Showing papers on "Currency published in 1991"

Optimum Currency Areas

Abstract: An optimum currency area refers to the ‘optimum’ geographical domain having as a general means of payments either a single common currency or several currencies whose exchange values are immutably pegged to one another with unlimited convertibility for both current and capital transactions, but whose exchange rates fluctuate in unison against the rest of the world. ‘Optimum’ is defined in terms of the macroeconomic goal of maintaining internal and external balance. Internal balance is achieved at the optimal trade-off point between inflation and unemployment (if such a trade-off really exists), and external balance involves both intra-area and inter-area balance of payments equilibrium.

Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach

Abstract: We examine the connection between exchange rates and foreign direct investment that arises when globally integrated capital markets are subject to informational imperfections. These imperfections cause external financing to be more expensive than internal financing, so that changes in wealth translate into changes in the demand for direct investment. By systematically lowering the relative wealth of domestic agents, a depreciation of the domestic currency can lead to foreign acquisitions of certain domestic assets. We develop a simple model of this phenomenon and test for its relevance in determining international capital flows.

The Gold Standard and the Great Depression

Abstract: The Depression of the 1930s remains the ultimate testing ground for theories of macroeconomic fluctuation, while the operation of the gold standard is the ultimate measuring rod for alternative international monetary systems. Yet neither the cause of the Great Depression nor the workings of the gold standard are understood adequately. (1) One reason, my research suggests, is that they tend to be analyzed in isolation from one another when, in fact, the gold standard provides the key to understanding the Depression, and the Depression illuminates how the gold standard workes. (2) How the Gold Standard Worked The dominant explanation for the stability of the prewar gold standard emphasizes adept management by the Bank of England. The Bank is said to have stabilized the gold standard system by acting as international lender of last resort. In an influential book, Charles Kindleberger contrasted the pre-World War I situation with the interwar period, when Britain was not sufficiently powerful to stabilize the system, and the United States was not prepared to do so. (3) In an application of what has come to be known as the "theory of hegemonic stability," Kindleberger concluded that the requisite stabilizing influence was supplied adequately only when there existed a dominant power ready and able to provide it. (4) My research challenges this view. It suggests that the interwar period was hardly exceptional for the absence of a hegemon. Neither was there a country that single-handedly managed international monetary affairs prior to World War I. The prewar gold standard was a decentralized, multipolar system whose smooth operation was not attributable to stabilizing intervention by a dominant power. The stability of the prewar gold standard was attributable rather to two very different factors: credibility and cooperation. (5) The credibility of the gold standard derived from the priority attached by governments to balance-of-payments equilibrium. In the core countries--Britain, France, and Germany--there was little doubt that the authorities would take whatever steps were required to defend the central bank's gold reserves and to maintain the convertibility of the currency into gold. If one such central bank lost gold reserves and its exchange rate weakened, then funds would flow in from abroad in anticipation of the capital gains that investors in domestic assets would reap once the authorities adopted the measures needed to stem reserve losses and strengthen the exchange rate. Because there was no question about the commitment to the existing parity, stabilizing capital flows responded quickly and in considerable volume. The exchange rate strengthened of its own accord. Stabilizing capital flows thereby minimized the need for government intervention. (6) What rendered the commitment to gold credible? In part, there was little perception that policies required for external balance were inconsistent with domestic prosperity. There was no well-articulated theory of how supplies of money and credit could be manipulated to stabilize production or reduce joblessness. The working classes, possessing limited political power, were unable to challenge the prevailing state of affairs. In many countries, the extent of the franchise was still limited. Those who might have objected that restrictive monetary policy created unemployment were in no position to influence its formulation. Nor was there a belief that budget deficits or changes in the level of public spending could be used to establize the economy. Since governments followed a balanced-budget rule, changes in revenues dictated changes in public spending. Countries rarely found themselves confronted with the need to eliminate large budget deficits in order to stem gold outflows. Ultimately, however, the credibility of the prewar gold standard rested on international cooperation. Minor problems could be dispatched by tacit cooperation, generally achieved without open communication among the parties involved. …

Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States

Abstract: The main goal of this paper is to estimate to what extent the federal government of the United States insures member states against regional income shocks. We find that a one dollar reduction in a region's per capita personal income triggers a decrease in federal taxes of about 34 cents and an increase in federal transfers of about 6 cents. Hence, the final reduction in disposable per capita income is on the order of 60 cents. That is, between one third and one half of the initial shock is absorbed by the federal government. The much larger reaction of taxes than transfers to these regional imbalances reflects the fact that the main mechanism at work is the federal income tax system which in turn means that the stabilization process is automatic rather than specifically designed each time there is a cyclical movement in income. Some economists may want to argue that this regional insurance scheme provided by the federal government is an important reason why the system of fixed exchange rates that exists within the United States today has survived without major problems. Under this view, the creation of a European Central Bank that issues unified European currency without the simultaneous introduction (or expansion) of a fiscal federalist system could put the project at risk. Rough calculations of the impact of the existing European tax system on regional income suggests that a one dollar shock to regional GDP will reduce tax payments to the EEC government by half a cent!. Hence, the current European tax system has a long way to go before it reaches the 34 cents of the U.S. Federal Government.

