Showing papers on "Currency published in 1994"

The social meaning of money

Abstract: A distinguished social scientist shows what money really does for us--and to us. The book describes how people have invented their own forms of currency, earmarking money in ways that baffle market theorists, incorporating funds into webs of friendship and family relations, and otherwise differentiating the process by which spending and saving takes place.

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. The 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 previous 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 1992-93. This paper then 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.

Puzzles in International Financial Markets

Abstract: This paper presents a survey of two basic puzzles in international finance. The first puzzle is the `predictable excess return puzzle.' The returns on foreign currency deposits relative to domestic currency deposits should be equalized based upon uncovered interest parity. However, not only do researchers find that deviations from uncovered interest parity are predictable ex ante, but their variance exceeds the variance in expected exchange rate changes. In the paper, I describe different explanations of this phenomenon including the view that excess returns are driven by a foreign exchange risk premium, peso problems or learning, and market inefficiencies. While the research to date has been able to better define the `predictable excess return puzzle' and to suggest the most likely directions for future progress, no one explanation has provided a full answer to the puzzle. The second puzzle is the `home bias puzzle.' Empirical evidence shows that domestic residents do not diversify sufficiently into foreign stocks. This evidence is clear whether looking at models based on portfolio holdings or outcomes of consumption realizations across countries. In this paper, I examine several possible explanations including non-traded goods and market inefficiencies, although even after considering these possibilities, the puzzle remains.

Puzzles in International Financial Markets

Abstract: This paper presents a survey of two basic puzzles in international finance. The first puzzle is the `predictable excess return puzzle.' The returns on foreign currency deposits relative to domestic currency deposits should be equalized based upon uncovered interest parity. However, not only do researchers find that deviations from uncovered interest parity are predictable ex ante, but their variance exceeds the variance in expected exchange rate changes. In the paper, I describe different explanations of this phenomenon including the view that excess returns are driven by a foreign exchange risk premium, peso problems or learning, and market inefficiencies. While the research to date has been able to better define the `predictable excess return puzzle' and to suggest the most likely directions for future progress, no one explanation has provided a full answer to the puzzle. The second puzzle is the `home bias puzzle.' Empirical evidence shows that domestic residents do not diversify sufficiently into foreign stocks. This evidence is clear whether looking at models based on portfolio holdings or outcomes of consumption realizations across countries. In this paper, I examine several possible explanations including non-traded goods and market inefficiencies, although even after considering these possibilities, the puzzle remains.

One Money or Many? Analyzing the Prospects for Monetary Unification in Various Parts of the World

Abstract: The literature on optimal currency areas identifies the symmetry of disturbances and the speed with which economies adjust as key criteria affecting the decision of whether to form a monetary union. This paper uses structural vector autoregression techniques to examine these issues for three regions: Western Europe, the Americas, and East Asia. The results suggest three country groupings that best satisfy these criteria: Northern Europe (Germany, France, the Netherlands, Belgium, Denmark, Austria, and possibly Switzerland); Northeast Asia (Japan, Taiwan, and Korea); and Southeast Asia (Hong Kong, Singapore, Malaysia, Indonesia, and possibly Thailand).

Contagious Speculative Attacks

Abstract: During the European exchange market turmoil in 1992-93 it was evident that speculative attacks tended to spread across currencies Using a twocountry version of the model developed by Flood and Garber (1984) we show how a speculative attack against one currency may accelerate the warranted collapse of a second parity More importantly, even if the parity of the second currency is viable in the absence of a collapse of the first one, it might be subjected to a speculative attack if the reserves available to defend the parity are small

Money and government in the Roman empire

Abstract: List of plates List of figures List of tables Preface Abbreviations Part I. The Economics of Empire: 1. Surplus and deficit 2. Money, prices and inflation 3. The imperial budget 4. Tax and tax-cycles Part II. The Coin-Evidence: 5. Coin-hoards and their origin 6. The implications of coin-hoards Part III. Money and Money-Supply: 7. Coinage and currency: an overview 8. The chronology of mint-output 9. Reign-studies: the chronology and structure of coin-output 10. The size of die-populations 11. The size of coin-populations 12. Mobility and immobility of coin 13. Weight-loss and circulation-speed 14. Wastage and reminting of coin 15. Change and deterioration 16. Contrast and variation in the coinage Appendices: 1. Payments of congiaria 2. The chronology of minting under Tiberius 3. Variations in land-tax in Egypt 4. Assessments of tax-revenue in the sources 5. Tax comparisons with Mughal India 6. Hoards below the sampling threshold 7. Rates of donative 8. Programs for finding negative binomial k and for estimating die-populations 9. Die-productivity in medieval evidence 10. Aureus and denarius hoards used in the main anlaysis Bibliography Index.

