Showing papers on "Exchange rate published in 1968"

The Appropriate Use of Monetary and Fiscal Policy under Fixed Exchange Rates

Abstract: This paper deals with the problem of achieving internal stability and balance-of-payments equilibrium in a country that considers it inadvisable to alter the exchange rate or to impose trade controls. It is assumed that monetary and fiscal policy can be used as independent instruments to attain the two objectives if capital flows are responsive to interest-rate differentials, but it is concluded that it is a matter of extreme importance how the policies are paired with the objectives. Specifically, it is argued that monetary policy ought to be aimed at external objectives and fiscal policy at internal objectives, and that failure to follow this prescription can make the disequilibrium situation worse than before the policy changes were introduced. The practical implication of the theory, when stabilization measures are limited to monetary policy and fiscal policy, is that a surplus country experiencing inflationary pressure should ease monetary conditions and raise taxes (or reduce government spending), and that a deficit country suffering from unemployment should tighten interest rates and lower taxes (or increase government spending). 2

Real income levels in latin america

Abstract: The measurement and inter-spatial comparison of Latin American real income levels calls for techniques which depart substantially from the conventional procedure of applying such official or free market exchange rates as happen to prevail in any given period. The reasons are varied, the main ones being that in an area such as Latin America prices are notoriously volatile, their structure differs radically from that encountered in other parts of the world, and the exchange rate system is characterized by frequent and usually irregular revisions, while in certain countries a multiple exchange rate system applies and no single factor is available for conversion purposes. In addition, there exists the problem common to all developing countries that the rates to a large extent reflect the exchange value of a limited number of export commodities vis-a-vis a wide range of imported goods and in no way typify the internal-external price relationship for the bulk of production which by its nature fails to enter into international trading transactions. The author has endeavoured to circumvent these difficulties by adopting the often-discussed “purchasing power parity” approach whereby national accounts data are converted into a common monetary denominator (in this case, the U.S. dollar) expressed in “real” or quantitative terms which as far as possible eliminate inter-spatial price differences. Results are presented and analyzed, first for the base year 1960, and then for the period 1955–1964 at the level of main expenditure sectors as well as for the total gross domestic product. To the extent that available statistics permitted, results for Latin American countries are also related to the United States and certain countries in Western Europe, a main objective being to determine the approximate dimension of the incomes “gap” and to ascertain whether this is increasing, decreasing or remaining very much unchanged in size.

Monetary and Fiscal Policy for an Economy with Fixed Exchange Rates

Abstract: The exchange rate can be a powerful instrument for control over the balance of payments. Variations in the rate of exchange generally alter the relationship between prices of home-produced goods and commodities produced abroad and thus directly affect the major elements in the current account. A commitment to fixed exchange rates therefore involves the sacrifice of a major policy instrument and raises the question of how to reconcile domestic goals, such as achieving full employment or stimulating economic growth, with the preservation of equilibrium in the balance of payments. In a "classical" world in which prices and wages are flexible in both directions other routes are available for altering the relationship between domestic and foreign costs and thus for maintaining payments equilibrium. It is in a world of rigid prices that the policy problems posed for an economy tied to a fixed rate of exchange become most acute, and it is a simple model of such a world that I wish to analyze in this paper. A rich literature in recent years has suggested that both internal balance (full employment) and external balance may be achieved by an appropriate mix of monetary and fiscal policy.1 By pointing out that balance-ofpayments equilibrium can be reached by changes in the capital account as well as (or instead of) the current account, this literature has suggested that an expansion of employment that upsets the balance of trade can be countered by a contractionary monetary policy that raises interest rates and attracts capital flows. However, when complications have been introduced

