Showing papers on "Exchange rate published in 1970"

Flexible Exchange Rates and Oligopoly Pricing: A Study of Canadian Markets

Abstract: The primary purpose of this paper is to demonstrate that a system of flexible exchange rates will not necessarily destabilize the prices of traded goods. It will be argued that the usual conclusion that traded goods prices in at least one market must move with the exchange is based on the implicit and unrealistic assumption of perfectly competitive markets, and that the realities of imperfect markets make stable prices likely over a range of exchange rates. This hypothesis is tested in a study of six markets during Canada's experience with flexible exchange rates between 1950 and 1962. It is not the purpose of this paper to provide a general defense of flexible exchange rates, but instead merely to invalidate the argument that such a system cannot operate successfully for an open economy because too many prices will be forced to shift from day to day to offset exchange rate movements (McKinnon 1963). The numerous other arguments against exchange rate flexibility are not discussed. If perfect competition is assumed, prices can differ between two markets only by transport costs and tariffs; if the two markets have separate currencies, and the exchange rate varies, at least one of the two prices of any traded goods will have to shift to maintain the equality; percentage changes in the relationship between the two prices should equal the percentage changes in the exchange rate.1 This process provides a rather

To Send, or Not to Send: That Is the Question. A Review of the Literature on Workers' Remittances

Abstract: This paper reviews the empirical literature on workers' remittances. Based on the empirical evidence, we are able to assess the facts and myths about the determinants and consequences of remittances. We also discuss the potential implications of our findings for the theoretical literature on remittances and account for the open-ended questions that still remain. The review suggests that there are several motivations to remit and it does not seem that one specific motivation has been consistently selected over the others. The literature also suggests that remittances have the potential to impact a large number of variables related to the recipient country and household. Introduction The large increase in remittances (money transfers from migrants to family and friends back home) during the last two decades has stimulated a keen interest in understanding the nature and economic consequences of these flows. Policymakers in developing countries and international organizations around the world have become interested in increasing the flow of remittances, finding ways to channel remittances into productive investments, and diminishing the possible detrimental impacts of these transfers. On the other hand, due to concerns regarding money laundering and terrorism support, policymakers in developed countries are interested in seeing a larger share of remittances sent through official channels. In fact, policymakers and government officials from countries that are host to large communities of migrants are encouraging increased supervision on the part of receiving countries on the use of remittances. The remittances phenomenon has also drawn attention from the private business sector. Given the potential for profit in the money transfer business, there has been a proliferation of money transfer agencies. Banks have also been encouraged to participate in the remittances market, not only by being more competitive in their fees and processes, but also by recognizing that offering remittance services can help in attracting migrants to open bank accounts in the host country. In this article we present a review of the empirical literature on remittances. That is, we want to assess the different conclusions that have been drawn from the data and evaluate what can be said with relative confidence about remittances. We also want to highlight the open-ended questions that still remain and ascertain the facts that are still in doubt. Organization of the Literature Review The literature on remittances is divided into two main areas of study. The first area investigates the nature and determinants of these flows. We look at questions like: What prompts a migrant to remit? What factors determine the amount of remittances they send? The second area of study is concerned with the impacts and consequences of these money transfers. That is, we look at the impacts of these money flows on the receiving countries and on household behavior. We look at questions such as: How are these flows affecting family composition? What are the consequences for the distribution of labor? What are the impacts on prices, the exchange rate and the overall economy? To answer those and other related questions we review the extant literature and differentiate between the different studies that use data on the migrant, the household (or both) and those that use aggregate economic data. The literature on the determinants of remittances, our first area of study, is divided into two specific groups. The first group includes those studies that use microeconomic level data to study the determinants of remittance transfers. Most of these studies make use of survey data on the emigrants and/or the receiving households. This type of study is usually interested in the relationship between remittances and individual specific factors such as income (household and migrant), gender, age, time abroad, marital status and household composition, among others. …

De-monetisation, inflation and coffee: the demand for money in Uganda

Abstract: This paper investigates the recent macroeconomic history of Uganda using time series models for the demand for the three main monetary aggregates. A collapse of income and high inflation led to de-monetisation. The flight from currency and demand deposits was limited by their use for transactions, but demand for time and savings deposits was largely a function of inflation. The role of the exchange rate and the price of coffee in determining an asset demand for money was mixed. Re-monetisation since the late 1980s has been slower than de-monetisation.