The Welfare Cost of Inflation in General Equilibrium

Abstract: This paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions. Although individually none of the distortions is very large, they combine to yield substantial welfare cost estimates. A sustained 4% inflation like that experienced in the U.S. since 1983 costs the economy the equivalent of 0.41% of output per year when currency is identified as the relevant definition of money and over 1% of output per year when M1 is defined as money. The results illustrate how the traditional, partial equilibrium approach can seriously underestimate the true cost of inflation.

The theory of monetary integration

Abstract: Research dealing with the theory of monetary integration is reviewed. After briefly describing the genesis of the theory as foreshadowed in work on optimum currency areas, the paper assesses two main areas of recent research — the analysis of the effects of disturbances on participating countries in a currency area, and reputational considerations. With regard to disturbances, the paper finds that it is difficult to draw clear-out inferences from theoretical work on the optimal degree of exchange rate management and from empirical studies on the effects of shocks. Work on reputational issues is found to suffer from conceptual problems and has generated empirical results that have not supported the hypothesis that participation in a currency area is a sufficient condition to enhance reputation.

The Underground Economy And The Currency Enigma

Abstract: The size, growth and causes of the US “underground economy” are examined in light of new estimates of foreign holdings of US currency World dollarization partially resolves the “currency enigma” which refers to the anomaly that roughly 80% of the US currency supply is “missing” and an estimated ten trillion dollars of cash payments can not be accounted for US currency that is used overseas suggests that there is a world wide unrecorded economy that could rival the size of the US economy Large and variable overseas holdings of US currency imply that monetary aggregates must be redefined to include only domestically held currency The paper defines and estimates the size of the ‘domestic money supply” Reference: Proceedings of the 49th Congress of the International Institute of Public Finance, Berlin 1993, Supplement to Public Finance Vol 49 (1994) pp119-136

Is Europe an Optimum Currency Area

Abstract: The debate on EMU has been very influenced by the traditional theory of optimum currency areas (OCAs). The paper shows that this theory is not an ideal yardstick for an assessment of EMU. Its assumptions are not very realistic and its focus on asymmetric real shocks is much too narrow. In addition, observed past real exchange rate changes are not a good predictor of future real shocks in the European Union (EU). In general, the OCA approach is heavily biased towards very small currency areas. Because of these shortcomings the paper develops a monetary approach to the theory of OCAs. In this concept the choice between a monetary union and independent national currency areas is analysed from the perspective of monetary policy efficiency. It can be shown that EMU is superior to national currency areas in terms of credibility, the response to asymmetric monetary shocks and the effectiveness of monetary targets and instruments.

Elusive Union: The Process of Economic and Monetary Union in Europe

Abstract: PART 1 Historical Perspectives: Lessons of history - nineteenth-century currency unions, federal monetary unions, the gold standard and the "Bretton Woods System" Lessons of history - The European Payments Union, the "spirit of the Hague", the Werner Report and the "snake" Ambition regained - Negotiating the EMS - power relations and policy change, Negotiating and implementing the Treaty on European Union - power relations and policy change. PART 2 Theoretical Perspectives: Putting the EMS and EMU into practice - The "rules of the game", the "two-level" policy process and the structural power of the "anchor currency", The structural power of sound money policy ideas , The structural power of financial markets, economic 'fundamentals' and trade interdependence. PART 3 Conclusions: The hollow core - The EMS and EMU policy process, theories of integration and the dynamics of union Elusive union - problems and scenarios.

What Should Central Banks Do? What Should Be Their Macroeconomic Objectives and Operations?