Sterling's Relationship with the Dollar and the Deutschemark: 1976-89

Abstract: This paper evaluates the linkages between bilateral exchange rates using a time-varying parameter model, which can be estimated using the Kalman filter. The technique solves many of the statistical problems which arise when ordinary least squares is used to estimate currency correlation. Applying the technique to the dollar-sterling, DM-sterling, and DM-dollar bilateral exchange rates, the results suggest a market weakening (strengthening) of sterling's relationship with the dollar (DM) since the mid-1970s. Additionally, these currency linkages are shown to have undergone a number of regime shifts, suggesting that the timing of the weakening of the dollar/sterling relationship is different to that proposed by previous studies. Copyright 1991 by Royal Economic Society.

Exchange Rate Policy in Developing Countries: Some Analytical Issues

Abstract: This paper addresses analytical aspects of exchange rate policy and emphasizes the relationship among exchange rate flexibility, financial discipline, and international competitiveness.

European financial integration

Abstract: List of figures List of tables Preface List of conference participants Foreword 1. Introduction 2. Banking competition and European integration 3. Banking, financial intermediation and corporate finance 4. How (not) to integrate the European capital markets 5. European financial regulation: a framework for policy analysis 6. Corporate mergers in international economic integration 7. Capital flight and tax competition: are there viable solutions to both problems? 8. Reflections of the fiscal implications of a common currency 9. Currency competition and the transition to monetary union: does competition between currencies lead to price level and exchange-rate stability? 10. Currency competition and the transition to monetary union: currency competition and the evolution of multi-currency regions 11. Problems of European monetary integration Index.

Firm Size and Export Behavior: Lessons from the Midwest

Abstract: In the last three decades the number of American companies involved in international commerce has increased dramatically Ojile (1986), for example, indicates that more than 6,000 US organizations have some sort of operation abroad and about one-third of all US corporate profits result from international activity By 1984, the internationalization of trade had created 58 million jobs in the US, and in 1990 it was expected to have generated no fewer than 74 million employment opportunities (Young et al 1986) Nevertheless, the US ranks last among the Organization for Economic Cooperation and Development (OECD) countries in exports as a percentage of Gross National Product This low ranking is explained in part by the skewed distribution of export activity The Department of Commerce estimates that a mere 1 percent of US manufacturing firms account for 80 percent of US manufactured exports (Edfelt 1986) Given the large size of the foreign market and this low participation rate, small and medium-sized firms have the potential to reap large gains from export activities Although it may increase cost and uncertainty, exporting can help smaller organizations increase profits, prolong product life cycles, and open new distribution channels Furthermore, small firms have been shown to be less severely affected by adverse external shifts than their larger counterparts They have been shown to be less sensitive to currency fluctuations, in part, because they can usually make quick price adjustments (Holden 1986) Nations which achieve highly competitive positions in world markets tend to have small and medium-sized firms actively involved in international trade For example, in Germany and Japan small and medium-sized enterprises account for a large percentage of each country's exports (Dichtle et al 1984, Edmunds and Sarkis 1986) Unfortunately, this is not the case in the US, despite research indicating immense potential America's small and medium-sized firms are producing products desired in the world market; yet, their enthusiasm for internationalization is tempered by their inability to gather market information and maintain a continuous flow of communication with foreign clients, and by their lack of experience in planning and targeting export sales in world markets (Kaynak and Kothari 1984) Given this mix of positive and negative forces acting upon a given manufacturing firm, export participation is largely a function of size, experience, and managerial interest Firms headed by managers who perceive global marketing as an opportunity and challenge rather than an undesirable burden are much more likely to respond favorably to foreign market opportunities The research reported here examines the relationship between firm size, as measured by sales volume, export experience, and export attitudes Four hypotheses are tested using data from 195 midwestern manufacturing firms SIZE AND FIRM EXPORT BEHAVIOR In their review of the literature, Kaynak, Ghauri, and Oloffesson-Bredenlow (1987) indicate that small and medium-sized firms display similar behavioral and operational characteristics That is, most of them are either passive or reactive exporters This observation is consistent with other research Studies suggest lack of knowledge about foreign markets, inability to assess market conditions in a changing international environment, and inability to target export sales are the major problems inhibiting small and medium-sized organizations from exporting (Czinkota and Johnston 1983, Edmunds and Sarkis 1986, Green and Larsen 1987, Kaynak and Kothari 1984, Kinsey 1987) On the other hand, export success seems to be facilitated by patience, flexibility, and a willingness to take on additional risk (Holden 1986, Posner 1984) The federal government has launched numerous promotional programs to encourage non-exporter interest in global markets …