Overinvoicing,U nderutilization, and Distorted Industrial Growth

Abstract: With an artificial exchange rate, a government establishes a set of prices that makes certain transactions highly profitable at the same time that it establishes laws making those transactions illegal. We usually call it "corruption" when people follow the government's price incentives instead of its contradictory legal incentives. In Pakistan, the dollar sells for 4.75 rupees in the official market but for two to three times that much in the free market. Handsome profits are made by those who can trade in both.

Speculation in the flexible exchange revisited

Abstract: SUMMARY This article analyzes the exchange speculation in the French franc when the exchange rate was floating in the 1920's to determine both whether speculation was stabilizing or destabilizing, the relationships between speculation and domestic inflation. Speculative behavior is analyzed by comparing changes in the spot rate with changes in the forward rate (adjusted for changes in the money market-interest differential). The impact of speculation on the price level is analyzed by measuring the terms-of-trade effect, the decrease in export prices necessary to generate increased net exports, and the absorption effect, the increase in the current account balance necessary to finance the capital outflow. The comparison of changes in the spot rate and forward exchange rate lead to the conclusion that speculation was destabilizing during much of the 1924-26 period. Only a relative small part of the observed price increases during this period appeared as a result of the terms-of-trade and the absorption effects. However, during the period when speculation was destabilizing, the economy was becoming less liquid; the demand for money was falling. This reduction is attributed to a reaction to speculation against the franc. Both the reduction in demand for money and the speculation against the franc could be attributed to some other factors, especially to political instability. Since the exchange rate depreciated much more rapidly than domestic prices increased, it is concluded that speculation was a trigger rather than a response.

The Impact of Risk and Uncertainty On Remittances Into Latin American Economies

Abstract: This study investigates the effects of exchange rate uncertainty and political risk, after controlling for the conventional macroeconomic determinants, on remittances transfers into eight Latin American countries during the period of 1990-2006. The results suggest that an increase in exchange rate uncertainty reduces remittances flows into these countries. Furthermore, an increase in political risk seems to have a negative but statistically insignificant impact on remittances transfers. Based on the findings of this paper, we can say that governments of the remittance receiving countries can influence the inflow of remittances by means of adopting appropriate macroeconomic policies to reduce exchange rate uncertainty and also by improving their political environments. Introduction Remittances have become an increasingly important and fast growing source of external finance for many developing countries. (1) By 2005, the total remittances inflows into developing countries reached $167 billion. This amount had more than doubled from its value of $58 billion in 1995 (United Nations Habitat, 2006). The increase in remittances flows into developing regions is welcomed because remittances have a potentially significant impact on the recipient country's economy. First, remittances are a more stable source of external finance as opposed to capital flows which tend to rise during favorable economic cycles and fall during less favorable ones. This acyclical nature of remittances exerts a stabilizing influence, and thus helps insulate vulnerable countries from economic shocks (Ratha, 2003; Global Economic Prospects, 2006). Moreover, remittances increase the recipient country's foreign exchange reserves and promote economic growth if households use remittances for investment. If they are used for consumption, they can also generate positive multiplier effects, offsetting some of the output losses that a developing country may suffer from emigration of its highly skilled workers (Ratha, 2003). By 2005, Latin America and the Caribbean (LAC) were the largest remittances destination in the world, with inflows around $53.6 billion. This amount exceeded, for the third consecutive year, the combined flows of all net Foreign Direct Investment (FDI) and Official Development Assistance (ODA) to the region (Inter-American Development Bank, 2006). Because of their increasing volume and their potential to reduce poverty and enhance economic growth, remittances are receiving growing attention from policymakers in the developing countries of Latin America. There is a wide range of important issues related to remittances. In this study, we focus on a very important issue, namely, the determinants of remittances to Latin American countries. Assuming that remittances have a positive effect on the recipient economy, what are the determinants of remittances into Latin American economies? The remittances literature is divided into two broad categories. The first category of determinants deals with microeconomic determinants of remittances such as the social and demographic characteristics of migrants and their families, while the second category considers macroeconomic variables of the host (sending) as well as home (receiving) countries. Our study fits into the second category as we investigate the macroeconomic determinants of remittances into nine Latin American countries. (2) Generally, studies that investigate the determinants of remittances assume that migrants are risk neutral in their preferences with respect to risk and return in that they do not include risk variables in their regressions (Higgins et al., 2004). However, remittances for investment would be influenced by risk and return considerations. Ratha (2003) reviews cross-country studies on remittances and reveals that remittances are affected by the investment climate in recipient countries in the same manner that capital flows are; though to a lesser degree. …