Abstract: Before turning to the normative question of what Central Banks (hereafter CBs) should do, we need to deal with the contentious issue of what CBs actually can do in the field of monetary control. One might think that this should be a relatively straightforward matter of fact. Instead, there is a yawning chasm of mutual misunderstanding, which has persisted for decades, between economists and those working in CBs, which has bedevilled the subject. Virtually every monetary economist believes that the CB can control the monetary base (hereafter Mo), and, subject to errors in predicting the monetary multiplier, the broader monetary aggregates as well. After all, Mo (apart from some relatively unimportant qualifications about coins from the Mint), represents the liabilities of the CB, and the CB should be able to control its own liabilities by open market operations. Hence the normal assumption is that Mo is controllable within a narrow margin. If the Central Bank should fail to do so, it must be because it has chosen some alternative operational guide for its open market operations, e.g. holding interest rates constant at some level, which operational rule is frequently decried as sub-optimal. Assuming that CBs can, almost perfectly, control Mo, economists have constructed several simulated schemes of how an optimal rule for so doing might be set up; McCallum (I993a, b) provides good recent examples. Almost all those who have worked in a CB believe that this view is totally mistaken; in particular it ignores the implications of several of the crucial institutional features of a modern commercial banking system, notably the need for unchallengeable convertibility, at par, between currency and deposits, and secondly that commercial bank reserves at the CB receive a zero, or belowmarket, rate of interest. The first means that fluctuations in the public's demand for cash, which are both strongly seasonal and somewhat unpredictable, must be accommodated. The second means that commercial banks will not willingly hold free reserves at the end of each day (assuming for this purpose that a stated reserve ratio has to be held on each day, rather than averaged over, say, a couple of weeks) beyond that needed to meet late fluctuations in the demand for cash after the money market has closed, or become thin. Only if interest rates fall to the very low levels of the I930s, and/or risks of interest rate variability or late-in-the-day cash runs increase, would commercial banks increase their desired free reserves. Thus, given the

Real exchange rates within and between currency areas: how far away is emu?

Abstract: The renewed quest for a European monetary union raises the question: Is Europe ready for a common currency? We compare the conditional variance and the persistence of real exchange rate shocks within the German monetary union and between Germany and eight European countries to assess the viability of a monetary union in Europe. The results suggest a 'Europe of Two Speeds': A core union among Germany, her smaller neighbors and France would be viable today. Further reduction of real exchange rate variability is needed, in contrast, between these countries and Denmark, Italy, and the United Kingdom. Alternatively, monetary union should be postponed until further adjustment has occurred. Such a waiting period would neither require nor benefit much from further tightening of the current EMS. Copyright 1994 by MIT Press.

Fixes: Of The Forward Discount Puzzle

Abstract: Regressions of ex-post changes in floating exchange rates on appropriate interest differentials typically imply that the high interest rate currency tends to appreciate - the `forward discount puzzle'. Using data from the European Monetary System we find that a large part of the forward discount puzzle vanishes for regimes of fixed exchange rates. That is, deviations from uncovered interest parity appear to vary in a way that is dependent upon the exchange rate regime. By using the many EMS realignments we are also able to quantify the `peso problem'.

Estimating and Interpreting Forward Interest Rates: Sweden 1992-4

Abstract: The use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden between 1992 and 1994 as an example. The forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates. They separate market expectations for the short, medium and long term more easily than the standard yield curve. Forward rates are estimated with an extended and more flexible version of Nelson and Siegel's functional form.

A Formal Model of Optimum Currency Areas

Abstract: The paper presents a model of optimum currency areas using a general equilibrium approach with regionally differentiated goods. The choice of a currency union depends upon the size of the underlying disturbances, the correlation between these disturbances, the costs of transactions across currencies, factor mobility across regions, and the interrelationships between demand for different goods. It is found that, while a currency union can raise the welfare of the regions within the union, it unambiguously lowers welfare for those outside the union.

Currency and barter exchange debit card and system

Abstract: The Currency Exchange Network transaction management and accounting system assists businesses, employees, and consumers to engage in productive economic activity that is not supported by traditional cash- and credit-based transaction systems. The system functions as a currency exchange between the non-cash, volunteer and barter economies and the mainstream cash economy. This dual-currency system handles transactions for goods and services using a combination of cash and Community Economic Development Scrip, a new currency based on non-cash service credits.