Reputation and Credibility in the European Monetary System

Abstract: EMS credibility Axel Weber This article provides a quantitative assessment of the credibility of the European Monetary System during the disinflation period of the 1980s. The results contradict the widely held view that the EMS has operated as a DM-zone. It is shown that, after a brief early phase, the EMS has functioned as a bipolar system with a hard currency option supplied by the German Bundesbank and a soft currency option offered by the Banque de France. Whilst from the onset the Netherlands have chosen the hard currency option, at least in a first stage the remaining smaller economies, Belgium, Denmark and Ireland, adopted the soft currency alternative. At a later stage of the EMS, however, the soft currency block has disintegrated and some countries, most noticeably Ireland and to a lesser extent France, have shifted towards the ‘hard currency’ standard. It is argued that this increased tightening of the EMS provides a favourable starting condition for the transition to Economic and Monetary Union.

Financial liberalization, money demand, and monetary policy in Asian countries

Abstract: This study examines the financial reforms undertaken by nine Asian countries in the 1980s (Indonesia, Korea, Malaysia, Myanmar, Nepal, the Philippines, Singapore, Sri Lanka, and Thailand) and their implications for money demand and monetary policy.

On the International Use of Currencies: the Case of the Deutsche Mark

Abstract: This paper assesses the role of the deutsche mark as a key international currency. It first investigates the theoretical basis underlying the international use of a currency. Theoretical considerations indicate that several factors relating to the issuing country--including inflation performance, openness of financial markets, and trade patterns--combine to propagate the international use of its currency. The paper then discusses these factors as they relate to the deutsche mark and identifies trends in several of these determinants of international currency use that presage an expanding role for the mark. Finally, data are presented on the extent of the internalization of the deutsche mark during the 1980s which corroborate the theoretical findings.

Real and Nominal Exchange Rates in the Long Run

Abstract: This paper decomposes longer-run movements in (major) dollar real exchange rates into components associated with changes in nominal exchange rates and price levels, and their comovements. Though the decompositions suggest some permanent movements, they imply that there are large transitory components in real exchange rates. These transitory components in real exchange rates are found to be closely associated with those in nominal exchange rates. A stochastic version of Dornbusch’s overshooting model—configured with representative parameter values for the United States and subjected to permanent nominal shocks—can rationalize these transitory comovements of nominal and real exchange rates as well as several other features of the decompositions.

Pricing of Exports and Exchange Rate Uncertainty

Abstract: This paper examines the implications of different pricing-cum-invoicing strategies available to an exporting firm that sells its product in domestic and foreign markets when the exchange rate is uncertain. The firms' decisions are made sequentially. Throughout the decision-making process, the firm receives new information about the distribution of the random exchange rate. The information arrives after output decisions have been made, but before setting prices and allocating sales. The authors state conditions that lead to the dominance of invoicing exports in the importer's currency over the alternative invoicing strategies. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Exchange rate sensitivity of the demand for money in developing countries

Abstract: There is consensus among researches that under the present floating exchange rate system although developing countries peg their exchange rate to a major currency, they cannot avoid fluctuation in their effective exchange rates as long as major currencies fluctuate against one another. Few authors have investigated the effects of changes in effective exchange rates of developing countries on their imports, exports, trade balance, demand for international reserves, inflation etc. In this paper we try to inestigate the effects of effective exchange rates of developing countries on their demand for money. Previous authors who have estimated a money demand function, inclusive of an exchange rate variable (bilateral or effective), have restricted themselves to industrial countries only. By using quarterly data over the 1973–85 period, it is shown that in most developing countries, while the short-run effcts of depreciation could be in either direction, its long-run effects are negative indicating that deprecia...

The Sources of Financial Crises--Pre- and Post-Fed Evidence

Abstract: This paper investigates the generation and the propagation mechanism of currency demand and supply shocks before and after World War I, the structural determinants of the variability of stock prices and interest rates, and the changes introduced by the creation of the Fed on the dynamics of the system. It is shown that in the pre-1914 era external monetary shocks interacted with a seasonal demand for money to produce financial crises. The Fed helped to prevent crises by insulating the U.S. economy from external shocks. A structural vector autoregressive model provides evidence for these claims. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The CFA franc zone : currency union and monetary standard

Abstract: The CFA franc zone comprises a group of countries in central and west Africa whose currencies have been firmly linked to the French franc since 1948. It combines the features of a currency union with those of an exchange rate peg, and an analysis of its effectiveness must examine both dimensions. Viewed from the perspective of a currency union among the African countries, it would appear that the zone would not constitute an optimum currency area. But when France is viewed as an integral part of the system, the benefits--including discipline, credibility, and stability in international competitiveness--become clearer.