Exchange Market Pressure and Monetary Policy: Evidence from Pakistan

Abstract: The study employs Girton and Roper (1977) measure of exchange market pressuresum of exchange rate depreciation and foreign reserves outflow, to examine the interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and interest rate. Evidence from impulse response functions suggests that domestic credit has remained the dominant tool of monetary policy for managing exchange market pressure. The increase in domestic credit upon increase in exchange market pressure (during 199198) is imprudent. The result suggests that fiscal needs/growth objective might have dominated the external account considerations during the span. Post 9/11 there is evidence of sterilised intervention in forex market. Interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (199198). The finding implies that for interest rate to work as tool of monetary policy vis-a-vis exchange market pressure a reasonable degree of capital mobility is called for.

On terms, concepts, theories and strategies in the discussion of greater flexibility of exchange rates

Abstract: The work represents an extensive survey of the issues related to the debate on the exchange rate system. The author make clarifications, proposes distinctions and warns against exaggerated claims in an effort to “clean up” the discussion in order to avoid confusion and provide sharper focus on the issues at hand. The topics dealt with are pegs and parities, alternative exchange rate systems, rate of crawl and width of band, greater flexibility, types of gliding-parity systems, flexible stable invariant, overvaluation undervaluation and the dilemma of advocacy.

Anchoring to the Euro (and Grouped Together)? The Case of African Countries

Abstract: This paper assesses the adequacy of the exchange rate regime of 16 African countries that are pegged to the euro since 1999. The evaluation is based on three key criteria borrowed from the optimal currency area literature. A first conclusion is that the peg to the euro has granted the 16 countries a good inflation performance. However, with the clear exception of Cape Verde, the peg is not supported by the other economic requirements, namely trade integration and synchronisation of business cycles. We also assess whether the US dollar would be a better currency to anchor. Since the results are ambiguous, pegging to the euro seems to be a better alternative as these countries benefit from established exchange rate cooperation agreements. Given that most of the countries in the sample are historically grouped together in the West African Economic and Monetary Union (WAEMU) or the Central African Economic and Monetary Community (CAEMC), the paper further assesses whether the grouping of countries in these two CFA monetary unions receives economic support. The conclusion is that the composition of CAEMC does not conform to basic requirements. In contrast, for a wide group of WAEMU countries there is room for sharing a common monetary policy.

A dynamic analysis of the demand for money in ghana

Abstract: The demand function for money in any economy helps to ascertain the liquidity needs of the economy. In this regard, it is imperative for governments and policy makers to understand the factors that influence this functio stable long-run relationship between these factors and the money stock. The main methodological and empirical contribution of this paper is to investigate the dynamics of money demand in Ghana using Dynamic Ordinary Least Squares (DOLS). This is achieved through a dynamic specification of a log money demand function to ascertain the relevant elasticities of money demand. The study found that apart from the scale variable, inflation exchange rate elasticities are negative. Also lagged values of these variables are important determinants of money demand in Ghana. The results indicate that there is a stable money demand function. Further, changes in past and current macroeconomic activity and past and current levels of economic activity significantly affect money demand in Ghana.

Estimating Equilibrium Real Exchange Rates in the Franc Zone

Abstract: This paper estimates the degree of real exchange rate misalignment in 12 CFA (Communaute Financiere Africaine) franc zone countries over the period 1960–99. Allowing for contemporaneous error co-variances, due to observed cross-sectional dependence, we use seemingly unrelated regressions equation estimations to estimate the equilibrium real effective exchange rate and degree of misalignment in each country. We find significant differences across member-states, however, the largest economies—Cameroon, Cote d'Ivoire and Senegal—showed some striking similarities. Just prior to the 1994 devaluation, these three economies were much more overvalued compared with the smaller member-states, some of which were either marginally misaligned or virtually in equilibrium. In 1994, only Cote d'Ivoire is exactly in equilibrium as a result of the devaluation. Our analysis of misalignment for the period after 1994 suggests that some challenges lie ahead for the CFA franc zone, if fixed parity is to be maintained.

U.S. Exports and Imports: Are We Tracking?