Fractal structure in currency futures price dynamics

Abstract: Financial economists always strive for better understanding of the market dynamics of financial prices and seek improvement in modeling them. Although there have been many studies devoted to analyze high frequency dynamics of financial prices, only recently have low frequency dynamics received attention. An issue of concern is the behavior of financial prices over long versus short horizons-whether the seemingly random movements in financial prices over short horizons contain detectable structures over long horizons. In this study a specific form of dynamics called “fractal” [Mandelbrot (1977a, b)] is explored. A time series having fractal structure is characterized by long-term dependence and nonperiodic cycles. Several studies have examined the cyclic long-term dependence property of financial prices, including stock prices [Aydogan and Booth

Mean/Variance Analysis of Currency Overlays

Abstract: Global investors are now paying more attention to the management of the currency risks of their portfolios. Some have started to delegate currency management to "overlay" managers. These managers use currency futures and forwards to minimize the risks or maximize the returns of the underlying asset portfolios. The overlay structure is inherently suboptimal because it ignores interactions between the assets in the underlying portfolio and exchange rates. Based on historical data, the efficiency loss appears to be on the order of 40 basis points for equity portfolios. This loss, of course, must be balanced against any excess returns that may be generated by specialized overlay managers. Simulated results over the 1978-91 period indicate that overlay management can add value to global equity and bond portfolios. It cannot enhance performance by as much as an integrated approach to currency management, however.

A Formal Model of Optimum Currency Areas

Abstract: A model of optimum currency areas is presented using a general equilibrium model with regionally differentiated goods. The choice of a currency union depends upon the size of the underlying disturbances, the correlation between these disturbances, the costs of transactions across currencies, factor mobility across regions, and the interrelationships between demand for different goods. It is found that, while a currency union can raise the welfare of the regions within the union, it unambiguously lowers welfare for those outside the union.

Exchange rate politics: Contemporary lessons from American history

Abstract: This essay makes two analytical points about the domestic and international politics of exchange rate issues. First, it argues that changes in the political prominence of currency values over time are best explained by changes in the level of international economic integration. The more cross‐border trade and investment takes place, the more national macroeconomic policies implicate the exchange rate, and the more exchange rates affect important socioeconomic actors. Second, the article provides a starting point to understand the pattern of domestic political conflict over currency values by analyzing the distributional impact of different currency regimes and levels. Internationally oriented economic groups prefer fixed exchange rates, domestically based groups prefer floating rates. Similarly, tradables producers prefer a relatively depreciated currency, producers of non‐tradable goods and services a relatively appreciated one. The arguments are brought to bear on American political conflict ov...

The Geography of the Gold Standard

Abstract: In this paper we chart the geography of the gold standard. We highlight the late date of the move to gold and the variety of transition strategies. Whether a country with a currency convertible into specie operated a gold, silver or bimetallic standard at mid-century depended not so much on whether it was rich or poor as on the monetary standard of the foreign country or countries to which its transactions were linked. When it came to the distinction between specie convertibility and inconvertibility, however, domestic economic conditions came into play. In particular, there was a strong correlation between economic development, as proxied by the level of per capita incomes, and possession of a convertible currency.Most countries went onto the gold standard between the 1870s and the first decade of the twentieth century. We enumerate the factors propelling this transition and analyse variations in its timing. Factors shaping the course of this transition include the level of economic development, the magnitude of reserves relative to world specie markets, whether reserves were concentrated at the central bank, and the presence or absence of imperial ties.

On Ensuring the Acceptability of a New Fiat Money

Abstract: Currency reforms of the type now being contemplated by some former Soviet republics, aimed at establishing new fiat monies linked to established currencies through fixed exchange rates, carry an inherent danger. Such reforms may, by neglecting certain requirements crucial for ensuring the acceptability of a new currency, cause it to be treated by the public as so many 'bits of paper.' Analyzing this problem serves to highlight some shortcomings of Patinkin-style Walrasian monetary ananlysis, which ignores money's character as a social institution and downplays the role of expectations in determining a would-be money's acceptability, thereby giving support to misguided reform efforts. In this respect, at least, some early non-Walrasian monetary theories are more enlightening. Copyright 1994 by Ohio State University Press.