Exchange Rate Economics; A Survey

Abstract: We survey the literature on the two main views of exchange rate determination that have evolved since the early 1970s: the monetary approach to the exchange rate (in flex-price, sticky-price and real interest differential formulations) and the portfolio balance approach. We then go on to discuss the extant empirical evidence on these models and conclude by discussing how the future research strategy in the area of exchange rate determination is likely to develop. We also discuss the literature on foreign exchange market efficiency, on exchange rates and ‘news’ and on international parity conditions.

Exchange Rate Changes and the Distribution of Industry Value

Abstract: This article investigates the simple, widely-held hypothesis that an exogenous real home currency depreciation enhances the competitiveness of home country manufacturers vis a vis foreign rivals. The study associates changes in competitiveness with redistributions of value within an industry. Daily and weekly data on redistributions of value are obtained from world financial markets. The study estimates the relationship between changes in exchange rates and redistributions of value within the world automobile and steel industries during the period 1978–87. The data generally do not support the notion that firms benefit competitively from a depreciation of the home currency. On the contrary, for large fractions of both industries, a depreciation of the home currency is associated with a significant decline in their share of industry value.

Dollarization in Latin America; Gresham's Law in Reverse?

Abstract: Since the 1970s, a number of high-inflation Latin American countries have experienced persistent "dollarization." To interpret some of the stylized facts, a simple model is presented in which dollarization reflects the costs that are involved in switching the currency denomination of transactions. The transaction costs of dollarization define a band for the inflation differential within which there will be no incentive to switch between currencies. Above the upper value of the band, the local currency gradually disappears as the economy becomes fully dollarized; below the lower value, de-dollarization occurs.

Tests for a Systematic Risk Component in Deviations From Uncovered Interest Rate Parity

Abstract: In the intertemporal asset pricing model, investments in spot foreign currencies involve time-varying risk proportional to the conditional covariance of the value of the position with the intertemporal marginal rate of substitution of domestic currency. We detect such risk premia in deviations from uncovered interest rate parity using weekly spot currency prices and Eurocurrency interest rates. Our tests use the conditional capital asset pricing model with a world equity index as benchmark to represent aggregate wealth.

Models of Inflation and the Costs of Disinflation

Abstract: This paper focuses on the output costs of disinflation. A model of inflation with both forward and backward elements seems to characterize reality. Such an inflation model is estimated using data for industrial countries, and the output costs of a disinflation path are calculated, first analytically in a simple theoretical model, then by simulation of a global, multi-region empirical model. The credibility of a preannounced path for money consistent with the lowest output loss is considered. An alternative, more credible policy may be to announce an exchange rate peg to a low inflation currency.

Academic Science as a System of Markets

Abstract: It is instructive to think of UK academic science as in interlocking system of ‘markets’, where ‘vendors’ offer ‘commodities’ to ‘customers’ in return for ‘currencies’. In the institutional market, higher education institutions compete commercially as research contractors. Money is also the effective currency in the markets in projects, academic jobs and intellectual property rights. But these are linked with the metaphorical reputational and research claims markets where academics compete fiercely for intangible ‘recognition’. Some typical market imperfections, such as research customer monopsony, arbitrary variations of project pricing, inadequate information on quality, and rigidities of staffing, could be reduced by systematic reform. But some current structural problems are deep-seated. For example, damaging conflict between institutional and individual interests is being generated by the introduction of commercial ‘market forces’ into the traditional academic marketplace, where competition was always by quality, not by price, and where individuals could enter and leave at minimal personal cost.

The Risk of Economic Crisis

Abstract: The stunning collapse of the thrift industry, the major stock slump of 1987, rising corporate debt, wild fluctuations of currency exchange rates, and a rash of defaults on developing country debts have revived fading memories of the Great Depression and fueled fears of an impending economic crisis. Under what conditions are financial markets vulnerable to disruption and what economic consequences ensue when these markets break down? In this accessible and thought-provoking volume, Benjamin M. Friedman investigates the origins of financial crisis in domestic capital markets, Paul Krugman examines the international origins and transmission of financial and economic crises, and Lawrence H. Summers explores the transition from financial crisis to economic collapse. In the introductory essay, Martin Feldstein reviews the major financial problems of the 1980s and discusses lessons to be learned from this experience. The book also contains provocative observations by senior academics and others who have played leading roles in business and government.