Abstract: CHANGES IN NET EXPORTS of the United States seldom have an important direct impact upon domestic activity. For this reason and because of the difficulties involved, little effort has been-or should be-spent on forecasting the U.S. net export component of gross national product (GNP). Indeed, the domestic economy is influenced by its foreign elements only when the concern policy makers feel about the competitive position of American goods in world markets, or about the balance of payments in general, becomes sufficient to affect economic policy. Hence it may be worthwhile to consider the prospect that such a worrisome situation might develop. According to the aggregate numbers, there may be grounds for concern. Net exports of goods and services by the United States in the calendar year 1969 were only $2.1 billion, continuing the decline from the $8.6 billion peak reached in 1964. No doubt the very rapid and inflationary growth of the domestic economy over this period was the major factor in the decline. The important questions are whether and to what extent net exports will recover, given changed conditions in the domestic economy. Putting the question somewhat differently, one can ask to what extent the price developments at home and abroad, plus exchange rate adjustments (or their equivalents), have resulted in a deterioration of the competitive position of the United States. Some evidence that bears on this question is presented below.

The foreign exchange constraint tariffs and import substitution

Abstract: SUMMARY Recent studies have stressed that a foreign exchange constraint can be limiting the rate of output growth in many developing countries On the basis of a simple constraints model the role of tariffs and related import substitution in relieving a foreign exchange constraint are analyzed It is first argued that the assumptions necessary for a foreign exchange constraint to be limiting output growth require that the optimal government intervention is through non-uniform exchange rate adjustment implied by trade controls and multiple exchange rates But, whereas the optimum government intervention is through the establishment of a structure of optimum tariffs and subsidies, such a policy is not feasible in light of data availability and administrative capacity in developing countries The costs and benefits of a non-optimal intervention through controls are then explored and standards of minimum acceptability of developing countries’ trade policies are established against which actual policy can be compared It is concluded that trade controls can be used to improve growth performance but only if a number of rigid conditions are met

Pricing of Foreign Exchange in Indonesia, 1966-67

Abstract: As a Dutch colony, the Indonesian archipelago fully qualified as an "export economy," that is, one whose prosperity fluctuated in response to the world prices of rubber, sugar, palm oil, petroleum, and tin. As an independent nation, Indonesia has experienced a dwindling of the absolute and relative importance of her foreign trade. Indeed, at the very outset of her period of independence, the sources of her foreign exchange earnings were in a state of low activity caused by war damage and disruption of market relationships. That lost ground has never been recovered, and postwar events have resulted in further decline. Her prewar positions of strength in sugar and tin have never been regained, and her position of primacy in rubber has passed over to Malaysia. In the 1960s, Indonesia's exports have fallen consistently below 10 percent of GNP-roughly in the neighborhood of 6-8 percent-with merchandise imports falling slightly below that proportion. A substantial deficit in payments for services has given her a consistent balance-of-payments deficit on current account of $200 million to $250 million annually in this recent period. The persistent payments deficit, the awareness of large export potential, and (more importantly in the short run) the need to tax foreign trade heavily in order to maintain anything like an adequate level of government activity, all force economists to direct their attention to the foreign trade sector in this country, in spite of its reduced size. This interest has been heightened in recent months because of the quite radical movement of the exchange rate policies of the Indonesian government in the direction of liberalization. The primary vehicle of this policy change is the broadening of the market for export bonus (BE) certificates. The central feature of the system is that most exporters are required to surrender vir-

An Estimation of the Extent of Over¬valuation of the Domestic Currency in Pakistan at the Official Rate of Exchange, 1948/49—1964/65

Abstract: The purpose of this paper is mainly two-fold: to exaniine some methodological issues involved in estimating the rate of overvaluation and to make a point-estimate of the rate based on observed data; and to construct time-series estimates of rates of overvaluation of Pakistani currency at the official exchange rate for the period from 1948/49 to 1964/65.

The use of home resources to save imports: a new look

Abstract: An earlier article *was concerned with the assessment of the net contribution (if any) made to the balance of payments by a marginal expansion of U.K. agricultural output. Such evidence as there is suggests that an increase in U.K. agricultural output would make a positive contribution to the Balance of Payments, though this contribution might be only about one half the value of net import saving. In addition it is necessary to compare agricultural expansion with other measures which are intended to make a positive contribution to the Balance of Payments. The purpose of this article is to re-examine the theoretical ideas behind the argument for using home resources to save imports. This argument was first put forward in the early 1950's and was concerned primarily with agricultural import saving and export promotion as alternative methods of alleviating the contemporary Balance of Payments problem. The argument has become relevant once again with the current proposal for further agricultural expansion to aid the U.K. Balance of Payments. A new method of presentation is employed which it is hoped adds clarity to the exposition. In addition it is suggested that the theory behind this argument is inadequate from the point of view of its application to agricultural import saving: agricultural import substitution gives a country only the potential to turn the terms of trade in its favour. A necessary second stage in the process—the realisation of this potential—seems to have been overlooked by previous writers. The theory is also considered under an assumption of flexible exchange rates, and it is argued that the use of the exchange rate as a balancing mechanism results in a failure to exploit any inelasticity of demand for a country's exports