Toward a New International Monetary System

Abstract: HE CRISIS of the international monetary system today is truly a crisis of the system itself and not just of the U. S. dollar. It has its origins in the concept of using certain "key" currencies as a supplement to gold in international monetary reserves. This is the Achilles' heel of the system, since it ties the viability of the system to the acceptance by other participants of the political and economic policies of the key currency countries. In the postwar period, the United States dollar has gained pre-eminence as a key reserve currency forming an important part of the monetary reserves of many countries. This pre-eminence of the dollar is not always welcomed because countries with large holdings of dollars find their economic sovereignty to some extent circumscribed by the balance of payments deficits of the United States. This, in a nutshell, is the root of the problem. We have moved full circle from a position of dollar scarcity in the early postwar period to a position of dollar glut. But while the IMF agreement at Bretton Woods had a great deal to say about scarcity, it had nothing to say about glut. The whole question of the future adequacy of international monetary reserves and of their composition was ignored. The only mention of the nature of reserves was that they were to consist of "gold and convertible currencies". As a practical matter, monetary reserves are required under the pegged exchange rate system in operation today in order to provide flexibility. When deficits occur, they can be met out of these reserves while the deficit country takes fiscal and monetary action to bring its payments back into equilibrium. Reserves serve as a cushion which prevents any temporary deficit from becoming an immediate crisis. Naturally, as world trade expands a concomitant expansion in international monetary reserves, or liquidity, is desirable because the possibility of bigger deficits requires larger reserves. Yet in the postwar period since 1948 world trade has grown five times as fast as world monetary reserves. World trade (exports plus imports) rose from $1 12 billion in 1948 to $391 billion in 1967, an increase of 250%. In the same period world monetary reserves rose from $48 billion to $73 billion, an increase of somewhat more than 50%. This is why some students of the problem speak of a liquidity shortage. But it is not the dollar which is in short supply, it is gold-the traditional form in which monetary reserves have been held for centuries. This is dramatically brought out by the fact that, of the entire increase of some $25 billion in world monetary reserves since 1948, only one quarter was in the form of the yellow metal. In the last half dozen years there has been no net increase at all in official world reserves of gold, and in the last two years there was an outright decline. This is not because world gold production is falling. On the contrary, world output of gold has doubled in the last twenty years and is still rising. It is currently adding about $1 ?/2 billion annually to world supplies, exclusive of U.S.S.R. production, which is sizeable. But since 1962 all of it has gone into industry, the arts, and private hoarding. Most of the increase in world monetary reserves since 1948, and almost all of it since 1962, has been in the form of U. S. dollar holdings by foreign countries and has been financed by a long string of U. S. balance of payments deficits. These deficits have amounted to $371/? billion since 1948 and have been especially ERNEST W. LUTHER is Staff Economist for Investors Diversifled Services, Inc. in Minneapolis.

Output Stimulation and Employment Stagnation. Policy By-Products in the Philippines

Abstract: The recent economic development history of the Philippines provides an almost classic example of the undertaking of an economic policy for a specific set of reasons in one area which has had important or more important effects in other areas of the economy. The specific economic policy to which we refer was the exchange control policy introduced in 1949 to preserve foreign exchange holdings at the existing overvalued exchange rate. This action produced a partially unanticipated positive result in the form of an impetus to the development of manufacturing and industrial activity. At the same time, however, it has had the undesirable effect of inhibiting the rate of employment generation. The first section of the paper explores the interactions between exchange control policy and the rate and character of the development it induced. The second section is devoted to a discussion of the interrelations between exchange control and the rate of labor absorption in the industrial and manufacturing sectors.

Spain and the Atlantic Community: A Study of Incipient Integration and Economic Development

Abstract: One of the critical decisions in accelerating the modernization of a less developed country concerns the degree of integration of the home economy with the world economy. Less than a decade ago, Spain's national economic life proceeded in virtual isolation from the international currents of trade, private investment, and tourism. Since the late 'fifties Spain has fundamentally reoriented her economic policies from a stance of autarky to one of progressive integration with the world economy, particularly the Atlantic community. This radical policy shift toward a more open economy has been guided by a handful of like-minded government officials. Broadly European in their attitudes and committed to free markets, they today command the key ministries and the strategic planning commission. Because of their influence, Spain became a member of the World Bank and the International Monetary Fund and joined the Organization for European Economic Cooperation (OEEC). And early in 1962 Spain applied for associate membership in the European Economic Community. A major foreign exchange crisis in the spring of 1959 strengthened the hand of those cabinet ministers who sought to end Spain's economic isolation. Alberto Ullastres, Minister of Commerce, and Mariano Navarro Rubio, Minister of Finance, prevailed upon General Franco to seek outside counsel and credits. As a result, in July 1959, the Spanish government drew up, in cooperation with the Organization for European Economic Cooperation and the International Monetary Fund, a stabilization program designed to bring into equilibrium the nation's domestic and international transactions. The peseta was devalued, the exchange rate unified, and inflation curbed. Subsequently, the new policy-makers liberalized the conduct of international trade, promoted tourism, actively sought and received official external credits, and created propitious conditions to attract private foreign capital. The components of Spain's balance of payments