2 million originally anticipated. The problem becomes even more complicated when two or more foreign suppliers from countries utilizing different currencies are under consideration for a contract. …

Managing Exchange Rate Crises: Evidence from the 1890's

Abstract: This paper investigates the effectiveness of the monetary authority's borrowing policies in resolving exchange rate crises It shows why obtaining loans or lines of credit in foreign currency may avoid, at least temporarily, the devaluation of a fixed exchange rate, and discusses the problem of the optimal size of the loan and/or the line of credit The analysis focuses on a particular episode of foreign exchange rate pressure, during the troubled years between 1894 to 1896 The results suggest that the borrowing policy followed by the US Treasury in those years was effective in avoiding the collapse of the United States' gold standard, and that the amount of the borrowing undertaken by the Treasury might have been optimal

Equation of Exchange

Abstract: The equation of exchange (often referred to as the quantity equation) is one of the oldest formal relationships in economics, early versions of both verbal and algebraic forms appearing at least in the 17th century. Perhaps the best known variant of the equation of exchange is that expressed by Irving Fisher (1922): $$ MV = PT $$ Equation (1) represents a simple accounting identity for a money economy. It relates the circular flow of money in a given economy over a specified period of time to the circular flow of goods. The left-hand side of equation (1) stands for money exchanged, the right-hand side represents the goods, services and securities exchanged for money during a specified period of time. M is defined as the total quantity of money in the economy, T as the total physical volume of transactions, where a transaction is defined as any exchange of goods, including physical capital, services and securities for money, P is an appropriate price index representing a weighted average of the prices of all transactions in the economy. Finally, to make the stock of money comparable with the flow of the value of transactions (PT), and to make the two sides of the equation balance, it is multiplied by V, the transactions velocity of circulation, defined as the average number of times a unit of currency turns over (or changes hands) in the course of effecting a given year’s transactions.

Determinants of capital flight from argentina, brazil, and mexico

Abstract: This paper derives four alternative measures of “hot money” outflows of capital from Latin America's three major debtors–Argentina, Brazil, and Mexico. These measures are based on two sources of quarterly data from 1977 to 1986: (i) the balance of payments statistics and (ii) changes in the U.S. bank deposits of non-banking entities in the debtor countries. The portfolio adjustment model then is used to specify the factors influencing capital flight. These factors are grouped into two types. The push factors relate to characteristics of the so-called source countries for capital flight and include the interest and inflation rates, the degree of currency overvaluation, and the environmental risks embodied in both frequent regime changes and the onset of the 1982 debt crisis. The pull factors include the interest and inflation rates in the host country, the United States. The principal findings of the paper show that the push factors alone are significant in explaining capital outflows from Argentina and Brazil. For Mexico, by contrast, the push factors as well as the pull factors are found to be relevant in explaining the behavior of flight capital, as measured by changes in the deposits of Mexican non-bank entities in the U.S. banking system.

The Meaning of the Social Market Economy

Abstract: Since the currency reform of 1948, the economic policy of the Federal Republic has been conducted under the banner of the ‘social market economy’. This term has since been used to describe the overall conception of economic policy developed primarily by the then Federal Minister for Economic Affairs, Ludwig Erhard. In 1949 the guiding principles of the Christian Democratic Union (CDU) as laid down in Dusseldorf brought the term to public attention. Since then it has become the foundation of the politico-economic programme of the coalition parties in the first and second Federal Parliaments.

Financial Innovation and Financial Fragility

Abstract: The extent of structural change and product innovation in financial markets during the past twenty years has been striking. Regulatory and technological barriers inhibiting banking competition across state and national boundaries and between different types of financial intermediaries have tumbled, while new financial instruments and usages have proliferated. Moreover the pace of innovation has accelerated since 1980. Innovations of the 1970s such as currency futures, mortgagebacked securities and floating rate notes have gained much wider market acceptance in the last decade. Entirely new markets in financial options, currency and interest-rate swaps, zero coupon bonds and junk bonds have emerged since 1980 and already play a major role in portfolio management and in government and corporate finance.' Hyman Minsky alludes to this rapid institutional change in his recent treatise on financial instability, Stabilizing an Unstable Economy and notes the absence of any coherent analysis of its effects on the stability of the financial structure. "In recent years we have seen many institutional changes in banking and finance. These changes have been permitted even though the authorities have no theory enabling them to determine whether the changes taking place in financial practises tend to increase or decrease the overall stability of the financial system."2 Minsky himself has no doubt that the overall impact of financial inno-

Bank Failures, Financial Restrictions, and Aggregate Fluctuations: Canada and the United States, 1870–1913

Abstract: During 1870_1913, Canada had a well-diversified branch banking system while banks in the US unit-banking system were less diversified Canadian banks could issue large-denomination notes with no restrictions on their backing, while all US currency was essentially an obligation of the US government Also, experience in the two countries with regard to bank failures and panics was quite different A general equilibrium business cycle model with endogenous financial intermediation is constructed that captures these historical Canadian and American monetary and banking arrangements as special cases The model's predictions contradict conventional wisdom about the cyclical effects of banking panics Support for these predictions is found in aggregate annual time series data for Canada and the United States

CURRENT PERSPECTIVES ON MONETARY PoLIcY

Abstract: Rather than discuss the specifics of the Federal Reserve’s current concerns and goals for policy, I wish to discuss the more fundamental long-term goals of monetary policy and how we can proceed to reach these goals — particularly under current domestic and international monetary arrangements. Clarifying the goals of policy is especially important in our current monetary environment in which essentially every currency in the world is directly, or indirectly, on a pure fiat standard.1 In such circumstances, the credibility of the world’s monetary authorities is of utmost importance.

Restrictions on Financial Intermediaries and Implications for Aggregate Fluctuations: Canada and the United States 1870-1913

Abstract: During the period 1870-1913, Canada had a well-diversified branch banking system while banks in the U.S. unit banking system were less diversified. Canadian banks could issue large-denomination notes with no restrictions on their backing, while all U.S. currency was essentially an obligation of the U.S. government. Also, experience in the two countries with regard to bank failures and banking panics was quite different. A general equilibrium business cycle model with endogenous financial intermediation is constructed that captures these historical Canadian and American monetary and banking arrangements as special cases. The predictions of the model contradict conventional wisdom with regard to the cyclical effects of banking panics. Support for these predictions is found in aggregate annual time series data for Canada and the United States.