The impact of direct trade controls and an overvalued exchange rate on factor proportions in manufacturing : the case of the Philippines, 1949-62

Abstract: This paper is an analysis of certain aspects of manufacturing development under a regime of import and foreign exchange controls, where such controls are accompanied by an overvalued exchange rate. The analytical framework is a modification of the ‘effective rate of protection’ analysis. The argument proceeds from the fact that the overvalued rate represents a subsidy on imported capital equipment and intermediate goods. Two implications are drawn from the analysis. First and most important, the subsidy on imported intermediate goods will exacerbate the oft‐noted tendency of import‐substitute industry to take the form of ‘processing and packaging’ operations with minimal domestic value added. Second, the subsidy on imported capital equipment will give entrepreneurs an incentive to substitute imported capital equipment for domestic labour.

Some Determinants of Canadian Municipal and Provincial Bond Flotations in the United States

Abstract: T HIS is an empirical study of what determines the flotation of Canadian municipal and provincial bonds denominated in United States dollars. The determinants of foreignpay flotations are important for two reasons: (1) United States purchases of these flotations result in a significant inflow of capital to Canada from the United States; and (2) a large part of United States portfolio investment abroad is United States purchases of new Canadian securities denominated in United States dollars. This paper presents an analysis of individual issue data in order to establish the determinants. Many empirical studies of international portfolio investment have been conducted. Some of them are based largely on the Canadian-United States flows while others concentrate on the aggregate flows in and out of the United States.' They are founded completely on aggregate economic data and are devoted to the analysis of time series. This paper is the first study to the author's knowledge that uses micro-economic data and cross-section analysis to investigate portfolio capital flows. If Canadian bond issuers behave rationally they will float their securities to enable their costs for any given issue to be minimized. These costs include both underwriting fees and interest payments. If the security is floated in the United States and is denominated in United States dollars, a subjective adjustment factor is included in the cost calculations to incorporate exchange rate risks. When Canadian issuers do make use of the United States capital market to raise capital, they are expressing their preference for this market over the domestic market for these issues.2 During any given period does the United States capital market appeal to a particular group of Canadian issuers or is the economic incentive to raise funds abroad spread evenly across Canadian issuers? If the incentive to raise funds abroad is equally great for each Canadian issuer, then foreign-pay issues will be selected from domestically floated issues by a random process; they will have no characteristics which distinguish them from domestic flotations. Alternatively, foreign flotations may appeal to a distinguishable group of issuers. If so, then what are the characteristics differentiating these issuers from domestic issuers? In part II of this paper foreign bond flotations are found to be statistically distinguishable from domestic bond flotations, and their differentiating characteristics are discussed. What factors give rise to the groupings observed in part II? The Canadian capital market may subject issues with certain characteristics to cost premiums so that the United States market is especially attractive to these issues. Alternatively, the United States market may offer these issues particular cost advantages. Thus, the grouping arises as a result of market characteristic configurations in Canada and in the United States. * This article is based on the author's doctoral dissertation, "United States Investment in Canadian Securities, 1958-1965," Harvard University, 1969 (unpublished). The research for this dissertation was financed by the Ford Foundation and by the National Science Foundation. The author accepts complete responsibility for the views expressed in the paper. 'For example see Robert Baguley, "International Capital Flows and Canadian Monetary and Fiscal Policies, 1951-1962," unpublished Ph.D. dissertation, Harvard University, 1969; Gerald K. Helliner, "Connections Between the United States' and Canadian Capital Markets, 19521960," Yale Economic Essays, II (No. 2, 1962), pp. 351400; William Branson, Financial Capital Flows in the U.S. Balance of Payments (Amsterdam: North-Holland Press, 1968). 2 The distinction between the United States capital market and the Canadian capital market is one between two regional markets. Each market is part of the world capital market but has characteristics which differentiate it from other components of the world market. This paper discusses the movement of capital from one regionally defined market to another.